The Civil Society Team for the Public Budget Transport concludes its 2020 annual conference with a discussion on a report on fiscal leakages and losses of the Palestinian Authority
Ramallah – Tens of participants attended the virtual 2020 Public Budget Conference organized by the Civil Society Team for the Public Budget Transparency (CSTPBT). The second session discussed the fiscal leakage and losses of the PNA due to occupation acts. Imports, savings, taxes, smuggling, tax evasion all contribute to annual losses of over half a billion Dollars for the Palestinian Public Treasury. The report focused on potential use of the leaked money to promote socioeconomic welfare.
The report offers a comprehensive analysis of fiscal leakage, addressing its sources, volume, and subsequent losses and wasted opportunities. It also proposes possible feasible and non-feasible interventions to diagnose and stop the leakage – or at least reduce it.
Fraudulent invoices and receipts
The study showed that the Israeli occupation authority violate the principle of “final destination of commodity”. It handles invoices as if their final destination was “Israel” and collects payable taxes for its own treasury. When goods are re-exported to the Palestinian Territory, the occupation authority treat them as Israeli-made commodities. It then transfers to the PNA VAT only based on the receipts prepared for this final transfer of goods. As such, the PNA loses income from other applicable taxes.
No disclosure of indirect imports
The Israeli government deliberately colludes with Israeli suppliers depriving the Palestinian treasury of an important revenue. Recorded Palestinian imports doubled in recent years and accounted for $ 6 billion end 2019. Direct and indirect imports from Israel represent the largest proportion ($ 3.2 billion). No accurate estimates of the goods reimported from Israel is provide. As a result, the PNA loses around $ 30 million per year on uncollected purchase taxes, customs duties and excise. By non-disclosure of indirect imports, the occupation contributes to the fiscal leakage not to mention the high cost and obstacles faced by Palestinian importers when they import directly. Consequently, some importers opt for the less costly indirect importation via an Israeli agent.
3% administrative fees cost the Public Treasury $ 40 million annually
The occupation deducts a 3% annual administrative fee on the taxes collected on behalf of the PNA prior to the transfer of taxes to the PNA as per the Paris Protocol. Since end 2019, Israel started to deduct about $ 52 million under the clause of “estimated or imposed administrative fees”, of a total of $ 1.7 billion of tax revenues (with the exception of fuels). The Palestinian Ministry of Finance estimated the fair administrative fees at 0.6% of the tax revenues but this rate was not applied although it would save the PNA $ 40 million annually.
Poor Tax Clearance Mechanism
The Israeli tax clearance mechanism imposes submission of detailed invoices in terms of quality and quantity. It uses “clearance VAT invoices” for the transactions with the PNA to present only the last step of importation “from Israeli to the Palestinian Territory”. With this practice, it only transfers the VAT clearance and disregards customs duties. At times, these invoices are falsified and lead to customs or tax evasion. Some of these invoices are exchanged between traders but not submitted to the clearance sessions. The price of goods is also manipulated to reduce due taxes. Furthermore, some Palestinian traders sell false tax clearance invoices to Israeli counterparts in exchange of specified percentage. Israeli traders benefit then from the deduction of VAT dues on the false invoice, pouring more money into the Israeli treasury. This is an additional loss to the Palestinian treasury.
Palestinian suppliers do not submit tax clearance invoices to Palestinian tax offices. This induces further losses as VAT is paid on purchase invoices from Israel to Israeli traders. VAT is then paid to the Israeli treasury.
Tax evasion also includes customs duties on circulation of goods from Israel or settlements into the Palestinian market without invoice or documents. This is facilitated by easy trespassing of borders between the West Bank and Israel.
$ 152 million losses due to tax evasion till end 2020
Estimates of smuggling of supplies from Israel reached $ 950 million. External commerce data lack information on smuggling through customs. Using a formula to calculate based on current VAT rate, losses of tax evasion accounted for $ 160 million in 2019 and $ 152 million this year (16% of the value of smuggled goods).
Palestinian tax system facilitates leakage
The report concluded that the current Palestinian tax system facilitates fiscal leakage. It comprises VAT, customs duties, purchase and income tax, excises and property tax, etc.) while the PNA does not have control over management of these components in its trade and labor relation with Israel. Imports from Israel represent 55% of total Palestinian imports. 50% of these imports are strategic commodities: fuel, electricity, water, cement and animal feed.
Cuts on the imports from Israel reduces fiscal leakage
CSTPBT recommends to exert further efforts to emancipate from the Israeli economy and shift toward direct importation. It further recommends empowerment of the Palestinian economy to produce local substitutes to Israeli imports. Suggestions include: enactment of direct investment, local production and exports promotion laws; setting smart technical restrictions on imports from Israel and legal and technical restrictions on importation via Israeli agents. Other recommendations include maximizing benefits of Goods Lists (A1, A 2 and B) set forth in the Paris Protocol. A thorough revision must be conducted to adjust the quota in the Protocol on some commodities since this quota does not respond to increasing Palestinian needs. A possible remedy is to benefit from the powers granted by the Paris Protocol on importation of oil byproducts from neighboring countries other than Israel. Connecting electricity grids of the Palestinian Territory with Jordan and Egypt is also a possible solution to cut down the current invoice on imports from Israel and subsequently fiscal leakage.
The team also recommends mobilization of local or foreign financial resources as well as public and private investment and foreign donations for development projects that lead to economic emancipation. The share of national products in these projects must also increase; they may include: a cement factory, steel factory, oil refinery, renewable energy and electricity generation plants, animal feed factories, water projects and wells.
International disclosure of Israeli violations and loathing of Palestinian money
Palestinians need to intensify their efforts in international arena to mobilize political and diplomatic pressure on Israel; to publicize Israel’s repetitive violations of its political and economic agreements with the Palestinians; to pinpoint the level of socioeconomic losses of fiscal leakage; Circulate local reports and reports published by international organizations like the World Bank and UNCTAD to evidence the violations; search other legal options including transferring the case to international courts to demand compensation for the losses. The PNA may also address the World Trade Organization, World Customs Organization, and the Organization for Economic Cooperation and Development, among other organizations to file cases based on Israel’s violations of the principles of activity of these organizations, mainly fair trade, similar treatment and do no harm to trade partners.
