Taxation in the State of Palestine

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.[1] Military Order 31 of 27 June 1967 assigned all powers of taxation to an Israeli official appointed by the Area Commander.[2] 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.[3] 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 (equal to 24,064 Israeli shekels, whereas in Israel the 48% rate only applied to Israeli wage earners earning nearly double that amount (45,600 shekels).[4] This discrimination did not affect Israeli West Bank settlers, who were allowed to be taxed at the lower rates operant in Israel.[lower-alpha 1] 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.[6]

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 (VAT) 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 (17 December 1988).[7][8] Israel's taxation[lower-alpha 2] 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.[10] 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."[8] 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.[11] In the First Intifada, tax payments dropped 50%, and Israel responded by cutting health benefits.[12]

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"[13] and the principle of the American colonial revolt against their British masters, namely No taxation without representation.[14] 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.[12][15] 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.[16][17][18]

Taxes paid by settlers and Israeli soldiers living in the Palestinian territories, including East Jerusalem, including income taxes, flow directly into the Israeli treasury.[19][20] 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.[21][22]

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.

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.[23] 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.[23][24] 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.[25][26]

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.[27] In December 2012, the tax revenues collected by Israel were put at some $100 million a month.[28][29] In 2014-2015, the revenue was about $160 million per month.[25] The Authority's self-generated revenue collected by Israel account for about 70-75% of the total government’s income.[25][30]

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.[25]

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.[25]

In July 2018, the PA Finance Ministry said that Israel was deducting NIS 120 million (about US$30 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.[31] 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.[31]

Israel has suspended transfers of Palestinian taxes on a number of occasions, including:

• 1997: following a bombing in Jerusalem, Israel suspended transfers for two months.[26]
• 2000: following the start of the Second Intifada, Israel suspended transfers for two years.[25][26]
• 2006: following the 2006 Palestinian legislative election, Israel suspended transfers for more than a year.[25][26]
• 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.[32][33]
• 2011: after a Fatah–Hamas reconciliation attempt in May,[34][35][36] and during October and November 2011 in response to Palestine's bid for full membership in the United Nations and admission to UNESCO, Israel suspended transfers.[30][37]
• 2012: in response to Palestine securing an upgraded status in the UN pursuant to United Nations General Assembly resolution 67/19, Israel suspended transfer in December 2012, to the amount of $100 million.[29] Foreign Minister Avigdor Lieberman said that "The Palestinians can forget about getting even one cent in the coming four months".[28] 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.[28] 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."[28][38] 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.[39]
• 2014: following the April 2014 Gaza Agreement, Israel withheld taxes to settle debts owed by the PA.[40][41]

• 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 transfers for 4 months until April 2015.[25][26][42]
• 2019: In February, Israel decided to implement a law passed in July 2018 requiring the deduction and freezing of a sum said to be equal to the amount paid by the Palestinian Authority in 2018 to Palestinians detained in Israel as well as to their families and to released prisoners [43]

• Economy of the State of Palestine