March 30, 2011 / 3:26 PM / 9 years ago

UPDATE 2-Israel approves law to raise tax on gas profits

* New law to significantly raise tax on natural gas profits

* Tax applies to newly discovered offshore reserves

* State’s share of profits to reach as much as 62 percent

(Adds Netanyahu comment, paragraph 4)

JERUSALEM, March 30 (Reuters) - Israel approved a law on Wednesday that will significantly increase its share of natural gas profits from newly discovered offshore reserves, upsetting energy companies and ending months of uncertainty.

Production of natural gas is set to soar in Israel in the coming years after the discovery of two fields in the eastern Mediterranean that could provide the country with all its gas needs for decades and possibly make it an energy exporter.

Prime Minister Benjamin Netanyahu has staked much political capital in passing the measure, which he says offers the right balance between the needs of Israel and investors, although gas exploration companies have lobbied strongly against it.

“This is a day that brings Israel closer to energy independence,” Netanyahu said in a statement shortly after Israel’s parliament passed the measure by a vote of 78 to 2.

The new law calls for keeping royalties at 12.5 percent, while adding a progressive tax of 20 to 50 percent, dependent on profitability. It would bring the state’s share to as much as 62 percent.

The hike nearly doubles Israel’s current tax and royalty rate, which is one of the world’s lowest.

The private energy sector says any change constitutes a breach of contract, and some lawmakers have warned that the new policy could scare off foreign investors and delay production.

Foreign Minister Yuval Steinitz says other Western countries have made similar changes to production agreements. “This is an important moment for Israel,” Steinitz told Parliament as he thanked lawmakers for passing the motion. (Additional reporting by Allyn Fisher-Ilan; writing by Ari Rabinovitch; editing by Elaine Hardcastle)

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