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
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.
Withholding Taxes
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.
Indirect Taxes
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.
Import Duties
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)
