Measures for Reducing the Deficit and for Coping with the Effects of the Global Economic

Crisis on the Israeli Economy

August 2012

The Crisis in Europe, 2012

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FranceGrowth 0.3%

Spain Growth -1.5%

Great BritainGrowth 0.2%

Italy.Growth-1.9%

GermanyGrowth 1.9%

Portugal Growth -3.3%

GreeceGrowth

-4.7

Adverse effect on credit ratings Cut in rating outlook: Germany, Holland, Austria

Rating downgradeGreece -12Spain -5Portugal -5Ireland -4Italy -3France -1Austria -1

IrelandGrowth 0.5% Holland

Growth -0.5%

AustriaGrowth

0.9%

BelgiumGrowth0.0%

SwedenGrowth 0.9%

NorwayGrowth 1.8%

FinlandGrowth 0.6%

Rise in Global Risks

Deepening recession in Europe that is proving worse than the forecasts Great Britain – The GDP declined by 0.7% in the second quarter Spain – Forecasts have been lowered; an additional program of cutbacks

has been formulated Italy – Rating downgrade; an additional program of cutbacks has been

formulated Greece – Increasing difficulties

The crisis is felt even in the stable economies Moody’s has cut the rating outlook for Germany and Holland. In the U.S. – Significant slowdown in growth in Q2 2012 and stagnation

in the job market; the central bank (the Fed) and the International Monetary Fund have lowered growth forecasts

3

Yields on Ten-Year Bonds

Source: Bloomberg

Greece*

Spain

Italy

Israel

FranceU.S.Germany

* Greece is on a separate axis – the yield in July 2012 stood at 26%.

Source: The Economist

The debt crisis in the Euro zone and the fiscal difficulties in the U.S. have caused a significant drop in the growth forecasts

Growth Forecast for 2012

5

Unemployment Rates in the Euro Zone

Source: Eurostat

Spain Greece Euro Zone France Italy U.S.

Developments in the Job Market Since the Beginning of 2012 (in Thousands)

7

MonthChange in ParticipationChange in

Unemployment

June v. January0.8%0.4%

67.7 (in thousands)19.4 (in thousands)

June v. Q4 20110.9%0.4%

79.8 (in thousands)18.8 (in thousands)

Change in Participation and Unemployment Since the Beginning of 2012

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Growth of Israel’s GDP(Annualized Quarterly Growth Rate)

10

Government Deficit as a Percentage of GDP –Planning v. Performance

Required Policy

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• Immediate steps to meet the deficit target for 2013

• Immediate steps to rein in the deficit in 2012

• Immediate steps to comply with the limit on expenditure in 2012

Significance of Failure to Take Immediate Steps

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• Risk of reduction in the credit rating

• Increased financing costs

• Loss of market confidence

• Impairment of private sector funding sources

Severe financial crisis necessitating harsher steps

July 1: Government resolution to increase the deficit target for 2013 from 1.5% to 3.0% of GDP

1.5% of GDP = Increase of NIS 15 billion in the deficit, resulting in a reduction of NIS 15 billion in tax increases

Deficit Target and Additional Required Tax Collection

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Required Measures

MeasureAdditional Revenue for 2013 in NIS Millions

VAT increase from 16% to 17%4,400Collection of tax on trapped corporate profits3,000Deepening of tax collection and fighting black money

2,000

One percent tax increase for wage earners earning more than NIS 14,000 a month

1,200

Increase in purchase tax on cigarettes and beer1,000Increase in employers’ National Insurance contributions

950

Two percent surtax on annual income above NIS 800,000

600

Adjustment of the green taxation formula for vehicles

400

Extension of the temporary order on purchase tax300No index adjustment for the top three tax brackets300Total14,150

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Steps to Increase Tax Collection and Fight Black Money

July 2012

Key Challenges

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Money laundering

Organized crime

False invoices

Concealment of assets

Fictitious imports and exports

Smuggling of funds abroad

Establishment of dummy corporations

Effective handling of the debt load

Proposed Bill for Fighting Black Money

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Tax offenses as source offenses (in the Prohibition of Money Laundering Law)

Transfer of information to the Israel Tax Authority from the Anti Money Laundering Authority

Reduction in the amount of cash transactions between dealers (from NIS 20,000 to NIS 10,000 plus a 15% fine)

Proposed Bill for Increasing the Efficiency of the Tax Collection Processes

Expansion of debt collection powers

Tax offsetting between tax systems

Prevention of the concealment of assets

Piercing of the corporate veil – transfer of activity

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Proposed Bill for Increasing Enforcement Efficiency

Withholding tax refunds to those who fail to file tax returns

Administrative penalties / financial sanctions (for incorrect reporting / false invoices)

Effective tax collection in assessment and appeal processes (fines for arrears from the assessment date and

bond in an appeal proceeding)

Supervision of the transfer of goods to prevent tax evasion (on entering Eilat and in transfers to the

Palestinian Authority)20

Trapped Corporate Profits

July 2012

Trapped Corporate Profits

The temporary order will net NIS 3 billion

Trapped corporate profits

Approx. NIS 17 billion

22

Tax Brackets)NIS thousands per month,

2012 prices)

2007)Weighted for

changes in the tax brackets

20122013According to the

Bill

Up to NIS 5,20010.4% 10%10%

Up to NIS 8,88021.0%14%14%

Up to NIS 14,00030.2%21%21%

Up to NIS 20,00035.4%30%31%*

Up to NIS 41,83036.3%33%34%*

Above NIS 41,83148.0%48%48%*Recently raised from

45%

Income above Nis 67,00048%48%50%**

Income Tax Rates for IndividualsProposed Increase in 2013

* Plus freezing of linkage ** Including surtax 23

Examples of the Effect of the Changes in Income Tax

ManWoman with 3 Children

WageAdditional TaxAdditional Tax4,000006,000008,00000

10,0000012,0000015,000494920,000999940,000352352100,0001,0371,037

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Thank you