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TEL AVIV (Reuters) - Israel's parliamentary finance committee on Sunday approved a Finance Ministry proposal for the handling of "trapped profits" earned by multinational firms that is expected to add 3 billion shekels ($771 million) to government tax revenue.
Trapped profits are profits earned by multinational firms after they had been provided with tax incentives to invest in Israel. The ministry has been seeking to give the firms incentives to repatriate some of those profits and generate tax revenue for the government.
Israel's law for the encouragement of capital investment granted tax exemptions for companies setting up plants in Israel but required them to pay corporate taxes if they decided to distribute a dividend from the profits earned while they were exempt from paying taxes. Many of these companies refrained from distributing dividends to avoid taxation.
Under the Finance Ministry's amendment to the law approved by the finance committee, the higher the amount of profit transferred abroad by these companies, the higher the tax benefit they will receive.
The proposal, which still needs final approval by the full parliament, would enable multinationals to pay only 40-70 percent of the amount of taxes they would have owed, although no less than a 6 percent corporate tax rate.
These companies would also be required to reinvest in Israel an amount equal to half of the tax benefit they receive.
Some politicians had argued against the tax benefit, saying the companies should be obliged to pay the full amount of tax.
But Finance Minister Yuval Steinitz has said the tax breaks would encourage the companies to free up the profits that have been sitting in Israel for years, thereby boosting tax revenue and narrowing next year's expected revenue shortfall.
"At this stage it is important to make pertinent decisions and continue to preserve the Israeli economy for the good of its citizens," Steinitz said in a statement.
"The move I initiated will lead to billions of shekels in revenue from the large companies, which will save us from having to collect billions of shekels from the citizens of this country."
Last month, Israel implemented tax hikes and spending cuts aimed at reining in the budget deficit. For 2013, Israel will need further such measures to meet a budget deficit target of 3 percent of gross domestic product.
Reporting by Tova Cohen