Israeli mining companies face crippling tax burden

By James Sean Dickson
Published: Thursday, 27 November 2014

Operating resource profit tax of 42% possible, ICL: proposals are riding a “wave of populism” of levy rises

New "excessive profits" taxes could be imposed on natural resource extraction companies in Israel, if recommendations set out by the Sheshinski Committee II are implemented.

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 opposition

"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 indirect employees."

ICL said that it currently contributes around NIS1bn ($260m) to the Israeli Ministry of Finance.

Dutch disease

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.

Unsympathetic unions

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 journal.

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."

Non-domestic investment

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 potential.

*Conversions made November 2014