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

1. The Paris Protocol—Historical classification. Konrad-Adenauer-Stiftung, 2012. Accessed March 2016
2. Plan to Give 61 West Bank Settlements Tax Benefits. Moti Bassok and Zvi Zrahiya, Haaretz, 26 October 2015
3. Gov't promoting tax benefits for West Bank settlements. Moran Azulay, Ynetnews, 21 January 2016
4. Occupation, Inc.—How Settlement Businesses Contribute to Israel’s Violations of Palestinian Rights. Human Rights Watch, 19 January 2016
5. Israel Panel Okays Bill Calling for Tax Exemption to 'Zionist' Donations. Jonathan Lis 12 February 2012
6. The Israeli-Palestinian trade agreement – analysis. Yoav Stern, Britain Israel Communications & Research Centre (BICOM), 14 August 2012
7. Backgrounder: the Shrinking PA Budget. Esther Pan, Council on Foreign Relations, 21 April 2006
8. Report on UNCTAD assistance to the Palestinian people: Developments in the economy of the Occupied Palestinian Territory, para 9-24. United Nations Conference on Trade and Development, 6 July 2015 (doc.nr. TD/B/62/3). Source
9. Israel’s retaliatory seizure of tax, pp. 10-11. Al-Haq, 1 April 2015. Here available
10. Palestinians' Hamas Leader Faces Myriad of Problems. The New York Times, 6 April 2006
11. Israel to withhold Palestinian funds until March. Reuters, 12 December 2012
12. Palestinian PM calls for boycott of Israeli goods. AP, 16 December 2012
13. Sherwood, Harriet (30 November 2011). "Israel unfreezes Palestinian Authority tax millions". The Guardian.
14. Israel withholds Palestinian tax money amid EU row. Adam Entous, Reuters, 4 June 2008
15. Israel cuts off Palestinian tax funds as relations hit new low. Donald Macintyre, The Independent, 7 June 2008
16. WEST BANK: Palestinian vulnerability exposed as Israel withholds money. Los Angeles Times, 2 May 2011
17. Israel: Cash transfer to Palestinians on hold. Associated Press, 1 May 2011
18. France joins EU in pledging aid to Palestine. Andrew Willis, EUobserver, 10 May 2011
19. After UNESCO Vote, Israeli Sanctions on Palestinian Authority Anger U.S.. Barak Ravid and Agencies, Haaretz, 4 November 2011
20. 3209th FOREIGN AFFAIRS Council meeting, Brussels, 10 December 2012, Middle East Peace Process #5. Council of the European Union
21. Gardner, Andrew (10 December 2012). "EU criticises Israeli plans". European Voice.
22. Israel suspends peace talks with Palestinians. Batsheva Sobelman, Los Angeles Times, 24 April 2014
23. Venezuela signs deal to provide Palestinian Authority with oil. RT, 19 May 2014. "The Israelis are also withholding US$116 million of Palestinian tax revenue. The punitive measures were in response to the reconciliation agreement between the Palestinian Fatah party, which rules the Palestinian Authority, and Hamas, the militant group which controls Gaza, according to Haaretz."
24. Israel to Transfer PA Tax Funds. IMEMC, 19 April 2015

See also