Scope
This report is to provide a clear overview on the levied taxes at border crossings between Israel and Palestine and Israeli Sea/Land ports. The relationship between the two Jurisdictions is governed by Paris economic protocol “The Israeli-Palestinian Interim agreement on the West Bank and Gaza Strip” April, 1994. This agreement is the framework on import tax, export tax and value added tax that is levied and collected in both jurisdictions as well as the clearance mechanism between the two taxing authorities.
Principle of Final Destination
“The clearance of revenues from all import taxes and levies, between Israel and the Palestinian Authority, will be based on the principle of the place of final destination. In addition, these tax revenues will be allocated to the Palestinian Authority even if the importation was carried out by Israeli importers when the final destination explicitly stated in the import documentation is a corporation registered by the Palestinian Authority and conducting business activity in Palestine. This revenue clearance will be affected within six working days from the day of collection of the said taxes and levies. “Article III, Paragraph 15. The Israeli-Palestinian Interim agreement on the West Bank and Gaza Strip.
Taxes are levied on goods and merchandise based on rates applicable at their final destination for the benefit of the taxing authority governing that final destination, without regard of the identity of the authority – Israeli Tax Authority or Palestinian Tax Authority - conducting the collection or the facilities harboring the taxed merchandise – Ashdod seaport or Allenby Bridge land port.
Palestinian importers must be registered companies in Palestine and must obtain an import license from the Ministry of Economy in Palestine. Furthermore, they must register with tax authorities and obtain a tax number from the Ministry of Finance.
Goods arriving in Israeli seaports or land ports must go through Israeli customs. The Israeli customs validate the final destination of the goods at hand and decide on the type and rate of taxes to be levied. For goods that have a final destination within the Palestinian Tax Authority jurisdiction a 16% Value added tax is levied in addition to any purchase taxes or customs that are levied as per the Palestinian authority tax rates and laws.
An Israeli customs value declaration is issued and for the goods to be cleared payments of the levied taxes are made by the Palestinian importing company directly to the Israeli Tax authority bank accounts. After six days of the said payments are made the Israeli tax authority reemits the payments made by the Palestinian importing companies to the Palestinian Treasury.
The Palestinian importing company will pay directly to the seaport/land port handling fees, storage fees, X-ray fees or any other fees that are charged to clear customs and border control. These fees are not remitted to the Palestinian Treasury. At this point the goods are cleared for transport to the Palestinian importing company’s storage facilities using the Israeli customs value declaration to cross Palestinian Customs and into Palestinian tax authority jurisdiction areas.
After 6 days of the said tax payments have been made the Israeli tax authority remits them to the Palestinian treasury providing copies of the Israeli customs value declaration and all the needed details to assign the paid taxes to their respective importing companies. The Palestinian treasury reviews the Israeli customs value declaration and may or may not decide on reappraisal of value of the imported goods if there is doubt on the integrity of the commercial invoice that was used for basis of the Israeli customs value declaration. The Palestinian importing company may be asked to make additional tax payments based on the difference between the re-appraisals and the original commercial invoice directly to the Palestinian treasury.
If no additional appraisals are made the Palestinian importing company will submit an application for an acceptance of the Israeli customs value declaration and will be issued a Palestinian customs value declaration. This later will be integrated into its accounts with the customs, excise and Vat and the Palestinian importing company can request a tax refund on VAT paid on imported goods or decide to have a positive balance with the tax authorities. A positive balance offsets periods of negative tax balances.
Opportunity for Tax Evasion
The mechanism basis its success on the interest of the Israeli customs to review and appraise objectively the customs declarations provided by the Palestinian importing company in order to collect higher taxes on behalf of Palestinian customs and hence maximize their collection fees.
The fact is that the Israeli customs rarely if ever re-appraises the customs declarations presented by Palestinian importing companies and is not truly driven to collect taxes on behalf of the Palestinian customs leaves a wide window of opportunity for custom taxes to be evaded by Palestinian importers. The fact that the Palestinian Authorities does not have defined borders or crossings provides the Palestinian customs with little to no physical control over the merchandise after it clears the Israeli sea or land ports leaves abnormal commercial invoices un-investigated or re-appraised until the Palestinian importer requires tax clearances for purpose of license renewal or if his merchandise is confiscated in transit within Palestinian Authority territories.
Palestinian importing companies do not pay double taxes on imported goods. Payments are made to Israeli tax authority which in turn remits the balance to the Palestinian treasury. Value added tax paid offsets Value added tax owned and thus shouldn’t be accounted for as part of the cost of goods sold.
Suspicious commercial invoices or commercial invoices that are abnormal in value might cause the Palestinian customs to request supporting documents to validate the values in the commercial invoice presented. Failure to provide supporting documentation will result in re-appraisals that might result in taxes being levied on the difference between the original commercial invoice value and the newly appraised value.