State Comptroller Yosef Shapira leveled harsh criticism at the government's tax policies, saying that the tax breaks, debt relief and loan repayment practices afforded to large conglomerates in Israel endanger public funds. "The public sees [these practices] as 'freebies for the rich' and the [taxation] gaps make the public feel betrayed," Shapira said in a report released on Tuesday.
"It is highly unreasonable that while the public is made to struggle with the taxes imposed on it and the high cost of living, large companies enjoy such generous tax breaks," the report said.
Shapira also stated that the government failed to follow through on the "trapped profits" law, which was introduced in 2012 as an amendment to Israel's Encouragement of Capital Investments Law, and aims to lower the amount of taxes paid by multinational corporations by 40 to 60 percent -- depending on how much money the company is willing to invest in Israel. The law further states that the tax rate of a company benefiting from "trapped profits" cannot fall below 6%.
Large conglomerates are getting tax breaks worth billions of shekels, effectively paying only marginal taxes, Shapira's report said, adding that the state has failed to demand that the companies invest their "trapped profits" in Israeli ventures, as stipulated by the law.
The report found the tax breaks given to large companies in Israel in 2012 amounted to 36.9 billion shekels ($10.37 billion) or nearly 17% of the state's annual tax revenues.
The government, Shapira said, has failed to put in place a mechanism to ensure the tax breaks system is effective. "Affording companies unlimited tax breaks without assessing whether they are cost effective [to the state] is a financial practice that harms public interests."
The report further found faults in the preparatory work done by the Israel Tax Authority while the Trapped Profits Law was being drafted.
The comptroller's report used Teva Pharmaceutical Industries as an example, saying that despite getting tax breaks worth NIS 12 billion ($3.37 billion) between 2006 and 2012, and grossing over $12.5 billion in revenue during that time, the company paid only $450 million in taxes -- 3.6% of its revenues.
The perils of a centralized economy
According to the report, Israel's centralized economy -- especially the centralization of the credit and capital markets -- is perilous.
Shapira has labeled the government's handling of these issues as "insufficient," saying neither the government nor the local authorities have been able to properly address the issues raised by centralization, the financial conduct of Israeli tycoons, or the banks' restructuring of conglomerates' debts.
The comptroller also faulted the government for being slow to respond to the global recession, saying that is has yet to put in place laws meant to further stabilize the economy.
The report found that 25% of the companies trading on the Tel Aviv Stock Exchange belong to 25 conglomerates, which together control 69% of the TASE's registered capital. The top-10 corporate pyramids trading on the TASE, which are controlled by tycoon families, hold some 30% of the stock exchange's registered capital -- one of the highest ratios in the Western world.
"If the risks associated with debtors defaulting on their loans are realized, they may prompt a system failure that will place the entire economy at risk," Shapira said.
The report warned that Israel's centralized economy was placing the public's pension funds at risk, as the majority of the pension, provident, mutual and trust funds were invested in the five biggest conglomerates, which are controlled by tycoons plagued by financial problems who have all applied for debt relief.
According to the report, between 2008 and 2011, Israeli financial institutions afforded companies 94 "haircuts" -- or comprehensive debt restructuring -- amounting to NIS 21 billion ($5.9 billion) and similar deals, worth tens of billions of shekels, have been inked in 2013.
The comptroller warned that 46 of Israel's major companies are at high risk for debt restructuring, adding that the banks have afforded 2% of the bigger debtors 72% of the corporate lines of credit.
Shapira expressed concern about the lack of separation between lenders and debtors, as well as over the lacking supervision by both the banks and the regulatory system, saying that if these debtors default on their loans, the blow suffered by the credit market will impact the economy.
According to the report, the major corporate pyramids have raised 42% of their capital by issuing bonds and together they are in control of 90% of the market's bonds inventory. The biggest corporate pyramid -- the IDB Group -- holds 33 billion shekels' worth ($9.3 billion) of the bonds, so the collapse of any of the five major corporate pyramids will cause the entire market to tumble.
Tax policy unstable
Israeli tax policy is based on indirect taxes and as such it is subject to frequent, inconsistent changes, casing tax hikes and reductions within a short period of time, Shapira's report said.
This phenomenon raises concerns that the government's decisions on tax policies react to pressures and events that require the quick collection of revenue, and that they fall short of meeting long-term goals or following a set doctrine, the report said.
Frequent chances to the taxation system create insecurity among the taxpayers and might compromise the public's faith in the government, as well as destabilize the economy, Shapira warned.
He also leveled harsh criticism at the Finance Ministry, saying it does not analyze the impact tax fluctuations have on the economy or on socioeconomic gaps, and that its decision-making process regarding taxation is not properly documented.
The comptroller's report found that the government has failed to properly collect its due revenue from the corporate mining and selling of Israel's natural resources, causing state coffers significant losses.
Future revenues projections from natural resources, mainly oil, natural gas and potassium, have been pegged at NIS 12 billion ($3.37) billion.
The report also slammed the Water Authority for failing to collect its share of the profits made by corporations, such as the mineral company waters, all while relentlessly pursuing domestic users. Shapira labeled the practice an infringement on the principles of universal justice, saying that it is in the state's vital interest to ensure that all citizens enjoy natural resources, and that companies that utilize them for profit be taxed accordingly.
Shapira further warned that fictitious invoices have become a "plague" and that the tax authority is failing to combat the phenomenon. According to the report, the state has suffered a NIS 3.5 billion ($985 million) loss over the matter.