Netanyahu Quits Israeli Job; Policies Remain

by Lorys Charalambous, Tax-News.com, Cyprus

09 August 2005

Benjamin Netanyahu's shock resignation as Israeli Finance Minister on Sunday will not de-rail economic reforms, said Prime Minister Ariel Sharon after the stock market dropped 5%.

Netanyahu has overseen a pro-business policy aimed at liberalising the economy, cutting unemployment and welfare benefits, increasing the pace of privatization, and lowering taxes.

Sharon told Bank of Israel Governor Stanley Fischer that the upcoming state budget will meet deficit and expenditure targets that were set by Netanyahu, the statement said.

Fischer, a US citizen, IMF Managing Director and former vice chairman of New York-based banking giant Citigroup Inc, was chosen for the job by Netanyahu, who told a news conference he had remained in the government despite his opposition to the withdrawal in order to complete key reforms in the capital markets and tax system.

Netanyahu's most recent US$2.4 billion tax reform package was passed by the Knesset at the end of July in its second and third readings. The tax reforms will introduce a number of cuts in taxation over the course of the next five years in an attempt to stimulate investment and economic activity, and lessen the tax burden on the least well-off.

The key elements of the tax reform bill include: a reduction in corporate income tax to 25% from 35% and a cut in the top rate of individual income tax to 44% from 49% starting in 2006; a cut in value added tax to 16.5% from 17% from September 2005; and an increase in capital gains tax to 20% from 15% beginning in 2006.

The bill also grants exemption from purchase tax on homes up to NIS550,000 in value by a temporary order, to be in effect from July 1, 2005 until the end of 2007.

In addition, the committee approved the following amendments: a cut in the land betterment tax to 20% from 25% from 2008 instead of 2010; a reduction in the vesting period before employee options deposited with a trustee are eligible for tax breaks to 24 months from 30 months; and an increase in the tax exemption on pensioners' savings income to NIS7,800 for individuals and NIS11,700 for couples.

The Knesset has also passed the Bachar capital markets bill, which seeks to open up the country's banking sector to increased competition. Based on recommendations of the committee headed by Finance Ministry Director General Joseph Bachar, the capital market reform bill will force the banks to separate themselves from any holdings in mutual and provident fund companies.

As a result of the new legislation, Israel's two largest banks, Hapoalim and Leumi, will have to sell their provident funds within three years, and their mutual funds within four years, of the law coming into effect.

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