In 2005-2010, Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) received no less than a third of all the tax benefits granted by the state to exporting companies under the Law for the Encouragement of Capital Investments. Teva's contribution to employment in industry and software, however, was a disappointing 1%, in light of the huge state investment it received, according to analyses by the Ministry of Finance chief economist department included in a report by a team assigned to assess the law, headed by outgoing Ministry of Finance director general Yael Andorn.
The team, appointed in November 2013 by former Minister of Finance Yair Lapid, included Israel Tax Authority head Moshe Asher, Ministry of Finance budget director Amir Levy, Ministry of the Economy director general Amit Lang, and Israel Investment Center director Nahum Itzkovich.
The report, now on the desk of Minister of Finance Moshe Kahlon, examined, among other things, the effectiveness of the aid tools provided by the state to companies in the framework of the Law for the Encouragement of Capital Investments. The document indicates that in addition to Teva's minimal contribution to employment, compared with the size of the tax benefits it received from the state, one third more of the tax benefits granted in 2005-2010 went to companies whose aggregate employment accounted for no more than 4% of total employment in the industry and software sectors.
One of the indices considered by the committee in the attempt to determine the effectiveness of the tax benefits granted to companies under the law was the salary figures in the companies that received tax benefits during this period, compared with companies that received no benefits. "The salary levels in the benefiting companies (companies that received tax benefits, Y. A.) were higher than in the non-benefiting companies, and the greater the benefits, the higher the salaries, except for the largest company," the report states. The company in question, which received one third of all the tax benefits at that time, was Teva. The tax benefits granted to exporters under the Law for the Encouragement of Capital Investments totaled NIS 30 billion in 2005-2010, with 62% of the benefits being granted to companies operating in outlying areas.
Figures reported by the Andorn committee show a significant drop in taxes paid by benefiting companies and their employees over the past decade. The taxes paid by these companies in 2005-2010 were 2.2 times as much as the benefits they received from the state, while the taxes they paid in 2011-2015 were only 40% more than the tax benefits they received. 2011 tax proceeds from the benefiting companies were only 17% higher than the benefits received by the companies. Among the four largest companies (which received most of the tax benefits, Y.A.), corporate taxes and taxes paid by their employees were 30% less than the benefits they received from the state.
In an attempt to bolster the benefit to the Israeli economy from the granting of especially large tax benefits, the report includes a recommendation for the addition of an special track aimed at augmenting the link between the benefits themselves and the promotion of the goals of the Law for the Encouragement of Capital Investment. The recommendation mentions a ceiling for tax benefits granted automatically under the law's green track. This proposal concerns a group of 10-20 companies that receive most of the benefits.
The proposed ceiling is taxable income of NIS 400 million, 60% of salary expenses if the enterprise operates in a development region, or 100% of investments by the company in mechanization, equipment, and research and development. Companies seeking tax benefits above the ceiling will switch to the special track, in which they will have to meet additional conditions and targets for their salary expenses and investments in Israel.
Andorn's report was submitted to Kahlon, with the committee members being in disagreement about this recommendation. Kahlon will have to decide whether to accept or reject it. The committee members supporting the recommendation believe that the connection between eligibility for tax benefits and meeting the aims promoted by the law, such as making investments and creating new jobs, has been loosened in recent years, following the 2011 amendment in the law, which stated that the condition for receiving a benefit was exports by the company to a specific destination of at least 25% of its output. As a result of this situation, the supporters of a benefit ceiling believe that companies could even cut back on their business in Israel without any effect on their eligibility for tax benefits.
The committee members who support the benefit ceiling for this group of companies believe, according to the report, that "The state's duty is to maximize what is obtained from the companies receiving benefits in return for the benefits granted to them. The annual cost of the tax benefits is estimated in the billions of shekels, and the state is not free to grant tax benefits on this scale without at least trying to obtain a suitable and proportionate return for them."
Some of the Andorn Committee members who support this recommendation also believe that "it is improper to continue the current arrangement, which allows some of the companies especially high tax benefits, without demanding something in return from them, and without trying to even estimate the effectiveness of those tax benefits in advancing the purposes of the law."
The committee members supporting this proposal hold that the proposal is measured and cautious, and does not establish a restriction on the extent of the benefit, while acting to increase the return for the state, and that only in cases in which the amount of the tax benefit is especially high and granted automatically, as in the case of a dramatic increase in sales by a single company.
In any case, the supporters of the recommendation explain, a very small number of companies receiving benefits amounting to tens of millions to billions of shekels is involved. Incidentally, these requirements prevail in many countries whose policy in this matter was examined by the Andorn team, and were also accepted in Israel until the law was amended four years ago.
Those opposed to this recommendation explain that it will have a negative impact on the simplicity of the Law for the Encouragement of Capital Investments. They say that investors will be deterred from doing business in Israel because the benefits will not be stable, and assert that expanding industrial activity in Israel through the law will necessarily lead to improvement in nationwide productivity while creating jobs and improving the economy's competitive production capacity. They hold that there is no reason for more government intervention in this context.
In the opinion of the opponents of the recommendation, there is no reason to regard the reduced tax rate for companies under the Law for the Encouragement of Capital Investments as a tax benefit, because the reduced rates are granted to companies that in any case probably would not have done business in Israel without them. The opponents assert that further demands by the state as a condition for receiving the full tax benefits is liable to cause the switching of business overseas, have a negative impact on tax revenues, and lead to fewer jobs.
Teva said, "Teva's contribution to the Israel economy is measured in many ways. Its annual contribution to Israel's GDP amounts to 1.5%, or NIS 15 billion, which is more than the total benefits received by the company in the period under question. The company has invested over NIS 23 billion in capital infrastructure and R&D over the past decade, and the company by itself accounts for 15% of Israel's industrial exports.
"The figures in the story present an inappropriate comparison. Teva is a production and industrial company and therefore cannot be compared with a global development center located in Israel. As one of the biggest employers in the economy, and as one that has doubled its labor force in a decade, Teva provides employment, directly and indirectly, to over 21,000 employees. Furthermore, the average salary at Teva is almost triple the average wage, and almost double the average pay of industrial workers. Teva has been, and still is, a significant engine for moving the Israeli economy forward."
Published by Globes [online], Israel business news - www.globes-online.com - on July 9, 2015
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