The tax system

Scale of Control

Israel continues to control taxation in the Gaza Strip, which forms part of a single customs envelope along with Israel and the West Bank. This means that Israel sets the customs and Value Added Tax rates collected for goods and in so doing influences product prices as well as Palestinian fiscal policy. To illustrate: a merchant in Gaza who purchases clothes from an Israeli manufacturer pays VAT at a rate determined by Israel, and Israel is responsible for transferring this amount to the Palestinian Authority. If the merchandise is imported, Israel sets and collects the customs for it and is responsible for transferring the amount to the Palestinian Authority. The VAT and customs rates set by Israel then affect the price the consumer pays for clothes in Gaza.

Israel continues to collect VAT and customs on behalf of the Palestinian Authority and has the power to decide whether or not to transfer this revenue. As such, Israel controls the Palestinian Authority’s ability to use this revenue to fund public services in the West Bank and Gaza Strip, such as electricity, health care, public service salaries, etc1.

The exception to the rule whereby Israel controls the collection of taxes and hence the services provided to the Palestinian public is the taxes collected by Hamas on goods entering Gaza from Egypt through the underground tunnels. The volume of goods transferred via the tunnels significantly increased since Israel began restricting the entry of civilian goods to the Gaza Strip in 2007. The government in Gaza collects taxes for some of these goods, such as cigarettes, fuel, and occasionally building materials. For example, the Hamas regime in Gaza sets the tax rate for fuel transported through the tunnels and collects it from the merchants who import the fuel to Gaza from Egypt. In this way, the regime in Gaza influences local fuel prices, which are significantly cheaper than those in Israel or the West Bank. Having some goods transported into Gaza via tunnels rather than the Israeli-controlled crossings and the collection of taxes on these goods allow the government in Gaza to reduce its dependence on Israel for setting tax rates for these goods and for funding public services.

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  1. See e.g., GISHA, DISENGAGED OCCUPIERS, supra note 1, p. 56, which provides details of the impact of Israel’s nonpayment of tax revenues to the Palestinian Authority from March 2006 until June 2007, a period in which Hamas presided in the Palestinian Authority along with Fatah and other parties. A similar measure was taken in May 2011, when Hamas and Fatah announced a reconciliation agreement. See: Israel Suspends Cash to Palestinians after Hamas Deal, BBC News (May 1, 2011). []
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