Israel Sends $50 Million a Month to the Palestinians?

How to collect taxes for your neighbor.

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Israel’s prime minister will decide on Sunday whether to begin economic sanctions against the Palestinian Authority. To protest the new Hamas-led government, Israel may stop sending the Palestinians the $50 million a month in taxes it collects on their behalf. Why does Israel collect taxes for the Palestinians?

That’s the arrangement they worked out during the peace accords of the early 1990s. Before the Palestinian Authority was set up, the Israelis taxed imports and exports in the occupied areas and withheld payroll taxes from visiting Palestinian workers. The PLO and the Israeli government had to work out a new taxation system for the newly self-governing areas. The Protocol on Economic Relations of 1994 gave the PA the right to collect taxes directly from its people, and indirectly via Israel.

Here’s one example: Israel continued to collect customs duties and the “value-added tax” on imports that came through Israeli ports. But if those imports ended up in the Palestinian areas, Israel would have to turn that money over to the PA. Israel is also supposed to send back the value-added tax that Palestinians pay for Israeli goods, as well as any excise taxes that Palestinians have to pay for fuel, cigarettes, and alcohol.

Palestinians who work in Israel provide another important source of revenue for the PA. According to the Protocol on Economic Relations, the PA gets back more than three-quarters of the money withheld from the paychecks of Palestinians who work across the border.

These rules go both ways. The PA collects (a tiny bit of) money on behalf of Israel, as well. On the 20th of each month, representatives of each government get together to go over recent transactions and determine the total rebate. The final number reflects the indirect taxes owed to the PA, minus anything the Palestinians owe for Israeli utilities like electricity and telephone service. Once the two sides have sorted through the bills and receipts, Israel is supposed to hand over the rebate within six days.

The amount of the transfer varies from month to month, depending on how much the Palestinians happened to buy or import. Payments tend to be about $50 million, which covers around half of the Palestinian Authority’s total operating expenses.

Israel has decided to cut off the tax transfers several times over the past decade. Benjamin Netanyahu was the first to use the sanction, after a series of deadly suicide bombings in the summer of 1997. The Israelis stopped the transfers again with the start of the intifada in 2000; they withheld the Palestinian tax revenue for two years.

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