A $2.7 billion deal is not routine in Israel, and the government is naturally seeking its share. The deal gives the Israel Tax Authority a chance to collect a 26.5% capital gain tax from the sellers of rights in the Leviathan gas field to Australia's Woodside Petroleum Ltd. (ASX: WPL) - $715 million.
But nothing is straightforward when it comes to taxes, a major disagreement is liable to break out between the partners in Leviathan and the Tax Authority. Tax experts believe that the dispute will be over the question if the deal is even a tax event. The partners in Leviathan can claim that adding a partner will not enrich them, because there is no sale of shares, which means that there is no taxable "sale" event, but at best a revaluation of the partners' assets.
As a rule, the issue of shares in a company to shareholders in exchange for investing in a company is not considered a tax event by Israeli law (except for the incorporation of land). This is in contrast to the sale of shares by a shareholder on which the capital gain is taxed. "The issue of shares is not a tax event because the shareholders are not financially enriched by the company's fundraising. On one hand, the company value rises, but, on the other hand, the shareholders' stakes are diluted by the same amount," says a tax expert.
However, the Leviathan deal involves limited partnerships, not companies, which raises the question whether a rights issue in a partnership can be ignored as a tax event or whether this should be seen as the partners selling holdings in the partnership proportionate to the dilution of their holdings.
A well-known tax expert says, "The Tax Authority will fight for every shekel, and the case will probably end up in court, because the question whether an issue in a partnership is a tax event or not is not unique to Delek. The argument that there should be no difference from the custom applied at companies is not disproven and it is logical that the judges will decide if the Tax Authority refuses to accept it."
So far as is known, during the advanced stage of the negotiations, the partnership asked the Tax Authority for a pre-ruling on various tax aspects of the deal, and the Tax Authority has established a special team, comprising representatives from its legal and professional departments, and an assessor for large enterprises who handles Delek Group Ltd. (TASE: DLEKG). If it is decided that this is a tax event, the tax calculation is complicated - in other words, this is not simply collecting the 26.5% capital gains tax - and the Tax Authority will have to take into account investment costs of each of the partners in the assessment cost.
Published by Globes [online], Israel business news - www.globes-online.com - on February 9, 2014
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