Published On: Sun, Nov 10th, 2013

Teva Owes $583 Million Taxes in Israel on Trapped Profits; Check Point and Israel Chemicals Are in the Same Club

Assuming that Check Point pays a tax rate of 5-6%, its tax liability will be $82-102 million (NIS 300-360 million).


Check Point Software Technologies Ltd. (Nasdaq: CHKP),  Israel Chemicals Ltd. (TASE: ICL), and Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) are members of an exclusive club of corporations that obtained huge tax breaks and were exempt from the companies tax under the Law for the Encouragement of Capital Investment.

Now with the pending deadline of the directive granting a discount on taxes on dividends paid from trapped profits, the companies are “compelled” to open their wallets and pay some taxes. Nonetheless, the tax that some companies have agreed, or will agree, to pay is a fraction of the full amount they would have paid were it not for the directive.

We will begin with the biggest of the three companies, Teva. The Israeli generic giant, which is going through a serious management crisis and has a market cap of $32.5 billion, stated in its financial report for the third quarter that it has $15.14 billion (NIS 53.5 billion) in trapped profits, and if it were to pay tax on the distribution of a dividend from them, the tax would total $2.13 billion (NIS 7.5 billion).

This is only theoretical. The trapped profits law is the result of the Law for the Encouragement of Capital Investment, which was enacted in 1959, to encourage investment in Israel. The law states that any company defined as an “approved enterprise” is eligible for tax breaks; in effect paying a negligible tax rate. It also states that a company subject to the law that wants to distribute dividend from the untaxed profits will pay a dividend tax of 15% on top of the companies tax rate of 25%, for a total tax rate of 40%.

This condition resulted in corporations, which accumulated huge profits over the decades, not distributing dividends because of the tax liability that would have applied. To avoid paying the tax, they essentially trapped the untaxed profits. The result was the trapped profits law, which basically allows the corporations to pay a much lower tax rate than the 15% rate on dividends distributed from the untaxed profits, and releases them from paying the 25% companies tax.

In effect, the law grants the companies an additional tax break. The law sets out different tax plans, and there is no uniform tax rate for all companies, so it is possible that some companies will pay far less than the 15%.

As for Teva, it stated in its latest financial report that if it utilizes the trapped profits law, it would pay a maximum one-time tax assessment of $700 million (NIS 2.5 billion), or a tax rate of just 4.6%. In May, the company said that it would pay NIS 336 million in taxes on NIS 5.5 billion in trapped profits (a tenth of its total trapped profits), a tax rate of just 6.1%.

On the basis of Teva’s statement that its tax assessment will be $700 million, and excluding what it paid in May, the question is: Will Teva pay NIS 2.1 billion in taxes to the Israel Tax Authority?

As for Check Point, which has a market cap of $11.6 billion, it stated in its financial report for the third quarter that it has $1.7 billion in trapped profits. Check Point, in contrast to Teva, did not mention the amount of its tax assessment, so at this point it is only possible to use Teva’s tax assessment as a baseline for an estimate. Assuming that Check Point pays a tax rate of 5-6%, its tax liability will be $82-102 million (NIS 300-360 million).

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