Why does Israel collect Palestinian tax?

A decades-old arrangement, which many believe is outdated, gives Israel a stranglehold over the Palestinian economy

The Palestinian economy is on the brink of collapse as the war in Gaza continues. Getty Images

Live updates: Follow the latest on Israel-Gaza

Israeli Finance Minister Bezalel Smotrich reopened a decades-long economic tussle between Israel and the Palestinian Authority, as he announced he would withhold tax revenue Israel collects on behalf of the PA in response to Norway, Spain and Ireland saying they will recognise a Palestinian state.

The news highlights a strange, unpredictable dynamic for Palestinians, in which Israel holds massive leverage because of a long-running agreement that means it collects funds that should be bound for the perennially fragile Palestinian economy.

What are the Palestinian funds that Israel collects?

Israel collects Palestinian import tax revenue as agreed to in the 1994 Paris Accords signed by the Palestine Liberation Organisation and Israel.

The tax revenue Israel collects is made up of indirect taxes imposed on Palestinian imports. It comes from two primary sources: VAT on goods and import tax on goods brought in from outside Israel.

The funds constitute the majority of Ramallah’s income. Withholding them is a potentially existential blow to the PA, which has been buckling under severe economic pressure since the Gaza War started.

How are the funds collected?

Israel collects the revenue which should then be sent to the PA, subject to the approval of Israel's Finance Ministry.

The ministry is currently headed by Finance Minister Bezalel Smotrich, one of the most extreme members of Prime Minister Benjamin Netanyahu's far-right government.

Israeli Finance Minister Bezalel Smotrich is a long-time advocate of Israel implementing draconian policies in the occupied Palestinian Territories. EPA

How does Israel transfer the funds to the PA?

Israel's Finance Ministry oversees the payments, which should be made in monthly instalments.

Mr Smotrich froze the transfers in November, saying the portion of funds normally sent by the PA to Gaza could be used to finance Hamas's war effort.

The decision led to a dramatic reduction in PA salary payments across the occupied Palestinian Territories, which are a vital injection into the Palestinian economy.

In February, Israel and the PA reached an arrangement whereby the Finance Ministry's payments would be made to a Norway-based trust account and then transferred to the PA.

The Norway-held funds could only be transferred with the permission of the Finance Ministry, to make sure none of it went to Hamas.

Is Israel legally allowed to withhold the funds?

Palestinians have long criticised the arrangement set out in the Paris Accords, which was supposed to expire in 1999 as part of the wider process to establish a Palestinian state as set out in the Oslo Accords.

A press release from the Office of the UN High Commissioner for Human Rights last month quoted two UN experts saying an Israeli decision to withhold the funds would breach international law.

“Because a significant proportion of taxes in the [PA budget is] collected by Israel, the PA is vulnerable to unilateral suspensions by Israel of transfers of clearance revenue, qualifying as unilateral coercive measures contrary to international law,” the experts said.