10 - Taxation of Natural Resources

Summary

This chapter surveys the development of fiscal policy with regard to revenues from exhaustible natural resources. The Oil and Gas Law of 1952 determined that royalties would be paid to the State on the revenues from a discovery by a privately owned concessionaire at the rate of 12.5 percent. Following the discovery in the early 2000s of large gas fields in Israel’s economic waters (in the amount of about one trillion cubic meters), the government created a committee to evaluate the policy in Israel and compare it to that in other countries. It was found that the taxation of natural resources in Israel (Government Take) was much lower than the world average (30 percent vs. 63 percent of profit). The government and the Knesset adopted the recommendations of the committee (which became Sheshinski Law I in 2011), according to which a progressive tax on excess profit (“rent”) – a more efficient instrument than royalties – would also be imposed at the rate of between 20 and 50 percent, depending on the level of profit. After the amendment to the law, the government expected to collect 60 percent or more of the concessionaires’ profit (equal to the average Government Take in the OECD). The law was expanded in 2014 to other natural resources, primarily potash from the Dead Sea (Sheshinski Law II). This chapter also discusses the Wealth Fund established by law in 2011, in which the revenues from the tax on excess profits will be deposited. Most of the investments will be made abroad thereby preventing the Dutch Disease (i.e., the effect of the appreciation in the exchange rate). Revenues – in the amount of 2 percent of GNP – will be deposited in the Wealth Fund starting from 2020.