Bethel Finance: Tax Authority demands NIS 2.7b from Teva

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Bethel Finnace news:
Israel's Tax Authority has issued an assessment requiring Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) to pay NIS 2.7 billion, arising from several matters related to the Law for the Encouragement of Capital Investment.

Teva is not the only company having to deal with a high tax demand arising from claims by the Tax Authority of aggressive tax planning in the structure of its overseas holdings. A claim against Check Point Software Technologies Ltd. (Nasdaq: CHKP) is currently underway in the Tel Aviv District Court. The Tax Authority is demanding that Check Point should pay hundreds of millions of shekels, in a dispute over transfers by Check Point to an associated company in Singapore.

$7.4 billion deal

While Check Point considered the profits on the money transferred to Singapore tax exempt, the Tax Authority sees things differently.

In Teva's case, the background to the dispute is the huge deal whereby Teva acquired Ivax in 2005 for $7.4 billion, making it the world's largest generic drugs company. Teva had received benefits under the Law for the Encouragement of Capital Investment, subject to meeting certain employment and export criteria.

The law gives an enterprise a complete tax exemption, as long as its profits are not distributed as a dividend. This includes any transfer "by the enterprise owner to an associate." According to the tax assessor, such a situation arose when Teva bought Ivax for shares and cash through a special purpose subsidiary. As far as is known, the assessor's position is that the transfer to the subsidiary is a sum given to an associate, voiding the exemption granted under the Law for the Encouragement of Capital Investment. The assessor argues that the transfer constitutes a dividend payment liable to tax.

Tax experts said today that this was not a reasonable argument, and that it related to an essentially technical matter. Sources inform "Globes" that even in the Tax Authority itself not everyone agrees with the basis of the tax assessment that has been issued. Senior Authority officials believe that there were no grounds for issuing the assessment at all, and certainly not for the huge figure stated in it.

In response to the tax demand, Teva said, "The income tax claim is based on the groundless concept that acquiring companies by Teva is a dividend liable to tax. In Teva's opinion, and in line with an analysis by the best tax experts, this is an erroneous interpretation of the law and would be rejected by the courts if and when the matter is brought before them. Moreover, according to a professional opinion that we have obtained there is no need to set aside money for this assessment."

Teva added, "Teva has been exemplary in the application of the Law for the Encouragement of Capital Investment and the tax incentives stemming from it. Teva operates at 16 sites in Israel, factories and research centers, from Kiryat Shmona to Ramat Hovav. The company supports 10,000 families directly and a further 40,000 families indirectly. Teva's tax payments in its extended activities reach NIS 3 billion annually. In 2010, exports from Israel amounted to more than NIS 20 billion, and R&D investment was NIS 1.9 billion. Fixed capital investment was NIS 1 billion in 2010 and has totaled NIS 15 billion since 2000."