6/26/2024–|Last updated: 6/26/202408:22 PM (Mecca time)
Avi Simhon, economic advisor to Israeli Prime Minister Benjamin Netanyahu, proposed providing additional tax benefits on companies’ distribution of retained profits, to fill the budget deficit expected in 2025 with the increase in military expenditures as a result of the war on the Gaza Strip, which is likely to expand to Lebanon, amid strong opposition from professionals in the Ministry of Defense. Israeli finance, according to what was reported by the Israeli economic newspaper Globes.
Retained earnings refer to a percentage of a company’s net profits that it retains and does not distribute to shareholders to reinvest it in its core business, or to pay off debts, and is recorded within shareholders’ equity in the balance sheet.
Simhon, supported by Netanyahu, sees the release of retained profits (by distributing them to shareholders in companies) as an opportunity to pump large sums of money into state coffers in the short term, as a means of dealing with the exorbitant costs of the war, according to the proposal conveyed by the Minister of Finance, Bezalel Smotrich.
According to Simhon, such a program could generate taxes worth NIS 20 billion ($5.33 billion) on the distribution of NIS 80 billion ($21.35 billion) of retained earnings.
Simhon’s numbers are based on an estimate that accumulated retained earnings in companies amount to about NIS 700 billion ($186.85 billion), according to Globes.
Underselling
Finance Ministry officials say the proposal amounts to a sell-off that will reduce Israel’s revenues in the long term, adding that previous special measures have provided companies with significant benefits, and that repeating them will create lasting expectations for future campaigns, which will encourage companies to continue accumulating profits rather than distributing them sparingly. routine.
The Director of the Israel Tax Authority, Shai Aharonovitch, supported the Finance Ministry professionals, saying at conferences that the new campaign with tax breaks will actually reduce tax revenues in the coming years.
However, according to Samhoun, even if some future taxes are collected in advance, with the fiscal deficit expected to peak this year and gradually moderate over the next few years, there is justification for turning to these savings now.
A carrot without a stick
Retained profits are the product of a tax policy designed to encourage investment in the economy. Under the Capital Investment Encouragement Law, companies received significant tax benefits on profits generated from approved investments, provided that these profits were not distributed to shareholders. The goal was to encourage companies to invest their profits in developing its business more.
With this measure, Israel motivates companies to accumulate profits without distributing them, in order to avoid paying taxes. In the two-stage Israeli tax system, corporate profits are taxed once at the company level, and again when they are distributed as profits to shareholders.
By retaining profits, companies benefit from significant tax deferral, as they are only subject to tax at the company level (at reduced rates) and not at the shareholder level.
Previous proposals to confront the Israeli budget deficit
This month, the Ministry of Finance in Israel put forward a proposal to close the budget deficit in 2025, which includes a comprehensive reduction in ministries’ expenditures in next year’s budget by 5%, amounting to 3.5 billion shekels ($940.2 million).
This is one of several measures proposed by the Ministry’s Budget Department, which aims to reduce the expected fiscal deficit for next year by about 3.8% of the gross domestic product.
The Budgets Department of the Ministry of Finance prepared a list of possible amendments with a total value of up to 50 billion shekels ($13.43 billion), according to what Globes quoted from a source in the Ministry of Finance.
Among other proposals presented:
- Reducing the salaries of senior managers in the public sector.
- Postponing the next batch of pay increases in the civil service.
- Reducing allocations to the coalition parties (the parties forming the government) by between 2 and 4 billion shekels ($534.2 million and $1 billion).
- Abolition of unnecessary ministries.
- Raising the value-added tax rate to 19% (it is scheduled to be raised from the current 17% to 18%).
However, the sources suggested that this step would remain a precaution in the event that the confrontations in the north with Hezbollah develop into a comprehensive war, which requires immediate sources of funding.
