Israeli Prime Minister Benjamin Netanyahu and his economic adviser Avi Simhon are seeking to cancel the increase in value-added tax from 17% to 18% scheduled to take effect in early 2025, according to what the Israeli economic newspaper Globes reported, citing a source described as “close to the matter.”
Instead, the plan, prepared by Netanyahu’s adviser and head of the Israeli Economic Council, Avi Simhon, and supported by Netanyahu, proposes using revenues from additional tax benefits on the distribution of retained earnings to companies, which he is promoting, to cancel the VAT increase and was already approved as part of the state budget passed last March.
Retained earnings refer to the percentage of a company’s net profits that it keeps and does not distribute to shareholders to reinvest in its core business, or to pay off debts, and is recorded within shareholders’ equity in the balance sheet.
Budget deficit
This comes at a time when the Israeli budget deficit has worsened to more than the target under pressure from increased military spending as a result of the war on Gaza, which is expanding regionally on the northern front with Hezbollah and in other areas.
A 1% VAT increase would increase Israel’s revenues by more than NIS 7 billion ($1.92 billion) annually, while the Finance Ministry estimates the gains from releasing (distributing) withheld earnings at between NIS 5 billion ($1.37 billion) and NIS 10 billion ($2.75 billion), and Simhon puts it at NIS 20 billion ($5.5 billion).
Even with the lower estimate, the newspaper said, the taxes could replace the expected revenues from the value-added tax in 2025.
Last month, Globes quoted Finance Ministry sources as saying that offering tax benefits to release retained earnings amounted to a cheap sale that would reduce Israel’s revenues in the long run. They added that previous special measures had provided companies with significant benefits, and that repeating them would create a permanent expectation of future campaigns, which would encourage companies to continue accumulating profits rather than distributing them routinely.
Ministry of Finance Plan
The VAT bolsters the Finance Ministry’s master plan in the revised war budget to offset increased defense spending, and credit rating agencies welcomed its increase as a factor in avoiding further cuts, so a rollback could have a negative impact on Israel.
The latest proposal reflects Simhon’s return to a position of influence in shaping the government’s economic policy after a period of relative silence in the previous budget, as Simhon is now behind the promotion of a number of steps aimed at providing tax benefits to the public.
It includes a plan to stimulate the release of retained corporate earnings at a reduced tax rate, and to cancel the value-added tax increase.
Finance Ministry sources believe that Simhon’s increased involvement stems from increasing pressure from Netanyahu to find new sources of income to avoid additional tax increases.
