One sixth of Palestinian revenue 'leaks' to Israel
Palestinians run for cover as Israeli soldiers fire teargas canisters during clashes with stone-throwers at the Israeli Qalandiya checkpoint, between Jerusalem and Ramallah.The young Palestinians are all unemployed.
Palestinian Authority loses $300m in trade taxes a year to Israel
UN report defines as ‘fiscal leakages’ the customs, purchase and value-added taxes destined to the PA but retained by Israel
By Mark Tran, Guardian
September 04, 2013
The estimated cost to the Palestinian Authority of the $300m leaked annually to Israel is equivalent to 17% of total tax revenue. Photograph: Khalil Hamra/AP
The Palestinian Authority is losing about $300m (£193m) a year in “leakage” of customs, purchase and value-added taxes which are not transferred to the Palestinian treasury by Israel, according to preliminary UN estimates.
The UN conference on trade and development (Unctad) defines fiscal leakage as Palestinian fiscal revenue destined for the PA but retained by Israel instead. Palestinian trade taxes consist of purchase tax and VAT, levied on all imports, whether they originate from Israel or elsewhere, as well as additional excise tax and custom duties on imports from sources other than Israel.
Mahmoud el-Khafif, co-author of the preliminary report, said initial figures were higher but were revised when challenged by the Bank of Israel. “These are very conservative estimates,” he said emphasising that this fiscal loss is from two sources only. “We focused on leakages from indirect imports – goods produced in a third country, imported to Israel and sold on to Palestine. The second leakage is from smuggling.”
The report says the losses do not include the revenue leakages from many other sources, including taxes levied by Israel on incomes of Palestinians working in Israel and settlements; revenue loss from under-pricing imported goods in invoices due to lack of Palestinian control over borders and access to proper trade data; revenue loss related to lack of control over land and natural resources; financial resources loss related to goods and services imported through the Palestinian public sector (petroleum, energy, and water); and fiscal loss as a result of the smaller tax base caused by the destruction of the productive base and loss of natural resources to occupation.
According to the protocol on economic relations, or Paris protocol, signed in 1994 by Israel and the Palestine Liberation Organisation, any product wholly produced in Israel or has more than 40% of Israeli value added is exempt from customs duties, but subject to VAT and purchase tax.
Power cuts are frequent because of fuel shortages. Here, Palestinian school children do their homework bycandle light during a power cut in Gaza City, March 2012. Photo by Mohammed Abed/ AFP.
At the 2012 UNCTAD XIII quadrennial conference, member States reaffirmed and expanded UNCTAD’s mandate to assist the Palestinian people. However, the report notes, UNCTAD’s contributions to the Palestinian people remained constrained by inadequate resources. To maintain current work, build on previous achievements, and implement the expanded mandate, the organization needs additional resources.
The PA does not have its own water-supply infrastructure. It must either buy it from the Israeli company Mekorot or people install their own water cisterns and tanks which are frequently destroyed, like this one in Dura village near Hebron, by the IDF for lacking permits from the Israeli authority. Photo April 2012 by Mamoun Wazwaz / APA images.
By UN Conference on Trade and Development (UNCTAD)
September 03 , 2013
The occupied Palestinian territory (OPT) loses, by preliminary estimates, some US$300 million annually in “leakage” of customs, purchase and value-added taxes which are not transferred to the Palestinian treasury by Israel, UNCTAD’s Report on Assistance to the Palestinian People says.
This report, which was released today, is issued each year for presentation to United Nations’ Trade and Development Board. As in the previous years, the Board will hold its two-week annual session in September. An in-depth assessment of leakage of Palestinian revenue will be issued by UNCTAD’s Assistance to the Palestinian People Unit by the end of the year.
UNCTAD’s report focuses only on fiscal leakage from the revenue lost from taxes on direct and indirect imports and on smuggled goods into the OPT from or via Israel. According to the Protocol on Economic Relations, or Paris Protocol, signed in 1994 by Israel and the Palestine Liberation Organization, leaked revenue from taxes on direct and indirect imports is supposed to be transferred to the Palestinian Authority. The report says that an estimated unpaid taxes on smuggled goods arriving from Israel represent 17 per cent of total Palestinian tax revenues, or about $305 million in 2012, enough to cover 18 per cent of the Palestinian Authority (PA) wage bill.
If this “leakage” could be curtailed, and the money transferred from the Israeli treasury to the Palestinian treasury, the resulting increase in revenue would give the PA greater fiscal policy space and help to expand economic growth and employment. The gross domestic product of the OPT would increase by 4 per cent, and employment would increase by 10,000 jobs per year, the report contends.
The report stresses, however, that this fiscal loss is from one source only and does not include the revenue leakages from many other sources, including taxes levied by Israel on incomes of Palestinians working in Israel and settlements; seigniorage revenue loss from using the Israeli currency (shekel) in the OPT; revenue loss from under-pricing imported goods in invoices due to lack of Palestinian control over borders and access to proper trade data; revenue loss related to lack of control over land and natural resources; financial resources loss related to goods and services imported through the Palestinian public sector (petroleum, energy, and water); and fiscal loss as a result of the smaller tax base caused by the decimation of the productive base and loss of natural resources to occupation.
The report estimates that 39 per cent of Palestinian imports from Israel originate in third countries, cleared as Israeli imports before being sold in the OPT as if they had been produced in Israel. Customs revenue from these “indirect imports” is collected by the Israeli authorities but not transferred to the PA. Smuggling is another source of significant fiscal revenue loss. Where the smuggled goods are produced in Israel, the PA loses value-added tax (VAT) and purchase tax revenue. However, where goods are produced in a third country, tariff revenue is also leaked along with VAT and purchase tax revenue. The value of goods smuggled from Israel into the OPT is hard to estimate, but may make up from 25 to 35 per cent of the OPT’s total imports, the report says.
The report makes recommendations for reducing fiscal resource leakage. These include proposed changes to the Paris Protocol, so that it is a more balanced framework “consistent with Palestinian sovereignty needs for economic, fiscal and policy independence.” The report also recommends that the PA should have full access to all data related to imports from or via Israel when the final destination of goods is the OPT; that existing time restrictions be abolished which currently prevent the PA from claiming due revenue; that Palestinian dependency on Israel be ended by removing barriers to trade with countries other than Israel; that Palestinian custom brokers be allowed access to Israeli ports and crossing points so that they can monitor customs procedures; and that the PA be provided with financial and human resources needed to strengthen its customs administration capacity.
Occupation deters development
Economic growth in the occupied territory came to 6 per cent in 2012, down from double digits the previous two years, the study says. The constraints on both the supply and demand sides of the economy continue to accumulate. Aggregate demand is constrained by the fiscal crisis, lower aid flows, and the private sector’s inability to invest and generate employment. The supply side is depressed by the blockade on Gaza, mobility restrictions, the construction of the separation barrier in the West Bank, and by the isolation of the entire economy from regional and international markets – the report says the resulting high production costs cripple competitiveness.
In previous years, donor support masked the impact of the measures imposed by the occupation. However, with the decline of such support and the subsequent fiscal crisis, the severe impact of the occupation on the Palestinian people and their economy are becoming clearer, the study says. The economic impact was most pronounced in Gaza, where growth fell from 21 per cent in 2011 to 6.6 percent in 2012. The decline is concentrated in Gaza’s agricultural and fishing sector, which has been directly affected by the Israeli military operation in Gaza in November 2012.
Unemployment in the OPT increased by 1 per cent to reach 27 per cent in 2012, the report says. Among youth, the jobless rate is roughly 50 per cent. Real wages, labour productivity, and labour participation rates all declined in 2012. The poverty rate in the OPT in 2011 was 26 per cent – 18 per cent in the West Bank and 30 per cent in Gaza. Social assistance from the PA kept the rate from being 18 per cent higher, the study contends, but a fall in donor support in 2012 undercut the PA’s ability to apply fiscal stimulus measures. The PA increasingly has accumulated arrears to domestic banks, and loans owed to such institutions now represent 68 per cent of the Authority’s revenues. The territory’s human resources are severely impacted by Israeli closures, which hinder workers’ abilities to find jobs, reduce school attendance, and create pressures that lead to child labour, the report contends.
The report notes that since 1967, Israel has established about 150 settlements in the OPT, including East Jerusalem. In addition, an estimated 540 internal checkpoints, roadblocks, and other physical obstacles continue to impede Palestinian movement in the OPT, separating Palestinian communities from international and local markets. As a result, Palestinian products lose competitiveness in local and international markets, and economic growth in the OPT leans more and more towards the services sector, with a decline in agriculture and manufacturing.
Israeli restrictions on the movement of people and goods in and around the OPT make Palestinian trade heavily dependent on the Israeli economy. This reinforces Palestinian dependence on Israel and is the major factor behind the chronic Palestinian trade deficit, which grew in 2012 from 44 per cent to 47 per cent of gross domestic product, the report says.
UNCTAD’s Assistance to the Palestinian People
In 2012-2013, UNCTAD continued work aimed at strengthening the institutional capacity of the Palestinian private sector through a project titled “Capacity Development for Facilitating Palestinian Trade.” The project objective is to build the knowledge base of Palestinian shippers (exporters and importers) by consolidating the institutional capacity of the Palestinian Shippers’ Council, by increasing awareness among Palestinian shippers on trade facilitation best practices, and by building local capacities to provide advisory services and training. In addition, UNCTAD continued to support the Palestinian customs administration in 2012, maintaining close contact with the PA and donors. During 2012 the organization trained professionals from the Palestinian Central Bureau of Statistics and the Palestinian Authority in economic forecasting, evaluating and interpreting socio-economic data, and assessing alternative policies. UNCTAD also trained staff from the Palestinian Ministry of National Economy during the year to deepen their knowledge of UN agencies and functions in Geneva.
At the 2012 UNCTAD XIII quadrennial conference, member States reaffirmed and expanded UNCTAD’s mandate to assist the Palestinian people. However, the report notes, UNCTAD’s contributions to the Palestinian people remained constrained by inadequate resources. To maintain current work, build on previous achievements, and implement the expanded mandate, the organization needs additional resources.