Israel Will Enforce Tax Hike on One of Its Largest Companies

  • Finance Ministry says it won't budge on levy on potash profits
  • ICL threatens to cancel $1.3 billion in local investments

When it comes to potash mined from the Dead Sea, the Israeli government has drawn a line in the sand.

It’s been locked in a two-year tax dispute with Israel Chemicals Ltd., and while there is some room to negotiate, it won’t budge on potassium fertilizer, Shai Babad, director general of the country’s finance ministry, said in an interview last week. Where there is some flexibility is on the profits from commodities such as magnesium and on incentives for future investments, he said.

“The government takes from potash should be much higher than where they are today, that’s where they make all the money,” according to Babad, who prior to joining the finance ministry used to work in the shipping unit of ICL’s parent company, Israel Corp. It’s “going to go through, and we are pushing it.”

As one of the country’s biggest exporters, ICL carries clout: A three-month strike earlier this year shaved almost a full percentage point off of Israel’s second-quarter economic growth, according to an estimate by Leader Capital Markets. It has also tried to use it, threatening to cancel planned domestic investments totaling about $1.3 billion.

The row “has been dragging on for ages and until it’s settled, there will be a tax burden on the company, and of course there is a factor on the stock,” said Sophie Jourdier, an analyst with Liberum Capital in London who has a neutral rating on ICL shares.

Shares Suffer

Investors don’t like uncertainty. Shares in the Tel Aviv-based company have tumbled 22 percent in New York trading this year amid a global slump in commodity prices. That compares with an average drop of 4.6 percent among industry peers, data compiled by Bloomberg show. The shares fell less than 1 percent last week to close at $5.62 in New York. They fell 1 percent on Sunday in Tel Aviv, to 21.59 shekels.

ICL, whose parent company is controlled by billionaire Idan Ofer, is already shifting investments outside Israel in anticipation of a new tax regime that if approved will take effect in January 2017. The proposed levy on ICL is a progressive tax peaking at 42 percent on all quarried materials.

The company wants the terms revised to recalculate the profits subject to the tax, a finance ministry official, speaking on condition of anonymity to discuss confidential matters, told Bloomberg News last month. While the new levy may add 500 million shekels ($130 million) a year to public coffers, Chief Executive Officer Stefan Borgas has said it will hurt the economy in the long run by forcing the Israeli chemical giant to cut investment and jobs.

ICL “does not reject the possibility of turning to the Israeli Supreme Court,” the company said in e-mailed statement on Sunday. The company "is in a continuing dialogue with the Israeli government as well as with additional stakeholders, and will act to manage its investments –- in Israel or elsewhere –- according to the business environment that will result from the formation of the new bill.”

Wiggle Room?

“It seems there is some wiggle room, and the end result may not be as punitive,” Joel Jackson, a Toronto-based analyst at Bank of Montreal’s capital markets unit, wrote in an e-mailed response to questions.

Still, the lack of progress between the two sides is taking place against a backdrop of tumbling demand for agricultural products. Potash producers have endured a 19 percent drop in spot prices for the mined crop nutrient this year. ICL shares touched the lowest level since 2008 in Tel Aviv trading last month after Goldman Sachs Group Inc. cut its rating to sell from neutral.

UBS AG analyst Roni Biron says there is more to ICL than just potash, reiterating a buy rating on the Tel Aviv shares last week. A joint venture with China’s Yunnan Yuntianhua Co. will boost revenue, Biron wrote.

ICL’s net income will jump 38 percent this year to $641 million, while revenue will fall 8 percent to $5.6 billion, according to the median estimate of nine analysts surveyed by Bloomberg.

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