Palestinian Authority: Banking & Taxation
Foreign Banking and Currency
Foreign Currency Control
In areas of the West Bank under the control of the Civil Administration, the Controller of Banks regulates currency transfers that are in line with the currency control laws applicable in Israel. Furthermore, while bank accounts may be held in any of three currencies - U.S. dollars, Jordanian Dinars or New Israeli Shekels - withdrawals from accounts located in the West Bank under the control of the Civil Administration may be made only by converting the amount into either NIS or JD.
In accordance with Oslo 2, responsibility for banking has been transferred to the Palestinian Authority. The Paris Protocol contains significant provisions that will affect Palestinian banking when implementing legislation and regulation is effected.
The Paris Protocol authorized the creation of the Palestinian Monetary Authority (PMA), which enjoys the powers of most central banks, with the notable exceptions that it cannot issue a Palestinian currency and it cannot apply for state membership status at the International Monetary Fund. The PMA supervises fiscal policy in the Palestinian Authority and manages official reserves. It also reviews proposed legislation that will regulate banking in the future.
Regular savings accounts and interest bearing checking accounts in dollars may be opened in the West Bank and Gaza. Accounts may be held in U.S. dollars, Jordanian Dinars or New Israeli Shekels, and all three currencies are used for conducting business in the Palestinian Authority.
In the absence of a Palestinian currency, banks operating within the jurisdiction of the Palestinian Authority have to compete for deposits with banks located elsewhere. This competition is mostly for local residents' deposits. Unlike Israeli banks, local banks are generally not allowed to offer inflation-indexed savings accounts or foreign currency-dominated accounts, which places them at a relative disadvantage in competing for the accounts of large Palestinian firms and international organizations.
While many financial institutions are now operating in the Palestinian Authority, two of the most active banks are the Arab Bank and the Cairo Amman Bank. As Palestinian banking is still in its infancy and the banks that operate in the Palestinian Authority are unable to assess credit risk and worthiness, mid- and long-term financing is often difficult to obtain. It is anticipated that this will change as experience is gathered by the lending institutions as well as the promulgation of regulations and guidelines by the PMA.
As of 1997, there were 17 commercial banks with 69 branches operating in the PA-controlled areas of West Bank and Gaza, including one foreign bank (ANZ Grindlays). The largest institution is the Arab Bank, which currently has 17 branches worldwide, including two in New York.
Banks in the PA area generally offer only short-term credit such as overdrafts, LC's and bank guarantees. Average interest rates on loans in Israeli Shekels are 20-25 percent and 13 percent on loans in Jordanian Dinars. In 1996, the Arab Palestinian Investment Bank (APIB) started conducting business in the Palestinian areas. It was established by the Arab Bank (55 percent of shares), the International Financial Corporation, the private investment arm of the World Bank (25 percent of shares), the German Investment and Development Company (DEG), which belongs to the German Government (15 percent of the shares) and the Enterprise Investment Company, owned by Palestinian businessmen (5 percent of the shares).
Bilateral Banking Agreements
Israel, Jordan, Egypt and the Palestinian Liberation Organization have concluded several bilateral agreements, some of which affect banking matters.
The Central Bank of Jordan (CBJ) and the Israeli Controller of Banking (ICB) reached an agreement allowing Jordanian banks to open branches in the West Bank, after first seeking the approval of the CBJ and ICB. This agreement will be valid until superseded by action of the PMA.
The Arab Land Bank reopened its branches in the West Bank pursuant to the terms of an accord reached between Egypt and Israel in May of 1993, subject to the supervision of the CBJ, ICB and the Central Bank of Egypt.
The Jordanian laws concerning trademarks, patents and designs are applicable in the West Bank, with the exceptions that publication requirements are fulfilled by publishing notices three times in a local newspaper and that registration offices are located in the cities of Ramallah and Jericho. Copyrights are protected under Law No. 16 of 1924. In addition, autonomous cities are also governed by the Intellectual Property Laws of the West Bank.
In Gaza, the Palestinian Trademark and Patent Laws No. 35 of 1938, adopted during the British Mandate, are still applicable. The registration system under those laws is very similar to those prevailing in the West Bank under Law no. 33 of 1952. Despite the different authorizing legislation, the substantive differences between the laws governing intellectual property matters are minimal.
Furthermore, a side letter to the Paris Protocol provides that the parties to the agreement will hold discussions regarding mutual recognition and protection of patents, designs and trademarks, in addition to other intellectual property.
In both Gaza and the West Bank, patent protection is granted for a period of 16 years from the date of filing the patent application. Furthermore, both systems allow for the compulsory licensing of a patented product if the "reasonable requirements" of the public under the applicable law have not been met.
In Gaza, the novelty requirement for patents may be met if the invention has not been previously published or used in the Palestinian territories. Likewise, the novelty requirement in the West Bank is met if there has been no prior publication, use or sale in the West Bank.
Trade and Service Marks
Trademark protection is available for registered trademarks up to a period of seven years, a term that may be extended for additional periods of 14 years each. The prevailing laws in both Gaza and the West Bank prohibit the registration of a trademark that is contrary to public morals.
It is now possible to register service marks in Gaza and the West Bank. The Palestinian Minister of Justice in September 1996 issued a decision that amended Appendix No. 4 of the Implementation Regulations of the Trademarks Act of the Year 1940. Service marks can now be registered under the registration system applicable in Gaza. The International Classification of goods and services (classes 35-42) is used to classify services by enumerating the classes and class headings eligible for expanded registration.
New and original designs that have not yet been published may be protected under the laws of both Gaza and the West Bank. Both applicable legal systems prohibit the registration of designs that are contrary to morality or to the public order. In Gaza, a registered design may be compulsorily licensed under certain circumstances. Compulsory licensing of designs is not permitted in the West Bank.
The Agreement on the Gaza Strip and the Jericho Area, signed in Egypt on May 4, 1994 (hereinafter, the Gaza-Jericho Agreement), which incorporated the Paris Protocol into its provisions, authorized the transfer of power and authority relating to taxation to the Palestinian Authority. Oslo 2 also includes provisions on taxation and allows both Israel and the Palestinian Authority to levy personal or individual taxes.
Under Article V of the Gaza-Jericho Agreement, the right to tax residents of Gaza and the West Bank is territorially based. Area A covers the urban areas populated by Palestinians, such as Gaza, in which the Palestinian Authority has full power over all aspects of government, including taxation. Area B covers the rural areas in which the Palestinian Authority has civilian (as opposed to police powers) jurisdiction, including powers of taxation. Area C includes areas within the West Bank that are the subject of negotiations and in which there are Jewish settlements, military areas or open areas. The Palestinian Authority has no jurisdiction to tax Jewish settlements and military areas. With regard to open areas in Area C, however, the Palestinian Authority has limited civilian powers, including the power to tax Palestinian residents located therein. The Palestinian Authority's power to enforce the tax laws in Area C is limited. In the event that Palestinian taxpayers are located in Area C, their taxes will be levied by the Civil Administration and transferred to the tax authorities of the Palestinian Authority.
The Palestinian Authority has delegated taxation powers to the Ministry of Finance, which, in turn, has created a Tax Department. The Tax Department has issued a personal income tax regulation that became effective January 1, 1995 and is applicable to Palestinian residents of the West Bank and Gaza. Since no other regulation, directive or legislation regarding taxation has been adopted by the Palestinian Authority, Jordanian Income Tax Law No. 25 of 1964, as amended by Military Orders, remains applicable in the West Bank, and the British Mandatory Income Tax Law No. 13 of 1947, as amended by Military Orders, rules in Gaza, with regard to all other taxes, including corporate income tax. The Ministry of Finance, however, has issued a large number of regulations to supplement the existing laws.
The PA has taken steps to stimulate investment with an April 1999 decision to cut income taxes. Company tax rates were slashed to 20 percent from 38.5 percent, while personal rates for higher incomes dropped to 20 percent from 48 percent, and low-income rates were reduced to merely 5 percent.
Taxation of Companies
The controlling tax laws in the West Bank and Gaza define a company as any public or private shareholding company incorporated or registered in accordance with the prevailing law. Thus far, no distinction has been made between local and foreign companies for the purposes of taxation.
A territorial approach regarding the source of income is applied in order to determine taxable income. In Gaza, all revenue from any of the sources listed in the British Tax Law "accruing in, derived from, or received in" Gaza is considered taxable income. In the West Bank, taxable income is defined as all revenues from any of the sources provided in the Jordanian Tax Law "accruing in or derived from" the West Bank. Taxable income may be reduced by permissible deductions and exemptions as provided under the relevant law. Thus, any company, whether local or foreign, which earns revenues that are accrued in or derived from the Palestinian Authority (and in the case of revenues in Gaza which are received in Gaza), are subject to taxation.
Business losses can be carried forward from year to year, provided that the carry over does not exceed four years and as long as not more than 50 percent of taxable income is carried over for each of the four years and that the carry over is not for a loss, other than from the source originally stated. The appropriate tax authority must authorize all carry overs.
Tax incentives are available for approved investment projects, which include exemptions from VAT and other duties and taxes. These incentives are discussed at greater length in the section on Investment Incentives below.
Dividends distributed in the Palestinian territories to shareholders of a foreign company are subject to 25 percent withholding, whereas dividends distributed to shareholders of a Palestinian company are not taxed, regardless of the nationality or the place of residence of the individual shareholder. Only dividends paid from profits are taxable; dividends paid after redistribution of capital are exempt from taxation. Retained earnings are taxable under the Investment Law unless they are re-invested.
An automatic deduction of 25 percent is withheld at the source from companies that own stock in another entity, unless these companies obtain a Deduction at the Source Certificate, which grants a reduction of up to 5 percent. Applications for these certificates are available from the district tax offices.
The intertwined nature of the Palestinian and Israeli economies creates a complicated situation regarding withholding taxes on transactions between Israelis and Palestinians who are subject to tax under the separate jurisdictions.
The Paris Protocol, as amended, provides that when a Palestinian remits payment to an Israeli, no tax shall be withheld at source on income from the sales of goods from areas under Israeli tax jurisdiction that are not supplied by means of a permanent establishment (such as a branch, office or factory) in the areas under Palestinian tax control. Where income from the sale of goods is attributable to a permanent establishment in areas under Palestinian tax responsibility, tax may be withheld at source, but only on such income as is attributable to such permanent establishment.
No tax shall be withheld at source on income derived by an Israeli from transportation activities, if the point of departure or the point of final destination is within the areas under Israeli tax jurisdiction.
When an Israeli remits payment to a Palestinian on income accrued or derived in the West Bank or Gaza, no tax shall be withheld at source on income from the sale of goods from areas under Palestinian tax responsibility that are not supplied by means of a permanent establishment in the areas under Israeli tax responsibility. Where income from the sale of goods is attributable to a permanent establishment in the areas under Israeli tax responsibility, taxes may be withheld at source, but only on income that is attributable to such permanent establishment.
No tax shall be withheld at source on income derived by a Palestinian from transportation activities if the point of departure or the point of final destination is in the areas under Palestinian tax responsibility.
Each of the parties to the Paris Protocol undertook to provide that certificates of non-withholding be provided as proof that payments made were not subject to withholding tax requirements. If appropriate certification is not provided, taxes are to be withheld at source by the payer, according to applicable law.
Each party to the Paris Protocol will grant its residents tax relief for tax paid on income accrued in or derived in the areas under the tax responsibility of the other party. The parties also committed to establish a committee to review procedures regarding tax issues, including measures concerning double taxation.
The Palestinian Authority is empowered under the Paris Protocol to set certain indirect taxes, such as a value-added tax and import duties. The Palestinian Authority collects these revenues, and if they are still collected by the Civil Administration, the revenues are transferred by the Civil Administration to the Palestinian Authority.
Value Added Tax
Under the terms of the Paris Protocol, the Palestinian Authority's ability to determine a value added tax for Gaza and the West Bank is limited by the restriction that the rate may not be under 15 percent. At present, value added tax is charged at a rate of 17 percent in both Gaza and the West Bank, the same rate prevailing in Israel.
Exceptions are applied to tourist services, fruits and vegetables and products that are ultimately exported (including all raw materials and component parts). Further, companies and institutions whose annual sales do not exceed NIS 36,000 are also exempt from paying VAT. Companies can apply for refund of VAT payments on all business start-up costs and on goods that are exported.
The Palestinian tax authorities have accounts in all foreign and domestic banks in the Territories, so VAT taxes may be deposited in any of these banks. Payments must be made monthly or bi-monthly, depending on the classification of the business.
A special VAT is applied to financial institutions, including banks and insurance companies (provided they are not non-profit organizations), which is levied at a rate of 17 percent on employee salaries per month and on profits.
The Paris Protocol provides that the Palestinian Authority may charge import duties, provided that, with regard to certain products, the rates charged must be the same as the Israeli tariffs.
Real Property Tax
Property taxes in Gaza and the West Bank vary between localities and are generally applied using two separate systems: one for municipalities and another for villages. The village system of property tax applies only to irrigated land, and each village maintains its own schedule of rates. The tax paid depends on what type of crop is grown and on the land area in cultivation.
For municipalities there are two categories of property - buildings and vacant land (including agricultural land). Assessments determine the base for municipal property tax. Vacant land is taxed using the assessed value of the land as a basis. For buildings, the rental value is assessed, depending on actual rental value, location and type of structure. Although the rates vary, the tax rates for buildings in the West Bank are generally 13.6 percent of the assessed rental value. For vacant land, the assessed rate is 0.6 percent of the assessed land value. In Gaza, the rate for buildings is 15 percent of the rental value, 9 percent of that total is assessed to the tenant, the other 91 percent assessed to the owner. For vacant land, the rate is 15 percent of the imputed production value of the land.
© 2000 Mena Report (www.menareport.com)