Occupied Palestinian territory loses at least $306 million per year in public revenue leakage to Israel, new study finds

03 December 2014

​The Occupied Palestinian Territory loses at least $306 million annually in leakage of customs, purchase and value added tax revenues that are not transferred to the Palestinian treasury by Israel, a new UNCTAD study suggests.

The study says that fiscal revenue loss amounts to 3.6 per cent of gross domestic product (GDP) and 18 per cent of the tax revenue of the Palestinian National Authority.

The study, Palestinian Fiscal Revenue Leakage to Israel under the Protocol on Economic Relations, indicates that the leaked Palestinian public revenue would give the Palestinian National Authority greater ability to stimulate the economy and increase annual GDP by four percentage points and create additional 10,000 jobs per year.

In order for this leakage to be stemmed, the study makes recommendations to transform it into a more balanced framework consistent with Palestinian economic realities that have greatly changed since 1994. For example, it suggests modifying the Paris Protocol (1994), which remains the general framework governing Palestinian trade relations and economic and tax policies.

According to the study, a report by the Israeli Central Bank indicates that 39 per cent of Palestinian imports from Israel originate in third countries, cleared as Israeli imports before being sold in the Occupied Palestinian Territory as if they had been produced in Israel. Customs revenue from these "indirect imports" is collected by the Israeli authorities but is not transferred to the Palestinian National Authority.

Moreover, the Palestinian National Authority's lack of control over Palestinian borders makes smuggling from Israel and Israeli settlements another source of significant fiscal revenue loss. The value of goods smuggled from Israel and Israeli settlements into the Occupied Palestinian Territory is estimated to be in the range of 25–35 per cent of the latter’s total imports, the study says. Where the smuggled goods are produced in Israel, the Palestinian National Authority loses value added tax (VAT) and purchase tax revenue. However, where the goods are produced in a third country, tariff revenue is also leaked – to the Israeli treasury – along with VAT and purchase tax revenue.

The study underlines that there are additional output and employment costs to the Palestinian economy. These costs represent the extent to which the Palestinian economy would have been able to increase GDP and employment had this leakage been curtailed, and the money transferred from the Israeli treasury to the Palestinian treasury, as called for by the Paris Protocol.

Furthermore, the significant resource leakage perpetuates the Palestinian National Authority's fiscal fragility and undermines its capacity for fiscal planning as well as its ability to finance development expenditure and steer the macroeconomy towards maximizing growth and job creation, the study shows.

The study emphasizes, however, that the hitherto estimated annual fiscal revenue loss is partial and conservative, and points to the need for further research to quantify revenue leakage from multiple other sources, such as the following:

  • Untransferred revenues from taxes levied by Israel and Israeli settlements on incomes of Palestinians working in Israeli settlements

  • Losses incurred by use of the dominant Israeli currency

  • Revenue loss related to lack of control over Palestinian land and natural resources

  • Loss suffered by the Palestinian public sector of financial resources related to the importation of petroleum, energy and water

The study recommends that the Palestinian National Authority should be allowed full access to all data related to imports from or via Israel when the final destination of consumption is the Occupied Palestinian Territory, that existing time restrictions preventing the Palestinian National Authority from claiming due revenues be abolished, that Palestinian dependency on Israel be ended by removing barriers to trade with countries other than Israel and that the Palestinian National Authority be provided with the financial and human resources needed to strengthen its customs administration capacity.