Israel Chemicals Ltd. (TASE: ICL) unit Dead Sea Works should bear the "largest share" of the salt harvesting from the southern basin of the Dead Sea, and a special tax should be levied on the company's profits, Deputy Attorney General for Economics and Fiscal Affairs Adv. Avi Licht has ruled in a detailed opinion submitted to the Ministry of Finance. Licht says that the company should be compelled to carry out the salt harvesting through legislation, if the arbitration with the company fails.
Licht examined the proper sharing of the cost of salt harvesting and shoreline protection between the government and Dead Sea Works, and whether the company could be compelled to carry out the project if the arbitration fails. Given that the salt harvest could cost NIS 2.5 billion, he says that the company should bear most of the cost.
"The rise in the water level and the need to continue raising the dykes of the pool damage public interests, and could cause future damage to the tourist industry and to environmental interests," Licht says. "Operations by Dead Sea Works created the risk, and it should therefore solve the problem and bear the cost of preventing a further rise in the water level. Dead Sea Works operates like every manufacturer and assumes the cost of the risk arising from production of its products, including environmental damage that it causes."
Licht finds that, while the state bears some responsibility for the continued pumping of water from the northern basin of the Dead Sea to the evaporation pool in the southern basin, Dead Sea Works bear the main cost of the permanent solution, and the state, the hotels, and the regional authority should provide the balance of the funding. He says that if the talks fail to reach a deal, legislation can compel Dead Sea Works to bear the bulk of the burden of the salt harvesting.
Licht wrote the opinion following a discussion at the Prime Minister's Office a few months ago on the negotiations with Dead Sea Works on salt harvesting. Although the opinion is intended to set the government's limits in the negotiations, Licht noted the extraordinarily low royalty rate that Dead Sea Works pays the government, and called on the Ministry of Finance to consider raising the government's take through a special levy on the company's profits, rather than by raising the royalties.
"The royalty rate that Dead Sea Works pays the state is low, and does not reflect at all the proper share of the public in the profits generated from use of the natural resources that it owns," says Licht. "This situation requires thorough review." He proposes reviewing the tax rates on Dead Sea Works' profits in a way similar to the tax rates proposed by the Sheshinski committee on oil and natural gas profits.
Legal source say that there is a difference between a tax regime and a royalties regime. They say that royalties are inefficient, because they are derived from revenue, but that a tax levied on excess profits is part of a general concept that the state has the right to levy a special tax on the use of unique natural resources.
Published by Globes [online], Israel business news - www.globes-online.com - on September 4, 2011
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