Zim could abandon Israeli flag over tax dispute

After years of losses, Zim Integrated Shipping Services Ltd. (NYSE: ZIM) is now making profits, and the company has immediately begun talks with the Israel Tax Authority and Ministry of Finance about the tax rate that it is supposed to pay. Sources at the company have sent a ‘message’ to Ministry of Finance officials that if the state does not adopt the proposed occupancy tax law, which has been enacted in many other countries worldwide, and which calculates tax rates according to the occupancy of ships and not the company’s profits, then it will relocate its activities to another country.

Led by CEO Eli Glickman, Zim held an initial public offering (IPO) on Wall Street in January 2021 at a company valuation of $1.7 billion, after money. Since then the company’s share price has risen 280%, reflecting a market cap for the shipping company of $6.6 billion. This jump follows the company’s remarkable financial results over the past year spurred on by the boom in the shipping industry. In the first nine months of 2021, Zim set aside $636 million for income tax, representing 17.8% of the company’s profits over that period of $2.935 billion – the company also paid a dividend of $237 million to shareholders.

All this follows years of heavy losses in which Zim paid zero tax. In 2020, the company accumulated losses of $1.523 billion. Now not only do the profits cover the losses but Zim is the most profitable company in Israel, requiring it to pay a high tax rate.

Now that the time has come for Zim to pay hundreds of millions of dollar in tax, it is also talking to the state about the occupancy tax law initiative which would dramatically reduce the tax liability of shipping companies.

By the occupancy law method, income is calculated according to the occupancy of the ship that the company operates – how many tons the ship can transport, instead of company tax of 25%, which has already been cut from 30%. While company tax relates to the profitability of the company, occupancy tax relates to the size and the capacity of the company. Many countries worldwide adopted the occupancy tax 15-20 years ago including the US, EU, Japan, China and India, but Israel, despite discussions on the matter, has not done so.

In any case, Israel has not previously had shipping companies of a size that made the issue relevant. There was no sufficient pressure on the Israeli government to move ahead on the matter but now Zim has put the issue back on the agenda.

According to tax expert Adv. Yaniv Shekel, “Usually the overall tax rate is calculated for each ship separately and falls the bigger that the ship is. So in Cyprus for example tax amounts imposed on ships per year move between €0.365 for the first 1,000 tons through to €0.31 for the next 9,000 tons and down to €0.04 per ton.

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“This means that a 20,000 tons ship, for example, would pay annual tax of about €5,000, which is negligible compared with the profit that the ship can make.

“In Israel legislation regarding tax for shipping companies is mandatory. It is not clear and has been updated in recent decades in order to be adjusted with changes in the world.”

It is difficult to assess how much tax Zim would pay under occupancy tax in Israel because it is unclear which model would be adopted. But even with rough calculations according to the draft law that has previously been tabled at the Knesset, a dramatic reduction in tax liability is involved ranging from hundreds of millions of shekels to tens of millions.

The Israel Tax Authority is holding discussions on Zim’s current tax assessment and future taxes that will be imposed on the shipping company. Senior figures at the Tax Authority, Ministry of Finance and Zim including CEO Eli Glickman are involved in the discussions that according to the company could decide Zim’s future in Israel.

But Zim controlling shareholder Idan Ofer knows that he has limited ability to “threaten” the Israeli government. In addition to Zim, Ofer is the controlling shareholder in ICL (TASE: ICL: NYSE: ICL), which records billions of shekels in revenue from state concessions and cannot move its factories abroad. There will also be sensitive discussions about plans to move Ofer’s Oil Refineries Ltd. (TASE:ORL) from Haifa Bay.

Zim declined to comment on this report.

Published by Globes, Israel business news – en.globes.co.il – on January 12, 2022.

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