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As of 2016, taxation in the State of Palestine is subject to the Oslo Accords, notably the Protocol on Economic Relations also called the Paris Protocol, which was signed in 1994 by the Palestine Liberation Organization (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 PA's total tax revenue was as of 2014 collected by Israel on behalf of the PA and transferred to the PA on a monthly basis. Israel has occasionally withheld the taxes it owes the PA.
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 altered 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). This discrimination did not affect Israeli West Bank settlers, who were allowed to be taxed at the lower rates operant in Israel.[a] 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 (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). [b] [c] Israel's taxation[d] 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. [e] 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 occupation as opposed to Jordanian rule 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.
In 1994, the PLO and Israel signed the Gaza–Jericho Agreement and the annexed Protocol on Economic Relations (Paris Protocol), which created the Palestinian Authority, and established a customs union and the tax clearance system of the PA.
The PA imposes and collects taxes in the Areas A and B of the West Bank, but not in Area C, and in the Gaza Strip. In 2006, the PA directly collected in the West Bank Areas A and B approximately $35 million per month from taxes and other charges.
Under the Paris Protocol, the PA has no jurisdiction in Area C of the West Bank. Income taxes paid by settlers and Israeli soldiers living in West Bank Area C flow directly into the Israeli treasury. Institutions and businesses in the settlements are entitled to tax benefits, and pay taxes, including corporate taxes and water taxes, to the municipalities. Income taxes of Palestinian workers in the settlements are collected by Israel and remitted to the PA without any deductions.
Under the tax clearance system, Israel collects taxes on behalf of the PA. It is the largest source of income of the PA, accounting for about 70-75% of the PA's total revenue. The taxes collected by Israel on behalf of the PA are:
Israel may retain 3% of the total revenue collected by it as collection and processing fees. Taxes collected by Israel are transferred to the PA on a monthly basis.
In 2006, Israel collected about $50 million of PA taxes per month. In December 2012, the amount was put at some $100 million a month. In 2014–2015, the amount was about $160 million per month. The PA's self-generated revenue collected by Israel was about 70–75% of the PA’s total revenue.
Because of the large proportion of taxes in the PA's budget collected by Israel, the PA is vulnerable to unilateral suspensions by Israel of transfers of clearance revenue. As early as 1997, Israel began to unilaterally settle bills unpaid by Palestinians, not the PA itself, including fines and interest. Political reasons for suspension varied from Palestinian violence to the election of Hamas into PA, reconciliation between Fatah and Hamas and the demand for international recognition. Israel has suspended hundreds of millions of dollars for accumulated periods of some 4 years. While 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.
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 Palestinian territories, 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. In June 2019, the PA stopped all payments to Israel Electric Corporation (IEC), when its debts stood to IEC at ILS 2.0 billion (about US$540 million). In August, with PA agreement, ILS 300 million was deducted from taxes that had been withheld by Israel for the PA and applied against the PA debt to IEC. On 8 September, the debt was ILS 1.7 billion (about US$460 million) and IEC gave notice of its intention to cut power. Two months earlier the Supreme Court of Israel ruled that IEC must give 35 days notice before it can cut off electricity.
Israel has suspended transfers of Palestinian taxes on a number of occasions, including: