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, France Growth 0.3% Spain Growth -1.5% Great Britain Growth 0.2% Italy. Growth -1.9% Germany Growth 1.9% Portugal Growth -3.3% Greece Growth -4.7 Adverse effect on credit ratings Cut in rating outlook: Germany, Holland, Austria Rating downgrade Greece -12 Spain -5 Portugal -5 Ireland -4 Italy -3 France -1 Austria -1 Ireland Growth 0.5% Holland Growth -0.5% Austria Growth 0.9% Belgium Growth 0.0% Sweden Growth 0.9% Norway Growth 1.8% Finland Growth 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 Q 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 France U.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

Unemployment Rates in the Euro Zone Source: Eurostat SpainGreeceEuro ZoneFranceItalyU.S.

Developments in the Job Market Since the Beginning of 2012 (in Thousands) 7

MonthChange in Participation Change in Unemployment June v. January 0.8%0.4% 67.7 (in thousands)19.4 (in thousands) June v. Q %0.4% 79.8 (in thousands)18.8 (in thousands) Change in Participation and Unemployment Since the Beginning of 2012

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

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

Gap between Actual Tax Collection and January Forecast for 2012, by Month (in NIS Billions) 11 Month Revised Monthly Forecast Actual Monthly Collection Monthly Gap January-June Original collection forecast for Revised forecast from January Tax deficiency from January 2012 forecast as of June

Required Policy 12 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 13 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 14

Required Measures Additional Revenue for 2013 in NIS Millions Measure 4,400VAT increase from 16% to 17% 3,000Collection of tax on trapped corporate profits 2,000Deepening of tax collection and fighting black money 1,200One percent tax increase for wage earners earning more than NIS 14,000 a month 1,000Increase in purchase tax on cigarettes and beer 950Increase in employers’ National Insurance contributions 600Two percent surtax on annual income above NIS 800, Adjustment of the green taxation formula for vehicles 300Extension of the temporary order on purchase tax 300No index adjustment for the top three tax brackets 14,150Total 15

Steps to Increase Tax Collection and Fight Black Money July 2012

Key Challenges 17 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 18 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 19

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 Trapped corporate profits Approx. NIS 17 billion 22

Tax Brackets )NIS thousands per month, 2012 prices) 2007 )Weighted for changes in the tax brackets According to the Bill Up to NIS 5, %10% Up to NIS 8, %14% Up to NIS 14, %21%21%21% Up to NIS 20, %30%31%* Up to NIS 41, %33%34%* Above NIS 41, %48%48%* Recently raised from 45% Income above Nis 67,00048% 50%** Income Tax Rates for Individuals Proposed Increase in 2013 * Plus freezing of linkage ** Including surtax 23

Examples of the Effect of the Changes in Income Tax ManWoman with 3 Children Wage Additional Tax 4, , , , , , , , ,0001,037 24

25 Thank you