The Ministry of Finance will recommend to the government to levy a higher export tax on gas exports than demanded by Australia's Woodside Petroleum Ltd. (ASX: WPL). On Sunday, Woodside CEO Peter Coleman warned that it might withdraw from the Leviathan deal if no solution was found to the tax issue. Sources inform ''Globes'' that Woodside expects a tax of 17-19% on the capital invested in the venture, but the gas exports tax committee appointed by Minister of Finance Yair Lapid will recommend recognizing lower yield rates than Woodside wants.
Given the strategic importance of the matter, the committee's recommendations will be submitted to Prime Minister Benjamin Netanyahu in a few days, before they are submitted to the cabinet. This means that Woodside can still hope that Netanyahu will intervene in its favor. After the cabinet decides on the matter, the process to amend the necessary legislation will take a few months, but will not delay closing the Leviathan deal.
The gas exports tax committee, chaired by Ministry of Finance director general Yael Andorn, will submit its recommendations in a few days to Minister of Finance Yair Lapid, who was authorized by the cabinet in June 2013 to draw up rules on the matter. The current law, which is based on the Sheshinksi Committee recommendations, states that to calculate the tax on gas export deals, the government will set the price at which a gas field owner will sell the gas to the operator of the export facilities.
A maximum tax rate of 60% will be levied on the difference between this price, known as the "transfer price", and the transaction price, under the Israel Petroleum Profit Tax Law (5771-2011), which was enacted on the basis of the work by the committee chaired by Prof. Eytan Sheshinski. This law resulted in a major arbitrage gap between the tax levied on gas field owners (up to 60%) and the tax levied on gas exporters, which only pay the companies tax (currently 26.5%). The Ministry of Finance warns that this large differential in the tax rates opens the door to creative tax planning to roll profits from the gas field companies to the exporters. The ministry warns that the treasury could lose tens of billions in tax revenues as a result.
Closing the tax loophole
The Andorn Committee was appointed to close the tax loophole. It examined prevailing tax methods in other countries, and as first reported by "Globes" in January, it opted for the netback method. Under this method, the normative netback on investment for each export deal is based on the price of gas in the target market, less the set-up and operating costs of the gas transportation infrastructures.
To prevent gas field owners from selling gas at very low prices (to evade taxes), the Andorn Committee has established a mechanism to guarantee that the price of gas in export contracts will not be less than the accepted price in Israel. This mechanism will levy a surtax on gas field owners which declare that they sold gas for less than the floor price in Israel, which is the average weighted price in gas supply contracts with Israeli customers in the preceding years.
The proposed netback method includes a number of variables that can affect the final tax rate. The variable at the model's core is the accepted profit margin (or normative yield) in transactions of this kind. There is an inverse relationship between the height of the normative yield set by the committee and the taxable profit.
On this point, the gas field owners argue that the normative return should not be uniform. They argue that there are material differences between different gas export ventures relative to the risk/reward ratio from which the yield is derived. A floating liquefied natural gas (FLNG) venture requires much higher upfront capital investments than a pipeline export venture, which means that an FLNG venture should have a higher normative yield. This is an acute point for Woodside, which is investing in Leviathan precisely to export gas via FLNG.
In Sunday's interview with "The Australian", Coleman warned that the deal to acquire 25% of the rights in Leviathan for $2.71 billion could collapse. The sources said that Woodside has approached Lapid on this matter, claiming that the standard normative yield on FLNG ventures is 17-19%.
However, the Andorn Committee the accepted normative yield on gas export ventures is 5-6% to 17-18%. The Ministry of Finance is convinced that gas exporters, because they belong to the midstream part of the industry, have far lower risk than the gas exploration companies, which in the upstream part of the industry, because in the export stage there is already considerable certainty about the quantity of gas and the production potential.
Published by Globes [online], Israel business news - www.globes-online.com - on March 4, 2014
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