Palestinian authorities miss out on $285m due to tax arrangements

18 Apr 16

The Palestinian government is losing as much as $285m in revenues annually under arrangements whereby Israel collects VAT, import taxes and other revenues on its behalf.


Palestinians protesting Israeli occuptation

Palestinians protesting Israeli occuptation


Israel should share the revenues, which amount to two thirds of Palestinian public revenues, on a monthly basis. But the World Bank has today added its voice to a number of sources, including the United Nations, arguing the arrangements do not currently work as they should.

Steen Lau Jorgensen, World Bank country director for West Bank and Gaza, highlighted that if these million dollar revenue losses were mitigated, Palestine’s fiscal deficit could be reduced to less than $1bn and the government’s financing gap closed by 50%.

As well as the $285m in revenues every year, the government of Israel is holding $669m in funds destined for Palestine, equivalent to 5.3% of gross domestic product.

The funds would be a much-needed windfall for the Palestinian economy. Although it bounced back from the 2014 recession to a growth rate of 3.5%, this is barely enough to keep up with population growth.

The tax administration arrangements fall under the Paris Protocol, which was signed in 1994 and intended to serve for an interim period of five years while Palestine formed its institutions and built capacity, but has been extended beyond this.

The terms of the protocol still cover areas such as imports from third countries to the Palestinian territories. Many Palestinian businesses prefer to use Israeli middlemen to receive imports from a third country, who repackage the import and sell it on to the Palestinian trader as Israeli, not third country, goods.

This avoids delays caused by additional security checks at the border, and prevents Palestinian businesses facing of what they complain are always changing import regulations, available only in Hebrew.

However under the Paris Protocol, Israel retains all import taxes and other levies on third country imported goods unless they are explicitly labelled as destined for Palestine. As a result, the Palestinian government loses out on all import taxes and levies on goods imported via middlemen apart from VAT. The bank estimates this costs Palestine around $30.6m per year in lost revenues.

Palestine’s public purse also takes a hit from widespread undervaluation of third country imports by Palestinian importers, costing Palestine an estimated $53m per year.

Goods can travel into the West Bank through areas where Palestine has no jurisdiction, such as a territory known as Area C. While located in the West Bank, Area C is fully under Israeli control. Israel was expected to collect property tax, income tax and VAT in Area C, except for in areas marked as Israeli settlements or military locations, but both areas have significantly expanded, squeezing the revenues Palestine is entitled to.

A further $669m in accumulated Palestinian revenues, made up of pension contributions from Palestinians working in Israel and deductions from workers’ salaries meant to cover health and social benefits, are also being held by Israel because the Palestinian instrument to absorb them has not been established.

In 2013, the UN estimated that Palestine was losing $300m every year as a result of these arrangements, which was described at the time as a “conservative estimate”.

The bank’s report also found that slower-than-expected aid is hampering Gaza’s recovery. While $3.5bn was pledged to help reconstruct Gaza last year, the bank said only $1.4bn had been released.

The report comes after the International Monetary Fund recently warned that increased donor aid would be critical for the Palestinian economy

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