Expert: Israel Chemicals should lose Dead Sea franchise unless it pays its tax

Eytan Sheshinski, natural resources tax expert, says multinational giant must settle dispute over hundreds of millions of shekels before being allowed to renew contract

Sue Surkes is The Times of Israel's environment reporter

The Dead Sea Works factory at the southern end of the Dead Sea. (Yossi Zamir/Flash90)
The Dead Sea Works factory at the southern end of the Dead Sea. (Yossi Zamir/Flash90)

A senior academic who has headed government committees on taxing companies that exploit the country’s natural resources said Wednesday that Israel Chemicals Ltd, which holds the franchise for the Dead Sea Works, should be forced to settle its debts with the state — estimated to run into hundreds of millions of shekels — or else be excluded from consideration when the franchise comes up for renewal in 2030.

Israel Chemicals Ltd. (ICL), whose existing contract gives it first refusal over the new franchise, is stuck in a complex dispute with the tax authority over tax write-offs connected to some NIS 500 million ($145 million) that the latter says it should pay into a sovereign wealth fund.

ICL is controlled by the Ofer family’s Israel Corporation, the country’s largest holding company. It makes fertilizers, metals and other chemical products from bromine, phosphate, magnesium and potash taken from the Dead Sea or mined elsewhere in the Negev Desert.

The Environmental Protection Ministry’s Environmental Impact Index for 2018, published last Thursday, included five Israel Corporation factories in the country’s top six polluters. The Dead Sea Works came in fifth place. The others belonged to a different category of Israel Corporation factories involved with oil refineries and their associated products.

Prof. Eytan Sheshinski headed a 2010 committee on natural gas taxation and a 2014 one on taxing all natural resources, bar gas. The two laws that were subsequently passed are commonly known as Sheshinski 1 and 2.

On Wednesday, the professor urged members of a special Knesset committee that deals with a sovereign wealth fund, intended to collect some of the taxes, to ensure that the new franchise includes a condition that all bidders must come with “clean hands” — without any unfinished state business.

Committee head Avi Dichter (Likud) said lawmakers had already asked for a full Knesset debate on the ICL tax issue.

An aerial view of the Tamar gas processing rig off the southern coast of Ashkelon, October 11, 2013. (Moshe Shai/FLASH90)

In 2014, the Israeli Citizens’ Fund Law was passed, setting out the mechanics for the creation of a sovereign wealth fund aimed at ensuring that Israeli citizens —  not only investors — reap benefits from Israel’s natural gas bonanza, in addition to corporate taxes and royalties, around NIS 12 billion ($3.5 billion) of which have been paid to date. The law was subsequently amended to add levies on profits from natural resources such as mines as well.

The Israel Petroleum Profits Taxation Law, passed three years earlier, in 2011, exempted the owners of the Tamar gas reservoir — Israel’s first major find — from paying anything in levies to the wealth fund until they had recouped twice the cash they invested, from day one of exploration (the high-risk part) to the start of of commercial production, giving them a maximum of four years to do so. The law then gave them a further grace period via a complicated formula.

Prof Eytan Sheshinski addressing a Knesset committee on the sovereign wealth fund, Jerusalem, July 15, 2020. (Adina Velman/Knesset)

On Wednesday, during the third of several committee meetings being held on the wealth fund, Sheshinksy indicated that the owners of Tamar — mainly Kobi Maimon’s Isramco, Delek Drilling (part of Yitzhak Tshuva’s Delek Group) and the Texas-based Noble Energy — have already reached the threshold at which they should be paying sovereign wealth levies — something that they have not yet done.

One of the ways that Tamar’s owners have managed to delay payment is by convincing the state to let them write off various investments against tax. Sheshinski revealed that one of these investments was to upgrade a pipeline that once brought natural gas from Egypt to Israel, so that it could send Israeli gas to the Arab nation from January this year.

An undated photo of Energy Minister Yuval Steinitz R) and Egyptian Petroleum Minister Tarek El-Molla speaking during a meeting of the Eastern Mediterranean Gas Forum, in Cairo, Egypt. (Israeli Energy Ministry/courtesy)

On gas exports, Sheshinski said he had doubts about Energy Minister Yuval Steinitz’s plan to build the world’s longest underwater gas pipe to supply some of the nation’s gas to Europe, via Greece and Italy, despite Europe’s keen desire to wean itself off Russian gas.

Dichter and Sheshinski expressed support for a call by professors from the Israel Academy of Sciences and Humanities to divert some of the natural gas profits for the creation of a local academic branch that specializes in subjects related to gas, oil and the deep sea. Academy member Prof Zvi Ben-Avraham said that the academic community was caught without any research infrastructure when the Tamar gas well was discovered. Even today, the bulk of deep sea research was being carried out by prospecting companies and academic experts were brought in from overseas.

Last week, the committee heard that falling prices for natural gas in Israel and worldwide, uncertainty over the state’s ability to export gas to countries beyond Jordan and Egypt, and delays in legislation were among many reasons why just a half billion shekels have been collected from industry for the sovereign wealth fund. Several years back, the Bank of Israel predicted that the fund would by now contain billions of shekels.

The wealth fund needs NIS 1 billion ($291 million) to start operating. To date, only around NIS 450 million ($130 million) has been collected, 75% of it paid in 2013 for the Mari-B Yam Tethys gas field, which closed in 2012. The rest came from ICL, which, in addition to the Dead Sea Works, also mines phosphates in the Negev desert.

Deputy Governor of the Bank of Israel, Andrew Abir (R) next to Likud MK Avi Dichter at the Knesset’s special committee to monitor the sovereign wealth fund, July 7. 2020. (Screenshot)

Bank of Israel Deputy Governor Andrew Abir said that the tax authority now expected the first NIS 1 billion to be paid by the end of 2021. But he cautioned that the legally allowed percentage of the money would probably not be released to the government until the end of 2023, because companies have a two-year grace period to appeal tax and levy demands.

Even if the threshold were to be reached early, the sovereign wealth fund has not yet been set up. A recruitment committee established in 2016 for two years broke up without recommending any names.

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