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One of the exploration companies that discovered and now distributes Israel’s offshore gas reserves has begun legal action in a case that could decide how future earnings from the large underwater finds are taxed.
Isramco Negev 2 LP petitioned the Tel Aviv District Court Sept. 24 to order the Israel Tax Authority to issue tax certificates for 2013, its first profitable year. Isramco—a partnership whose units are publicly traded on the Tel Aviv Stock Exchange—owns Tamar, the first of Israel’s offshore fields to begin production, with several partners including a subsidiary of Houston-based Noble Energy Inc., which operates the field, and Delek Drilling LP.
Isramco and the Tax Authority agreed in July that the partnership’s 178 million shekels ($640 million) in profit for 2013 would be taxed at 27 percent, reflecting the proportionate ownership of partnership units by corporations, who were then liable at 25 percent tax, and individuals liable to up to 50 percent, Tali Yaron-Eldar, the lawyer representing Isramco said Sept. 27.
Isramco is demanding that the tax certificate state the amount of tax paid as 27 percent, while the Tax Authority wants it to record the differential rate applied to each individual holder.
The sums at stake will soon be very large. As Tamar moves toward full production and the larger Leviathan offshore field comes online, gas profits are expected to rise exponentially. A court decision could have multi-million-dollar implications for investors and the Tax Authority. Foreign investors, already deterred from participating in Israel’s burgeoning gas exploration industry because of a series of regulatory obstacles, will be noting the decision.
“After the partnership and the assessor for large enterprises reached a general agreement regarding the partnership’s taxable income in respect of Year 2013, and after the partnership and the assessor have not reached general agreement about the level of tax to be recorded on the eligible holder’s certificate,” Isramco said in a filing to the Tel Aviv Stock Exchange on Sept. 24, “the court is requested to instruct the assessor to issue a certificate of tax assessment to the eligible holder.”
Isramco said in its petition that a certificate distinguishing between corporate and individual holders, and their varying tax rates would discriminate against companies who had actually paid more. Issuing different certificates to corporate and individual holders would effectively mean “corporate unit holders would be subsidizing the taxes of individual unit-holders.” Holders of units were now “imprisoned” by the inability to finalize their financial affairs for 2013, the court petition said.
“There was agreement about the level of tax they would have to pay but not how it would be distributed among the partners themselves,” Yaron-Eldar said. “This is a discussion that started and never ended. Up to now, the tax authority has not given the partners a final report of their income or tax liability. I want the final filing so I can go to the tax authority and either get back money or pay more, or do whatever I have to do, but give me the final filing.”
The Israel Tax Authority refused to comment, saying that since the matter was before the court, it would respond to the court.
Avital Zohar, a private investor who owns partnership units, said the company’s demand to issue identical certificates “complicates the situation of the individual holders.” Many individual investors in Israel trade in securities through banks, which deduct tax at source, and so they do not have to file tax returns.
“If the tax certificate says 27 percent and I am liable to 47 percent, if I don’t file a tax return and pay the extra, I immediately become a criminal,” Zohar said by phone Sept. 28.
He said a separate but similar case involving tax payments by Delek Drilling was nearing conclusion at the same court and that Isramco should have waited until that case was decided, as it was likely to set the appropriate precedent.
Israel’s government has grappled for years with how to earn revenue from the country’s vast offshore reserves, revising its original tax framework that sparked a high court challenge and left foreign investors concerned about the regulatory hurdles. This latest dispute, if not settled quickly, will only fuel more uncertainty.
“What we see is only the tip of an iceberg,” said Leon Harris, a tax accountant based in Ramat Gan. “What happens to a foreign investor who has to file a tax return back in his home country of residence within prescribed time limits. What taxable income is reportable, what Israeli tax is creditable?”
“If Israel withholds 48%-50% tax applicable to trading gains, whereas a foreign tax authority clarifies the gain as passive, some or all the Israeli tax may not be creditable in the home country,” he said in emailed comments on Sep. 27.
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