Taxation in the State of Palestine

As of 2016, Taxation in the State of Palestine is subject to the Oslo Accords, notably the Protocol on Economic Relations or Paris Protocol, which was signed in 1994 by the PLO and Israel. The Paris Protocol established a customs union, which essentially formalized the existing situation where the Palestinian economy was merged into the Israeli one. Formally, the Palestinian Authority (PA) is entitled to collect taxes from the Palestinians in the Palestinian territories, but some 75% of the total tax revenue was as of 2014 collected by Israel on behalf of the PA and transferred on monthly basis. Israel has regularly withheld the taxes it owes the Palestinian Authority.

Background

Until 1967, the West Bank was subject to the Jordanian system of taxation; Gaza to the Egyptian. Neither territory had previously had economic ties with Israel. After Israel had occupied the Palestinian territories, the economic relations with the former rulers were cut and Israel launched a partial integration of the territories into its own economic structures in the form of an incomplete customs union. The Israeli labour market was opened up to Palestinian workers and in 1972, one out of four Palestinian workers had found employment in the Israeli economy.^[1]

The taxes paid by settlers and Israeli soldiers who live in the occupied Palestinian territories, including East Jerusalem flow directly into the Israeli treasury. This includes income taxes.^[2][3] Institutions and businesses in settlements pay taxes to the municipalities, albeit they enjoy tax benefits, thus contributing to the sustenance of the settlements. This includes corporate taxes and water taxes.^[4][5]

In 1994, the Gaza–Jericho Agreement and the annexed Protocol on Economic Relations (Paris Protocol) were signed by the PLO and Israel, which created both the Palestinian Authority and a formal customs union.

The tax clearance system

Israel collects taxes on Palestinian imports on behalf of the PA and transfers the results on monthly basis. Israel forces all Palestinian imports (and its exports as far as allowed by Israel) to go via Israel. Within the West Bank, all goods are unilaterally routed by Israel via military checkpoints and crossings through the Israeli West Bank barrier.^[6] Palestine highly depends on goods and services sold in Israel and intended for consumption in the Occupied Territories, on which Israel charges value added tax (VAT) and revenues from foreign imports on behalf of the PA.^[6][7] As a result, tax clearance is the largest source of Palestinian public income. Also income taxes as well as some insurance fees deducted from the wages of Palestinians employed in Israel and the Israeli settlements are collected by Israel.^[8][9]

Early 2006, the Palestinian Authority directly collected in the West Bank Area's A and B approximately $35 million per month from taxes and other charges; Israel turned over about $50 million of collected taxes per month.^[10] In December 2012, the tax revenues collected by Israel were put at some $100 million a month.^[11][12] In 2014-2015, the revenue was about $160 million per month.^[8] The Authority's self-generated revenue collected by Israel account for about 70-75% of the total government’s income.^[8][13]

Israeli withholdings as means of pressure

The large proportion of Israeli-collected taxes in the PA's budget makes the PA vulnerable to unilateral suspension of clearance revenue transfers by Israel. As early as 1997, Israel began to abuse the clearance system for political reasons and to unilaterally settle bills unpaid by Palestinians. Israel has frequently suspended hundreds of millions of dollars for accumulated periods of some 4 years. While the state-owned Israel Electric Corporation unilaterally issues excessive late payment penalties and interest charges, Israel did not pay interest on money it did not transfer to the PA.^[8]

Political reasons for suspension varied from Palestinian violence to the election of Hamas in the PA, reconciliation between Fatah and Hamas and the demand for international recognition.^[8]

• 1997: Following a bombing in Jerusalem, Israel suspended the transfer for two months.^[9]
• 2000: Following the start of the Second Intifada, Israel withheld Palestinian revenue for two years.^[8][9]
• 2006: Following the 2006 Palestinian legislative election, Israel suspended the tax transfers for more than a year.^[8][9]
• 2008: In June 2008, Israel retained a large part of the taxes in an apparent retaliation for PA Prime Minister Salam Fayyad's lobbying at the European Union not to upgrade the Israel–European Union relations.^[14][15]
• 2011: After a Fatah–Hamas reconciliation attempt in May,^[16][17][18] and during October and November 2011 in response to Palestine's bid for full membership in the United Nations and admission to UNESCO, Israel refused to transfer collected taxes.^[13][19]
• 2012: In response to Palestine securing an upgraded status in the UN pursuant to United Nations General Assembly resolution 67/19, Israel withheld the December 2012 tax transfer, to the amount of $100 million.^[12] Foreign Minister Avigdor Lieberman said that "The Palestinians can forget about getting even one cent in the coming four months".^[11] The withheld money will be used to pay Palestinian debts to the Israel Electric Corporation, and Lieberman also said that the Palestinians had a major debt with the Israeli water authority (Mekorot) that would have to be paid.^[11] Both the Israel Electric Corporation and Mekorot are primarily owned by the government of Israel. The Foreign Affairs Council of the Council of the European Union released a statement calling on Israel to "avoid any step undermining the financial situation of the Palestinian Authority" and stating that "Contractual obligations, notably under the [Protocol on Economic Relations], regarding full, timely, predictable and transparent transfer of tax and custom revenues have to be respected."^[11][20] On 9 December 2012, Mahmud Abbas warned he may refer Israel to the International Criminal Court (ICC) if it continues to withhold tax revenues at a meeting of the Arab League at which other members agreed to make up the shortfall in revenues.^[21]
• 2014: Following the April 2014 Gaza Agreement, Israel again withheld taxes as a punitive measure, in order to unilaterally settle debts.^[22][23]

• 2015: In December 2014, Palestine submitted a declaration accepting the jurisdiction of the International Criminal Court over crimes committed “in the occupied Palestinian territory, including East Jerusalem, and acceded to the Rome Statute to become a states party to the Statute. Israel suspended the transfer of Palestinian tax revenues to the PA as punishment for 4 months until April 2015.^[8][9][24]

References

See also

Taxation
An aspect of fiscal policy
Policies Government revenue Tax revenue Non-tax revenue Tax law Tax bracket Tax threshold Exemption Credit Deduction Tax shift Tax cut Tax holiday Tax advantage Tax incentive Tax reform Tax harmonization Tax competition Double taxation Representation Unions Medical savings account Tax, tariff and trade
Economics Price effect Excess burden Tax incidence Laffer curve Optimal tax Theory Optimal capital income taxation
Collection Revenue service Revenue stamp Tax assessment Taxable income Tax lien Tax refund Tax shield Tax residence Tax preparation Tax investigation Tax shelter Private tax collection Tax farming
Noncompliance Tax avoidance Tax evasion Tax resistance Tax haven Smuggling Black market Transfer mispricing Unreported employment Tax shelter
Distribution Tax rate Progressive Regressive Proportional
Types Direct Indirect Per unit Ad valorem In rem Capital gains Carbon Consumption Dividend Ecotax Excise Fuel Georgist Gift Gross receipts Income Inheritance (estate) Land value Payroll Pigovian Property Sales Sin Single Stamp Steering Turnover Value-added (VAT) Corporate profit Excess profits Windfall profits Negative (income) Flat Wealth
International Financial transaction tax Currency transaction tax Tobin tax Spahn tax Tax equalization Tax treaty Permanent establishment Transfer pricing European Union FTT Foreign revenue rule
Trade Custom Duty Tariff Import Export Tariff war Free trade Free trade zone Trade agreement
Religious Church tax Eight per thousand Teind Tithe Fiscus Judaicus Leibzoll Temple tax Tolerance tax Jizya Kharaj Khums Nisab Zakat
By country List of countries by tax rates Tax revenues as %GDP Albania Algeria Argentina Australia Azerbaijan Bangladesh Bhutan Bulgaria BVI Canada China Colombia Denmark France Germany Greece Iceland India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Lithuania Malta Namibia Netherlands New Zealand Norway Pakistan Palestine Peru Philippines Poland Russia Singapore South Africa Sweden Switzerland Tanzania United Kingdom United States Uruguay