New "excessive profits" taxes could be imposed on
natural resource extraction companies in Israel, if
recommendations set out by the Sheshinski Committee II are
Chaired by Eytan Sheshinski, the emeritus
professor of public finance at the Hebrew University of
Jerusalem, the committee was assembled June 2013 to look into
the way that the Israeli treasury benefits from tax revenue
derived from private natural resources companies.
On a base designated as the operating profit of a
company derived from mineral resource sales, a replacement
resource extraction tax would be set at a rate which rises with
segmental income operating profit yield. For a yield of 14% or
less, the tax rate would be 0%; 14-20% yields would be subject
to a levy of 25%; and, critically, for yields above 20%, the
tax rate would be set at 42%.
A change in royalty rates on mineral sales
volumes would also be implemented, should various bodies within
of the Israeli government and legislature approve of the
changes. The committee proceedings advise a flat royalty rate
of 5% to be applied on the sales value of each unit of
extracted mineral resource.
This would replace an individualised system which
includes potash royalties set at 5% — though 10%
royalties are activated annual sales for an individual company
exceed 1.5m tonnes — and a current phosphate royalty
rate of 2%.
Israeli state legislature, the Knesset, and the
full cabinet still need to approve the tax changes, though it
already the approval of the socioeconomic cabinet (SEC). Led by
current Israeli Prime Minister Benjamin Netanyahu, the SEC is a
relevance-based subdivision of the full cabinet.
With Netanyahu’s and the
SEC’s support, the implementation of the
recommendations appears unlikely to fail.
Israel Chemicals leads
"The Sheshinski II recommendations, as the
committee itself says, impose on Israel Chemicals Ltd. (ICL) a
business environment and tax burden that is the highest and the
most extreme in the world," said ICL, in a strongly worded
statement released 20 October 2014, after the committee watered
down its interim proposals of a flat 42% tax on all mineral
extraction related operational profits.
Sheshinski II’s proposals led the
company to cancel Israeli shekel (NIS) 2.5bn ($650m*) in
planned investments with a further NIS3.5bn ($910m) of
investments cast into doubt, though it has recently stated its
intention to reconsider the closure of a magnesium factory
which supplies chemical feedstock for its bromine operations,
should a tax concession be allowed for the plant.
ICL has voiced concern for its global
competitiveness in a number of industries. Under the proposed
tax regime, the company said that it would be subjected to
taxes "substantially [higher] than any other country on the
globe that engages in the production of potash, phosphate and
bromine natural resources."
The company further suggested that: "The
government take that the state is meant to collect from
ICL’s activities will be harmed as a result of
decreased revenues resulting from the reduced activities of the
company and the reduction in the number of its direct and
ICL said that it currently contributes around
NIS1bn ($260m) to the Israeli Ministry of Finance.
Sheshinski believes the tax increases are
entirely justified, despite the likely precipitation of job
losses and investment reductions, based on a feeling that
Israel is not earning enough from the extraction of its natural
resources, and to facilitate the avoidance of an economic
problem known as the "Dutch disease".
The term was coined by The Economist in
1977, after the Netherlands saw its domestic manufacturing
sector decline following the discovery and extraction of large
volumes of oil in its territories in the North Sea.
Commodity export currencies can appreciate in
relative value, leading to domestic manufacturing sectors
becoming uncompetitive — as high domestic costs
relative to revenues in relatively depreciated foreign
currencies provide smaller returns.
Unions are also unsympathetic to the
company’s woes. The Movement for Quality
Government in Israel and the Adam Teva V’Din
(IUED) criticised the final recommendations of the committee
for their watering down of the original 42% flat tax.
Both organisations even went as far as to accuse
Sheshinski II of leniency towards ICL. Amit Bracha, executive
director of IUED, told the Jerusalem Post that
committee members had "[yielded] to the pressure of ICL, which
is in large part responsible for the huge damage caused to the
Dead Sea in recent years."
The depth of the hypersaline inland lake has
decreased by around 20 metres since 1970, according to a paper
in the Theoretical and Applied Climatology
Sheshinski II’s recommendations have
also seen support from Udi Adiri, the deputy director of the
Israeli Ministry of Finance budget department, who said:
"Israel’s natural resources belong to the public,
and the public should benefit from them."
"We don’t want to hurt enterprises
and workplaces and we need the economy to continue to be
attractive to investors," Adiri added.
ICL said that adoption of the proposals would
make Adiri responsible for "the resulting serious consequences
of unemployment as well as social and human upheaval in the
Negev, and the severe blow to industry in the Negev and to the
economy that will result from it."
Investment cancellations in Israel have been
somewhat balanced by international plans, such as
ICL’s recent investment announcement for the Suria
potash facility in Catalonia, Spain.
A multi-stage capacity increase at the production
facility costing $435m will, according to the company, allow
for "continued and long-term growth of potash production in
Catalonia, as well as the reduction of average potash
production costs to a level that is closer to the level of
ICL’s fertilisers business unit in Israel - the
Dead Sea Works."
Only granular potash will be produced at the mine
following the upgrades, which will have a total capacity of
1.4m tpa. Granular potash is a premium fertiliser product,
often preferred for its slower uptake and lesser leaching
*Conversions made November 2014