Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) received tax benefits to the tune of NIS 3.2 billion in 2013, a similar figure to that for 2012, according to Israel Tax Authority data. This gives a total of the two years of NIS 6.4 billion, the highest tax benefit ever obtained by a single Israeli company. The figures confirm past "Globes" reports.
This means that, in the years concerned, Teva enjoyed an effective tax rate of 0%, at least on Copaxone, the multiple sclerosis treatment responsible for a substantial portion of its profits. The operating profit on Copaxone has been more than $3 billion in recent years, and in effect the entire amount was completely tax free up to 2013.
Tax benefits awarded to Israel's major companies between 2006 and 2011 were revealed in July 2013 after "Globes" petitioned the court. The newspaper demanded to be given the data on tax benefits granted to beneficiary companies under the Law for the Encouragement of Capital Investments, after the Ministry of Finance and the Tax Authority had refused to hand over the data on the grounds of privilege under the Income Tax Ordinance. The court granted "Globes" petition, but its scope was restricted to public companies after the Tax Authority appealed to the Supreme Court.
The figures disclosed at that time showed that over six years (2006-2011) Teva received tax benefits amounting to NIS 11.8 billion. With the disclosure of the figures for 2012 and 2013, the total stands at NIS 18.2 billion over eight years.
Each year, Teva takes about 40% of the total tax benefits awarded under the Law for the Encouragement of Capital Investments, which have risen dramatically in recent years. The source of the inflation in tax benefits in general and in those to Teva in particular is the amendments made to the Law for the Encouragement of Capital Investments in 2005 that in effect enabled an exporting company like Teva to pay virtually zero tax rates with no limitations and without reference to other aspects such as employment of workers. The only criterion was exports, which had to account for 25% or more of revenue.
Since then, the law has undergone further amendment, and the tax rates that it stipulates rose to 9% for enterprises in peripheral areas and to 16% in the center of the country. This does not take into account transferable accounting losses that can offset current profits and reduce the overall tax rate, which is apparently what happened at Teva in 2014, explaining its disappearance from the list of tax benefit beneficiaries in that year. If there are no profits, there are no tax benefits.
Another prominent beneficiary is Israel Chemicals (TASE: ICL: NYSE: ICL), which in the past two years received tax benefits totaling NIS 830 million. Israel Chemicals was excluded from the Law for the Encouragement of Capital Investments, but it still manages to exploit the old tax benefit tracks. In total, Israel Chemicals received tax benefits amounting to NIS 3.1 billion over eight years.
Check Point Software Technologies Ltd. (Nasdaq: CHKP) too enjoys tax benefits to the tune of hundreds of millions of shekels annually, but it should be stressed that Check Point has never paid zero tax, and that it contributes hundreds of millions of shekels tax annually to the public purse.
Are the tax breaks justified?
After "Globes" revealed the extent of the tax breaks obtained by the big corporations, engendering widespread criticism, the Ministry of Finance set up a committee headed by former director general Yael Andorn to examine the tax benefits awarded under the Law for the Encouragement of Capital Investments. Although the committee completed its deliberations before Moshe Kahlon became minister of finance, its conclusions have never been discussed or officially made public.
A report that the Ministry of Finance is about to release, however, casts doubt on the effectiveness of these tax benefits. The report will state that half of the companies concerned received aggregate tax breaks amounting to 1% of the total tax benefits awarded, and that the lowest nine tenths took less than 9% of the total benefits. The four largest companies took 65% of the total benefits, and Teva alone is estimated to have taken 40%, as mentioned.
The report will also state that total tax receipts (companies tax and tax deducted from employees' salaries) from companies that obtained tax benefits in 2013 were 30% higher than the tax benefits that the companies were awarded that year, suggesting that the state does gain value from the tax breaks. But for the four largest beneficiary companies (Teva among them), total tax receipts were 60% lower than the tax benefits they obtained. In other words, the added value they generate through employing workers who pay tax on their salaries does not justify the tax breaks. The companies argue, as will be seen below, that they generate other added value in the shape of wider circles of employment (external contractors).
"Globes" has revealed in the past that representatives of Teva appeared before the committee and presented a welter of data demonstrating the added value that Teva brings to the Israeli economy as a result of the tax benefits. As the company sees it, under the new structure of the law, its success means large public gain and growth in state revenue through indirect profits. One of the main arguments in favor of the huge tax breaks is the contribution to employment.
According to Teva's financial statements, the number of people it employs in Israel has grown by 3,000 over the past decade. In total, Teva employs more than 7,000 workers in Israel, 30% of them in the periphery. However, in the three years during which the company's tax breaks reached record levels, its headcount was stable, and in the past three years it has even shrunk in Israel by about 400.
Teva has stressed in the past that it is also connected to suppliers and contractors that employ more than 40,000 people in Israel, that its exports have been worth $140 billion in the past decade, that it makes an important contribution to economic growth, and that exports of drugs account for about 15% of Israel's total industrial exports excluding diamonds. In addition, Teva says that it has invested $15 billion in R&D and in promoting technological innovation in Israel, and that it is one of the motive forces behind Israel's biotechnology industry.
Teva's representatives also revealed that 88% of the company's employees earn more than the national average salary, which is nearly NIS 10,000 gross monthly.
Teva also presented its production costs around the world, although according to company sources the low production costs in India are not relevant to the production of more complex drugs, but only to simple tablets. Teva also mentioned its dilemma over where its profit will "reside" in the future, perhaps a hint as to its intentions in the event of further change to the Law for the Encouragement of Capital Investments.
Teva does agree that in order to safeguard the public interest there should be a control mechanism to ensure that companies meet the stipulated criteria not just at the time that they begin to be awarded tax benefits but also over the period that the benefits are spread. The company also stresses that the law should be adapted to changing circumstances, and that a mechanism should be established to enable it to be revised and updated to deal with global competition.
Teva said in response to the report, "Teva has paid and pays taxes according to law. The tax benefits that Teva received were and remain within the framework of the Law for the Encouragement of Capital Investments that applies to every company in the economy that meets the criteria. The tax rate under the Law for the Encouragement of Capital Investments was updated in 2014 and currently stands at 9%, substantially increasing the tax rate that applies to the company's income that falls within the provisions of this law. On the rest of its earnings, Teva pays companies tax at the full rate.
"We would point out that Teva's annual total contribution to Israel's gross national product is incomparably greater, amounting to $15 billion a year, about 1.5% of Israel's entire gross national product. This figure incorporates the state's revenue from direct taxes, tax on distribution of profits, tax on royalties paid by Israel providers of know-how, tax paid by suppliers and sub-contractors that support Teva's activity in Israel and worldwide, and tax deducted at source on dividend payments to shareholders."
Israel Chemicals stated in response: "In the years in question (2012-2014), Israel Chemicals invested some NIS 4.5 billion in Israel, more than five times the tax benefits it received, and thus contributed significantly to employment, to growth, to exports, and to the economy in the Negev and in Israel generally. Despite the fact that Israel Chemicals very effectively realized the aims of the law, the Israeli government decided to exclude it from the Law for the Encouragement of Capital Investments. As a result, Israel Chemicals is gradually ceasing to benefit from this law, to the point that all the relevant benefits will come to an end in the years 2017-2018."
Published by Globes [online], Israel business news - www.globes-online.com - on May 17, 2016
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