Israel Enacts Depletion Allowances for Oil Income; Goes Beyond U.S.

Foreign and domestic oil operators in Israel will now receive the benefits of depletion allowances, retroactive to the beginning of oil exploration in the state, the Government of Israel announced today in New York. The new regulations give oil operators not only the same depletion allowances current in the United States and Canada, but go beyond them in the deductions allowed.

According to the regulations, companies may deduct a “percentage depletion” equal to 27-1/2 percent of their gross income from crude oil and natural gas production, as long as this figure does not exceed half the net income for a taxable year. Furthermore, considering the high cost of oil development, companies may deduct “cost depletion,” an amount based on actual investment in oil and gas rights, should this amount be more than the percentage depletion.

Where Israel’s new ordinance goes beyond prior U.S. or Canadian tax provisions is in permitting the costs of geological and geophysical expenses to be included in exploration expenses, chargeable to current operations. Such expenses are not deductible in the U.S. and Canada.

The new income tax provisions have been under study since 1952, when the Israeli Government enacted the basic petroleum law under which nine private groups are currently engaged in test drilling. When the discovery of oil at Heletz in September 1955 made possible the production of oil in commercial quantity. Government tax experts concentrated on implementing the Government’s promise to enact tax measures with benefits at least equal to those in force in the U.S. and Canada. The new regulations become part of Israel’s general income tax ordinance.

To date, 26 deep wells have been drilled and, of these, 16 have been begun since the discovery of oil last year. The nine groups currently working test sites have licenses covering almost 12,000,000 dunams of Israeli territory. The nine private groups now drilling in Israel include five with substantial participation of U.S. capital, two financed by Canadian capital, and two, by domestic capital.

Israel’s petroleum law is based on free and competitive enterprise, and is designed to encourage investment by private capital. Under its provisions, a company is licensed to explore for oil in one or more of the petroleum districts into which the country has been divided. The license is granted for non-revokable three year period, and can be extended for up to seven years dating from the original grant.