Bethel Finances: Gov't take from gas revenues could reach 80%

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"The government will be the main beneficiary from higher natural gas prices," says BDO Ziv Haft senior partner Yehusua Nissim. "The government's take from oil and gas projects increases in line with rising prices, and could reach 80%."

Nissim said, "The government's take has three main components: 12.5% royalties on sales; levies pursuant to the Taxes on Oil Profits Law (5771-2011), based on the Sheshinksi committee's recommendations; and income tax on individuals, including National Insurance levies, which can reach 57%. In this context, it should be noted that gas consumption by Israel Electric Corporation (IEC) (TASE: ELEC.B22) significantly affects the government's revenues by collecting these taxes, compared with the consumption of other fuels by IEC, such as coal or heavy industrial oil, which have no effect on government revenues."

Nissim added, "The total rate of government revenues (royalties, taxes on oil, and income taxes) from oil profits increase in line with the rise in prices, because the rate of the tax as set out in the Taxes on Oil Profits Law is progressive, and increases as a project's profits grow.

"Under the mechanism set by the Sheshinski committee, the tax rate is not uniform. The tax is first collected after the investment in wells and set-up costs are recouped, and rises progressively from 20% to 50%. Rising prices and rising sales cause two things: the year in which the government will begin collecting the tax is brought forward significantly; and the maximum tax rate of 50% also moves up, so that after only a few years, developers could pay the maximum rate.

"When all is said and done, from the government's perspective, taking the government's take, including royalties, taxes on oil, and income taxes, into account under conditions of higher gas prices, could even exceed 80% (depending on the individual income tax bracket and National Insurance levies), compared with the rate set by the Sheshinski committee of 52-62% of a project's profits (based on the companies tax rate). This is in addition to earlier date at which the government begins collecting the oil tax.