The issue of taxing the natural gas partners was settled several years ago, as long the partners were supplying the gas to the domestic market. In recent months, however, the partners have signed a series of letters of intent (and one contract with the Palestinian Authority) for exporting gas to neighboring countries. The question then arose in the government of how to tax the gas partners in the export deals.
A draft bill was received today establishing a formula for determining the price of gas for tax purposes, and series of additional parameters. This draft was prepared by a team headed by Ministry of Finance director general Yael Andorn.
Following professional discussions, and after hearing the views of the public, the government ministries and the companies operating in the sector, and the opinions of international experts in the field, the team recommended establishing a netback model in the law as the method of determining the transfer price for the purpose of taxing gas export deals between related companies.
Under this method, the state will determine the taxable expected profit for the developers by calculating the transaction price, subtracting the accepted return on deals of this type, and adding the accepted rate of return on deals of this type.
In addition, in order to ensure that the partners in the gas fields do not sell the gas at prices that are too low, the committee established a mechanism that will ensure that the gas price in export deals is not lower than the accepted price in Israel.
What is the expected price in Israel? The method of calculated the average price in Israel will be based on a weighted average according to the size of the deals in the domestic market. The proposed change will make it clear in which cases the average local price is relevant for tax purposes.
The need to examine the question of taxing natural gas exports is due to the gap between the tax levied on companies producing gas upstream and the tax levied on companies that export the gas. The tax levied on gas producing companies in Israel stands at 65% (composed on royalties, Sheshinski tax, and corporate tax), while the tax levied on any company that exports a certain product (including gas exporting companies) is only corporate tax, which is currently 26.5%. The Ministry of Finance is concerned that the gap between the two could lead to various tax manipulations.
A committee was therefore established to consider taxation of gas exports, led by Andorn and composed of representatives of the Ministry of Finance, Israel Tax Authority, National Economic Council, and the Ministry of Justice. The committee examined the prevailing tax methods around the world, and selected the netback method.
Published by Globes [online], Israel business news - www.globes-online.com - on November 24, 2014
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