The committee advising the state on royalties and tax from oil and gas finds is tending toward rejecting the argument by the energy barons that Israel can’t change tax rates retroactively.
By Meirav Arlosoroff

The committee advising the state on royalties and tax from oil and gas finds is tending toward rejecting the argument by the energy barons that Israel can’t change tax rates retroactively. A sovereign nation has to be free in setting tax policy, argue the members of the Shishinsky Committee.

Some officials argue that the state should charge higher royalties from companies selling gas and oil found in Israel.

Tax is one thing, royalties another. The gas barons are especially vehement about royalties, which are a function of revenues from the sale of oil and gas, not a tax on profit.

The state charges a specific rate of royalties on revenues the companies make from selling gas and oil found on Israeli territory. Since the tremendous finds of natural gas in Israel’s territorial waters in the Mediterranean, however, some officials argue that the state should increase its share, rather than have private companies – not the general public – benefit from this valuable natural resource.

The companies have argued that the state can’t decide at this late stage after they already invested heavily in exploration that it wants a different – higher – rate of royalties.

Members of the committee, headed by Eytan Shishinsky, told TheMarker that it is unthinkable for the state to be unable to change royalty rates retroactively; this would mean the state was not entitled to manage its tax policy as it saw fit. Otherwise, say the committee members, the state could never change corporate tax levels: Companies would argue that changes would hurt their business plans retroactively.

Although the Shishinsky Committee is leaning toward rejecting the energy barons’ legal argument against tax increases, they do make one claim that the committee members say may bear weight. It is that retroactively changing the tax rate on energy companies after they had risked heavy investment in exploring would damage Israel’s good name and deter foreign investors.

Indeed, some committee members are concerned about Israel’s reputation if it decides to take advantage of the gigantic gas finds to retroactively change its tax rate. However, it is not rare for countries to change the rules after substantial finds of natural resources. Both Canada and Australia have done so.

The Shishinsky Committee is therefore likely to try to forge a compromise that would let the state raise tax on the exploitation of natural resources – but in a manner that factors in preliminary investment. In other words, a company that invested large sums before the tax hike would be immune, at least to a degree.

The question is where the boundary should pass. Specifically – would the revenues from the sale of gas by the Tethys Sea group be spared? And what about revenues from Tamar, the giant oil field 90 kilometers off the Haifa shoreline, and Dalit, its smaller sister next door?

Those may yet be spared, but merely conducting seismic tests wouldn’t pass the bar, say industry sources. Leviathan, another offshore field thought to have enormous potential, will almost certainly be subjected to a higher level of tax.

The fate of billions lies in their hands

Billions of shekels, that is, in income for the state or the tycoons: That’s the issue at stake, under the purview of the Shishinsky Committee.

The committee was set up on April 12 by Finance Minister Yuval Steinitz. Even before that, the ministry had come under terrific pressure from the gas and oil exploration companies, and even from Washington because of the involvement of U.S. company Noble Energy in drilling here.

The grounds given for setting up the committee were that the gas discoveries were so substantial that they warranted rethinking Israel’s policy on royalties to the state. The finds are so big that they could materially affect the Israeli economy and the government’s activities.