What gives them the right? Israel, Palestinian taxes and a failed regime

As the Palestinians move to join the International Criminal Court, Israel’s response has been to punish them by withholding $175 million per month in taxes collected on their behalf. This retribution has been condemned by Israel’s closest ally, the US government, and added to an already significant rift between Israel’s president and prime minister. However, if we examine the economic relationship between Israel and the Palestinian Authority (PA) more closely, it becomes clearer that these latest actions are only the tip of a much bigger iceberg.

The impact of Israel’s occupation on the health and prospects of Palestine’s economy is the subject of numerous studies and analyses. However the specifics remain largely unknown to the general audience. This is a problem. Particularly for those interested in understanding the impediments to a more just and sustainable solution for the Israel-Palestine conflict.

Indeed, in order to grasp just how deep Palestine’s economic problems really are, under these conditions, it is important to come to terms with the fact that not only is the current state of affairs a product of a long history of occupation, displacement and denial of basic Palestinian rights, but it has also come to pass because of the specific set of rules and regulations set out in the agreements between the PLO and Israel in the 1990s.

The political and regulatory framework

In April 1994, as part of the ‘Oslo Peace Process‘ Israeli and Palestinian negotiators signed a document called “Annex IV to the Gaza-Jericho agreement” – better known as the ‘Paris Protocol’ – despite being intended to last for only five years, this agreement established the main framework for the economic relations between the PA and Israel that remains in place today.

The Protocol acknowledged a number of Palestinian economic rights that had, up to that point, been ignored. By recognising these rights, some significant improvements were made to Palestinian lives in the West Bank and Gaza Strip, as well as allowing some room for Palestinian control over the destiny of private businesses and revenue streams for the newly established PA.

However, the overall outcome of the process was deeply flawed. In particular this was because it set up the relationship between the PA and Israel in the form of a normal customs union without properly taking into account the political reality. Or in other words, the Paris Protocol created an economic relationship between Israel and the PA based on the assumption that the two sides would be prepared to work together towards a mutually desirable goal of ending the occupation and establishing an independent Palestinian state. As it turned out, this assumption was not a good one to bank on.

Indeed criticism of the Protocol is both widespread and, in many cases, damning. According to Sara Roy, an academic based at Harvard University, the three critical outcomes of the Paris Protocols comprised little more than the economic aspect of a broader process of outsourcing Israel’s occupation to the Palestinian proxies. And, instead of bringing the end of the occupation closer, the Protocol entrenched it further and also helped to ‘de-develop’ Palestine.

Problems with the Protocol and their lasting impact

While there is some disagreement in academic analyses over whether or not Roy’s interpretation of Israeli intentions is correct, or provable (other academics, for instance, suggest that the process was less likely to be planned from the outset but, instead, more likely to be a product of successive Israeli governments maximizing their advantage), there is consensus that the Protocol turned out to be extremely one-sided and suffers from range of weaknesses.

These weaknesses are evident both in the Protocol’s implementation and in terms of the lack of opportunity it allowed for the Palestinians to redress the imbalance of power even at times when Israel clearly overstepped its rights, or ignored its obligations. One solid example of just such an overstep is in the actions taken by Israel at this very moment, to deny the PA access to taxes collected on its behalf.

Article V of the Protocol stipulates “Israel and the Palestinian National Authority will each determine and regulate independently its own tax policy in matters of direct taxation”. So for Palestinians working in the occupied territories, the PA is responsible for collecting taxes. But for Palestinian workers in Israel and in the settlements (some 11% of the labour force, according to official statistics) Israel should collect taxes and repatriate the money to the PA.

The Protocol goes on to specify that Israel should transfer 100% of taxes collected from Palestinian workers in Israeli settlements and 75% of the income taxes collected from Palestinian workers in Israel proper. This is because Israel also gets make deductions for social security and health insurance from Palestinian labourers in its territory, despite the fact that the workers do not generally receive benefits in return. (Moreover, given that these are official figures they do not take into account the labour of approx. 30,000 undocumented Palestinian workers in Israel who will contribute to Israel’s GDP, but are unlikely to pay taxes to anyone).

Fiscal leakage and Political Instability

Israel has, of course, played this trick before. Indeed in 2011 and 2012 Israel similarly withheld tax revenue collected on behalf of the PA, only to release that money when the PA’s fiscal crisis was a contributing factor in the outbreak of popular protests that could have, potentially, precipitated further instability. Currently however, Palestinian taxes have become a political football in the middle of a fractious Israeli election campaign, so their return looks less likely to be as smooth a process as before.

But even if these diverted taxes were returned tomorrow, it would hardly make a dent in a system that is profoundly debilitating to both the PA treasury, and consequently to broader Palestinian economic and social conditions. Indeed, figures from the United Nations Conference on Trade and Development (UNCTAD) show that, direct taxation such as income tax – (of which the taxes collected from Palestinian workers in Israel and the settlements, and is currently withheld by Israel comprise only a small portion) – is of much lesser significance to Palestine’s fiscal fortunes than is indirect taxation. And yet, just as in the case of direct taxation regime, the system of indirect taxation established by the Protocol is deeply one sided and problematic.

How Israel’s actions impact on the amount the PA gleans from indirect taxes is more complex and less obvious than in the case of withholding direct taxes. This is not to say that these data are not well documented or less costly.

In effect this wide array of complex dynamics involved effectively come down to a series of issues surrounding Israeli unilateralism on regulating taxes on imported goods, in spite of the requirement stipulated in the Protocol to coordinate with the Palestinians. Indeed, examples of how such actions have significant negative consequences for the PA and for Palestinian development are easy to find.

For instance, when in 2000 Israel cancelled or reduced the purchase tax on a range essential goods, without warning, Palestinian companies suffered losses estimated at $30 million in the value of warehoused goods (as value was reduced below that which was paid in when the original purchases took place). Israel again took a similar unannounced step in 2013 by reducing all customs duties on shoes and clothing thus completely undermining what little productive capacity there was left in these sectors in Palestine.

Overall, according to UNCTAD, the amount lost to the Palestinian treasury either through weaknesses in the system, or through deliberate evasion of the system’s rules by Israel, “exceeded $310 million in 2011, equivalent to 3.6 per cent of total gross domestic product (GDP) and 18 per cent of the tax revenue of the Palestinian National Authority.” Moreover, around 40 per cent of the money lost to the treasury “is related to direct and indirect imports from Israel, and the remaining 60 per cent is in the form of evasion of customs duties.”

Thus, even on top of the damage caused to Palestine’s economic prospects by the practical constraints of the occupation, related issues of political risk, denial of access to basic resources etc. – even at times when both sides are effectively ‘at peace’ – the legacy of the Paris Protocol ensures that the status quo is hugely biased towards Israeli interests and undermines prospects of Palestinian economic development in both the short and long term.

Dr Philip Leech is a visiting research fellow at the Council for British Research in the Levant. He is on twitter and his academic profile is available at academia.edu.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.