Big companies' tax breaks failing to boost employment

Teva  photo: Reuters

Four of Israel's largest companies received 65% of tax breaks given in 2013 but did not expand their staff.

Israel's four largest exporters pay only 4% tax, compared with 12.4% a decade ago, the Ministry of Finance reveals in a section clandestinely inserted into the state revenue report published a year ago. The probe also shows that companies whose taxes were increased hired more staff more quickly than companies whose taxes were not increased. "The findings cast doubt on the argument that increasing tax rates will lead companies to substantially cut back their business in Israel," Galit Ben Naim, senior division manager at the Ministry of Finance chief economist division, wrote in her report.

The Ministry of Finance concealed Ben Naim's radical conclusion, did not publicize the new study, and chose to insert it into a section of the state revenue report published a year ago. Ben Naim's conclusion is based on her examination of 57 companies whose taxes rose following the implementation of Amendment 68 to the Law for the Encouragement of Capital Investment in 2011. The amendment established three new tax brackets: 16% for exporters with an approved enterprise in the central district, 9% for an approved enterprise in the outlying areas, and only 5% for "a specially approved beneficiary enterprise" (meaning Intel).

The reduced tax bracket for outlying areas was designed to encourage enterprises to recruit employees living in those areas. The examination, however, showed that the number of people living in outlying areas employed in industry remained unchanged. 

As a result of the amendment, the average tax rate in the group examined by Ben Naim rose from 8.9% in 2010 to 13.7% in 2012-2013. The number of employees in this group of companies nevertheless rose 40% in 2011-2014, while the number of employees in companies whose tax burden did not increase during those years rose 33%. The actual difference is greater when the companies that enjoyed larger benefits are added to the equation, because these companies increased the number of their employees by a lower rate.

The study confirms the figure previously reported by "Globes" that Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) received a total of NIS 20 billion in tax benefits in 2013-2015 (on the assumption that it would have cut back its business in Israel had it been forced to pay more taxes). Teva benefited from an "special strategic" tax track that in effect reduced all of its taxes to negligible levels (including on dividends). This track, which was designed to attract international companies to Israel, was eliminated under Amendment 68. Despite the amendment, the Ministry of Finance discovered that the effective tax rate paid by the four largest companies (Intel, Check Point Software Technologies Ltd. (Nasdaq: CHKP), Israel Chemicals (TASE: ICL: NYSE: ICL), and Teva), fell from 12.4% in 2003 to only 4% in 2013. At the same time, the revenue reported by these companies skyrocketed from NIS 3.2 billion in 2003 to NIS 23.2 billion in 2013. These two developments caused these four companies' share of total tax benefits granted by the state to reach 70% in 2010 and 65% in 2013, compared with only 32% in 2003.

Published by Globes [online], Israel business news - www.globes-online.com - on November 3, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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Teva  photo: Reuters
Teva photo: Reuters
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