Knesset passes legislation to force companies to pay into sovereign wealth fund

The Knesset on Wednesday passed a legal amendment that will force companies profiting from the Israel’s gas, minerals and other natural resources to pay into a sovereign wealth fund, even if they are appealing the amounts.

Up until now, companies such as the Dead Sea Works and the natural gas companies have been exempted from paying while proceedings were ongoing.

With the passage of the amendment to the 2011 Petroleum Profits Taxation Law, they will now have to deposit 75% of any sum that is disputed. The law will also give tax authorities enforcement tools, such as fines, in the case of nonpayment.

The legislation was advanced by Minister of Science and Technology Orit Farkash-Hacohen (Blue and White), with the backing of Finance Minister Avigdor Liberman of Yisrael Beytenu.

It was originally approved in a first Knesset reading in March but was stalled by elections later that month.

“This step will stop the procrastination, put hundreds of millions of shekels into the state coffers and finally speed up the operation of the fund,” Farkash-Hacohen said.

Knesset Finance Committee Chairman Alex Kushnir described during the plenum debate how companies would “take the state to the courts and fight cases for years and years and years, during which time the money remained with the companies.”

Farkash-Hacohen chaired the Public Utilities Authority, a regulatory body, during the formulation of a deal with the partnership developing the Tamar offshore natural gas fields, which went into commercial operation in 2013. She was forced out of her position in 2015 after opposing the pricing mechanism that was agreed on, claiming it was unfair to the public.

Orit Farkash-Hacohen. (Yanai Yechiel)

Following the discovery of natural gas reserves off Israel’s Mediterranean coast in recent decades, the Knesset passed a law mandating the creation of a sovereign wealth fund. Companies profiting from Israel’s gas and other natural resources are supposed to pay 50% of their profits into this fund, to be used for the benefit of the Israeli public. This is in addition to 12.5% in royalties and to corporation tax, both of which the companies regularly pay.

Workers on the Tamar natural gas processing rig, June 23, 2014. (Moshe Shai/FLASH90)

Several years ago, the Bank of Israel forecast that by 2022, the fund would have NIS 14.2 billion ($4.3 billion), with around NIS 270 billion (over $82 billion) accruing by 2030.

But the fund has not even been set up because the minimum investment of NIS 1 billion ($305 million) has not yet been reached.

The Finance Ministry estimates that with the new rules, more than NIS 200 million will now start to flow into the fund’s coffers.

The Tamar partnership only paid its first installment of some $15 million at the end of last year. The rest comes mainly from the Mari-B Yam Tethys gas field, which closed in 2012. The money is being managed temporarily in a wealth fund by the Finance Ministry’s Office of the Accountant General.

That the wealth fund contains so little is thanks to complex formulas agreed to by the government that allows the companies to reap certain profits before starting to pay, as well as legal disputes and appeals by the companies over the payment demands.