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 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 occasionally withheld the taxes it owes the Palestinian Authority.

Background

Until 1967, the West Bank was subject to the Jordanian system of taxation, while Gaza to the Egyptian. Neither territory had previously had economic ties with Israel. After Israel occupied these 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. Israel’s labour market was opened to Palestinian workers, and in 1972 one out of four Palestinian workers had found employment in Israel.
Military Order 31 of 27 June 1967 assigned all powers of taxation to an Israeli official appointed by the Area Commander. Israel adopted the Jordanian Income Tax Law of 1964 to levy taxes on Palestinians in the West Bank, while making notable changes to its tax rate intervals, but applied Israeli tax laws to Israeli Jews moving into settlements there. Under the Jordanian system the highest tax rate of 55% started with incomes of 8,000 dinars. The Israeli military authorities squeezed the rates so that by 1988 this applied to Palestinians earning 5,231 JD. This discrimination did not affect Israeli West Bank settlers, who were allowed to be taxed at the lower rates operant in Israel. Similarly the self-employed West Bankers appeared to pay more than their Israeli counterparts, but due to the different deductibility regimes, clearer conclusions about discriminations could not be ascertained.
Access to most public services in areas under Israeli control is conditional on proof one is not in arrears with paying one's taxes, income, property and value-added and fines, to the military administration. The bureaucratic process is cumbersome and arbitrary. This system was legalized in the West Bank retroactively under two military order No. 1262. Israel's taxation allows broad leeway and discretion, taking in norms of appeal and the taxpayer's rights. The draconian provisions of Section 194 of the Israeli Income Tax Ordinance, allowing taxation officers to assess what a taxpayer may owe while limiting challenges, and making them conditional on the prior payment of a bond, rarely applied in Israel, has been routine in the West Bank. Likewise, imprisonment for tax offenses is uncommon in Israel but, according to Lazar, "in the territories it is used on a massive scale and for extensive periods of time." Palestinians deeply resented paying taxes on their business and commercial activities to the Occupation authority without receiving the same benefits Israeli taxpayers had in return. In the First Intifada, tax payments dropped 50%, and Israel responded by cutting health benefits.
The relatively affluent entrepreneurial Christian town of Beit Sahour, in response to military repression organized a sumud-inspired non-violent boycott of Israeli consumer products in favour of Palestinian-Jordanian wares, and shortly afterwards refused to pay taxes to the occupying power on the basis of the slogan "No taxation under Occupation" and the principle of the American colonial revolt against their British masters, namely No taxation without representation. They protested paying school taxes because under Israeli as opposed to Jordanian occupation they now had to pay for their education, and claimed tax monies received were not used to provide services but to cover the costs of IDF ammunition and tear gas fired at their children. There was even a tax on stones thrown. As a result, the IDF placed the town under total curfew for 42 days, blocking food imports, cutting telephone lines, impounding private cars, arresting over forty community leaders, who received year-long gaol sentences, and confiscating cash and property found in house raids amounting to millions of dollars, and one period seizing $US 1,500,000 worth of goods from 300 families, including living room furniture, fridges and stereos which were then sold in Israel at auctions. Closures of schools, medical clinics and food supply chains continued for months after the curfew was lifted. The revolt was crushed in nine months.
Taxes paid by settlers and Israeli soldiers living in the Palestinian territories, including East Jerusalem, including income taxes, flow directly into the Israeli treasury. 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.
In 1994, the Gaza–Jericho Agreement and the annexed Protocol on Economic Relations 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 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. 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 and revenues from foreign imports on behalf of the PA. 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.
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. In December 2012, the tax revenues collected by Israel were put at some $100 million a month. In 2014-2015, the revenue was about $160 million per month. The Authority's self-generated revenue collected by Israel account for about 70-75% of the total government’s income.

Israeli tax withholdings

Because of the large proportion of taxes in the PA's budget collected by Israel, the PA is vulnerable to a unilateral suspension of clearance revenue transfers by Israel. As early as 1997, Israel used the withholding of tax payments for political reasons and to unilaterally settle bills unpaid by Palestinians. Israel has 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.
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.
In July 2018, the PA Finance Ministry said that Israel was deducting NIS 120 million each month to cover the costs of electricity and water that Israel supplies to the Palestinians, in addition to medical treatment Palestinians receive in Israeli hospitals. Israel was also proposing to withhold the amount that the PA pays to security prisoners and their families, which total NIS 100 million a month.
Israel has suspended transfers of Palestinian taxes on a number of occasions, including: