Taxation in Palestine

Taxation in Palestine has changed with the region's governing authorities and administrative boundaries rather than developing as a single continuous code. Ancient systems relied heavily on tax farming, Ottoman administration combined land and produce levies, and the British Mandate introduced a mixed system of customs, property taxes, excises, and income tax.[1][2] Since the 1990s, the Palestinian Authority has exercised direct-tax powers while significant import-tax, VAT, and income-tax revenues have been collected or cleared through arrangements with Israel.[3][4]

The earliest tax arrangements covered by the cited sources date to the Ptolemaic period, when the taxes of Palestinian cities were leased annually to the highest bidder.[1] The lessee paid a fixed amount to the royal treasury and kept any excess collections as profit, while bearing the loss if collections fell short.[1] Under Ptolemy IV Philopator, royal revenues from Coele-Syria, Phoenicia, and Judea were leased to Joseph ben Tobiah, who held the tax-collector's office for 22 years before his son Hyrcanus succeeded him.[1] The annual rental paid by the two rose from 8,000 to 16,000 talents as they accumulated considerable wealth.[1]

Roman-era Palestine distinguished regular land and poll taxes, collected by governors or procurators, from customs duties, market tolls, and similar special imposts that were leased to tax collectors.[1] Under Roman rule, associations of tax farmers bid for collection rights and retained amounts above their bids; vague tariffs and overcollection contributed to their unpopularity.[1][5] Following Pompey's conquest, revenue demands were closely tied to the cost of maintaining Roman military power.[5] A report by Josephus indicates Julius Caesar apparently reduced the rate to 20 percent annually in 48 BCE, though the precise tax base is unspecified.[5]

Direct Roman rule was reasserted in 6 CE, accompanied by increased taxation.[5] After the destruction of the Temple, the Romans converted contributions formerly made to the Temple into the fiscus Judaicus, a tax imposed on Jews across the empire, including men, women, children, and enslaved people.[5] Rabbinic literature records land abandonment by people seeking to avoid the increasingly heavy fiscal burden of the later Roman period.[5]

By the middle of the nineteenth century, the Ottoman fiscal system required taxes to be paid in cash.[6] Since village agriculture in Palestine was largely subsistence-oriented and made limited use of currency, this requirement encouraged the production of cash crops — olive oil and grapes are cited as examples of crops cultivated specifically to generate money for tax payments.[6]

The two principal Ottoman taxes on agricultural land were the tithe (also called the ushr) and the werko. The tithe was a levy on gross farm output, nominally set at one-tenth of produce.[7] Collection had traditionally been farmed out at public auction, commonly to influential parties, with produce assessed at harvest; this method was later discontinued by the British because it was considered open to abuse.[7] The werko was an Ottoman land-and-buildings tax based on assessments dating from the early 1890s, except for property reassessed when it changed hands.[2]

The Ottoman Tapu Law of December 14, 1858, linked land registration directly to taxation, as registration was intended to support tax collection.[8] Some peasant farmers avoided registration out of fear of taxes, registration fees, or conscription; nobles and other parties consequently acquired title to some of that land, a process later connected to disputes over peasant landholding and tenancy.[8]

The legal foundation for Mandatory taxation was laid by Article 18 of the League of Nations Mandate for Palestine, dated July 24, 1922, which authorized the Administration of Palestine, acting on the Mandatory's advice, to impose "such taxes and customs duties as it may consider necessary," subject to the Mandate's other provisions.[9][10] The same article required non-discrimination against nationals and goods of League member states in taxation and commerce, and called for freedom of transit under equitable conditions.[9]

The fiscal system inherited by the British was described in the 1945–46 Survey of Palestine as transitional between the Ottoman inheritance and a more systematic model, with customs, excise, income tax, and property taxes co-existing in ways not directly related to income, and with revenue needs limiting further reform.[11] Jacob Metzer's study characterizes Mandatory central-government taxes as direct taxes on output, property, and income, alongside indirect taxes including customs duties, transaction taxes, and excises.[2]

Import duties were the largest single source of tax revenue throughout the Mandatory period.[2][11] The government shifted from Ottoman ad valorem duties to specific duties, which improved collection efficiency and effectively raised the rate during an era of generally declining prices.[2] The standard import duty stood at 12 percent ad valorem during the two prewar decades and rose to 15 percent during the war years.[6] Customs and excise receipts together reached £P.5,342,862 in 1944/45, with wartime excise increases driven both by repeated duty increases and by expanded consumption of locally manufactured products.[11]

The tithe underwent a series of reforms across the Mandate period. In 1925, the agricultural tithe was reduced from 12½ percent to its prewar level of 10 percent — a reduction the British report to the League described as reflecting an easier financial position and the tithe's heavy burden on cultivators.[12] In 1928 the government replaced the tithe-in-kind system with a commuted tithe: a fixed aggregate sum paid annually irrespective of individual production, related to the village's average tithe in preceding years and distributed among cultivators by village committees under official supervision according to land productivity.[7] The 1935 Rural Property Tax Ordinance then replaced the commuted-tithe system across Palestine, except in the Beersheba sub-district where commutation continued.[7]

The Rural Property Tax classified land by actual cultivation and average yields, following recommendations of the Johnson-Crosbie Committee appointed in 1930 to examine primarily Arab farmers' economic conditions and recommend fiscal measures.[2] Official valuers divided village and settlement land into blocks of roughly similar productivity and assigned tax categories ranging from citrus and irrigated land to ground-crop land.[7] Rates per dunum generally approximated 10 percent of a low estimated net annual value; the three lowest categories were initially exempt, though in 1943 a wartime measure brought categories 14 and 15 into the taxable base while category 16 remained exempt until the Mandate ended.[7] The Rural Property Tax system remained in force until the end of the Mandate.[7]

Urban property taxes were introduced in 1929 to replace the Ottoman werko for town properties.[2] The 1930 British report records rates of 9 percent of annual value for house property including its site, 6 percent for property used for industry, and 7 percent for land that was not a house site, with exemptions for owner-occupied houses below specified annual values varying by town.[13] Towns in which the Urban Property Tax was in force included Jerusalem, Jaffa, Gaza, Nablus, and Tiberias.[13] Municipal revenue additionally included general rates on buildings and occupied land, varying from 4 to 14 percent across the 12 municipalities that imposed them, and education rates of 2½ to 9 percent levied by six municipalities.[14]

The Survey also described an animal tax whose rates were revised at the beginning of 1945: the rate per head for cattle rose from 150 to 600 mils, and the sheep rate from 50 to 200 mils.[11]

A general progressive income tax was introduced in 1941 — effective from 1940/41 — largely to compensate for the wartime decline in import-duty revenue.[2] Individual rates rose by income band, from 50 mils per Palestinian pound on chargeable income up to £P.300 to 500 mils on income above £P.1,600; companies were taxed at 250 mils per pound.[11] Income-tax yield reached £P.2,534,181 in 1944/45.[11] The shift in the tax mix was marked: indirect taxes fell from 90.8 percent of total tax revenue in 1935/36 to 56.2 percent in 1944/45.[2]

The 1930 harvest failure illustrated the strains the fiscal system could place on rural communities. After winter-crop prices fell by roughly half compared with 1929 and the harvest practically failed, the High Commissioner remitted 30 percent of the commuted tithe, amounting to £P72,345.[13]

During the Arab general strike and disturbances of 1936, tax collection became a direct instrument of political protest. A car-owners' and drivers' committee issued a manifesto urging Arabs not to pay taxes, and a Jerusalem congress decided on non-payment and continuation of the strike.[15] No municipal rates or taxes were collected for six months during the disturbances; afterward, municipal councils resumed collecting arrears.[15]

Metzer's estimates for 1926/27 and 1935/36 indicate that Jews paid a larger share of total tax revenue than their shares of population and income, with the difference driven principally by indirect taxes.[2] Jewish direct-tax contributions in those years remained below the Jewish share of total output.[2] For 1944/45, official estimates recorded in Metzer's study put Jewish contributions at approximately 63 percent of central-government tax revenues and Arab contributions at approximately 37 percent.[2] Tax-income ratios stood at 9.2 percent for Jews and 7.6 percent for Arabs.[2] The study notes, however, that if taxes are compared with total resources — including net capital imports rather than income alone — the system appears approximately proportional, and it cautions that conclusions depend heavily on the chosen denominator and on incomplete measurements of some community-provided services.[2]

A separate explainer drawing on Zionist Organization and Jewish Agency reports gives a higher estimate of 65 percent of government revenue for Jews in 1944–45, when Jews made up approximately 32 percent of the population.[16] The two estimates rest on different source bases and should not be treated as identical measurements.[16]

The land statistics reproduced in Sami Hadawi's 1970 explanatory edition of the 1945 Village Statistics were shaped by the tax system. Village areas derived from fiscal records sometimes did not match actual village areas; differences were entered under "Public" for administrative convenience, whether or not the land was government-owned.[7] Critics quoted in the edition, including Maurice Hexter in testimony before the Royal (Peel) Commission, observed that figures based on a fiscal survey were "necessarily falsified by the natural desire to evade the tax," leading to disputes over land classifications.[7]

The foundational document governing Israeli-Palestinian economic and tax relations is the Protocol on Economic Relations — commonly called the Paris Protocol — signed on April 29, 1994.[3] Its stated aim was to strengthen the Palestinian economic base and enable Palestinian economic decision-making in accordance with Palestinian development plans and priorities.[3] The protocol first applied to the Gaza Strip and Jericho Area, with extension to the rest of the West Bank — known by its original, indigenous Jewish name of Judea and Samaria — under later interim arrangements.[3]

Under Article V of the 1994 Protocol, Israel and the Palestinian Authority (PA) were each to determine and regulate their own direct-tax policies, including personal and corporate income taxes, property taxes, municipal taxes, and fees.[3] Each tax administration could levy direct taxes generated by economic activity within its area, and the protocol called for procedures to address double taxation for residents conducting economic activity across the boundary.[3]

For customs and import taxes, the protocol established a "customs envelope" under which the two sides largely share an import policy, with Palestinian import taxes required to be at least as high as Israel's.[17] Palestinian authorities were granted some independent rate-setting power for goods on specified Lists (A1, A2, and B), within agreed quantities and up to estimated Palestinian market needs; for other goods and quantities above agreed limits, Israeli rates served as the minimum and the PA could raise rates further.[3] Import-tax and levy revenues were allocated according to each shipment's final destination, with relevant revenues cleared to the PA within six working days of collection.[3] At Palestinian customs points at the Jordan River crossings and Gaza entry points, Palestinian officials were responsible for customs procedures, inspection, and tax collection, while Israeli customs officials received shipment documents and could observe inspection and collection.[3]

The August 1994 Agreement on Preparatory Transfer of Powers and Responsibilities directed Israel to transfer, and the PA to assume, jurisdiction over direct taxation and VAT on local production in the West Bank.[18] The agreement excluded Jerusalem, settlements, military locations, and — unless otherwise provided — Israelis from the Authority's tax jurisdiction, and directed the PA to establish a revenue-collection system, with transitional provisions addressing possible initial shortfalls.[18]

The 1995 Israeli-Palestinian Interim Agreement's economic protocol reaffirmed each side's authority to set its own direct-tax policies and extended the income-tax transfer arrangement to Palestinians throughout Gaza and the West Bank who worked in Israel or in settlements.[19]

The 1994 Protocol assigned each side's administration to levy and collect VAT and purchase taxes on local production within its respective area.[3] The Israeli VAT rate at the time of signing was stated as 17 percent, while the Palestinian rate was set within a 15–16 percent range.[3] A later replacement provision in the Interim Agreement's protocol instead stated that the Palestinian VAT rate could not be more than two percentage points below the Israeli rate, then identified as 17 percent.[19] The PA was also granted authority to set the maximum annual turnover for VAT exemption within an upper limit of US$12,000.[20]

For cross-border transactions, the protocol established a VAT-clearance process using marked invoices. PA-registered and Israeli-registered businesses conducting qualifying transactions exchanged invoice lists monthly, with representatives meeting on the twentieth day of each month to settle net claims within six days.[3][20] Because Palestinians purchase significantly more goods and services from Israelis than Israelis purchase from Palestinians, Israel transfers the resulting net difference to the Palestinian side.[17]

On income taxes paid by Palestinian workers employed in Israel, the 1994 Protocol required Israel to transfer 75 percent of income taxes collected from Palestinians from the Gaza Strip and Jericho Area employed in Israel, and the full amount of income taxes collected from those employed in settlements.[3] The 1995 Interim Agreement extended this arrangement to Palestinians from throughout Gaza and the West Bank working in Israel or settlements.[19][21] The protocol also allowed Israel to deduct a 3 percent administrative charge from transfers of import taxes and other indirect taxes to cover collection and handling costs.[3]

Regular monthly transfers of tax-clearance revenues to the PA Ministry of Finance began in July 2007.[17] From then through March 31, 2009, approximately NIS 9 billion in revenues was credited to the Palestinians, including roughly NIS 2 billion in taxes from 2006–2007 that had not previously been transferred.[17] About NIS 1.8 billion was deducted for payments to Israeli companies for utilities and healthcare — amounts usually agreed in advance with the Palestinians — leaving approximately NIS 7.2 billion transferred to the PA over that period.[17]

For qualifying investment projects approved by the Palestinian Investment Promotion and Industrial Estates Agency, the PA offers tax incentives: agricultural producers whose income derives directly from land cultivation or livestock may receive a zero-percent income-tax rate, while qualifying projects may receive a 5-percent rate during an initial phase of up to four years and a 10-percent rate for the following three years.[4]

Tax revenues collected by Israel on the PA's behalf have become the dominant source of Palestinian public finance. The U.S. State Department's 2025 Investment Climate Statement defines these clearance revenues as customs duties collected on imports by Israel on the PA's behalf and reports that they represented 69 percent of all PA revenues in 2024.[4] Total incoming PA revenues for 2024 were approximately US$3.94 billion against a fiscal deficit of around US$2.1 billion.[4]

Earlier analyses document the same structural dependence. A 2022 Washington Institute analysis reported that revenues Israel collected and transferred monthly — mainly taxes on goods arriving at Israeli ports for the territories, income tax on Palestinians working in Israel, and certain VAT — represented 60–70 percent of PA revenues.[22] The same analysis reported that the PA collected roughly 23 percent of GDP in taxes, with a World Bank estimate that only 30 percent of those required to pay taxes in the accessible West Bank tax base actually did so.[22]

By category, cumulative transfers from January 2010 through August 2023 included approximately NIS 43.4 billion in import taxes, NIS 33.9 billion in fuel-excise transfers, and NIS 28.8 billion in VAT collected for the PA.[21] A 2023 report estimated that Israeli transfers represented 60–70 percent of an approximately US$5 billion annual Palestinian budget and described them as a central budgetary revenue source amid declining foreign assistance.[23]

In areas where the PA directly collects its own taxes, compliance has been limited. The same 2023 report estimated that the PA collected about US$60 million in taxes monthly from its own tax base, and cited World Bank estimates that only 30 percent of West Bank taxpayers paid taxes.[23] The PA did not collect taxes in the Gaza Strip, where Hamas collected taxes until October 7, 2023, or in East Jerusalem.[23] A 2018 proposal by PA President Mahmoud Abbas would have ended Gaza residents' tax exemption and brought the territory into line with the West Bank, with proposed rates including 20 percent income tax, 17 percent VAT, and higher customs duties on goods such as clothing, shoes, and furniture.[24] The proposal required parliamentary approval and its implementation was not established by available reporting.[24]

More than one-third of the PA budget was allocated to Gaza and East Jerusalem at the time described in 2023 reporting, principally for wages, allowances, and payments for electricity supplied from Israel.[23]

The tax-transfer mechanism has been a recurring source of political dispute. A July 2018 Knesset law required deductions from tax and customs revenues transferred to the PA for sums the PA granted to families of terrorists.[25] Israel began deducting more than NIS 40 million monthly in February 2019, and the PA refused to receive any transfers for eight months in protest, allowing roughly NIS 500 million to accumulate.[25] Israel subsequently granted a fuel-excise exemption returning approximately NIS 1.5 billion to the PA while continuing the monthly deductions.[25] Ynet reported that annual deductions, initially NIS 600 million in 2019, later averaged NIS 700 million; citing the Palestinian Finance Ministry, it said cumulative frozen revenues from 2019 through February 2025 reached approximately NIS 7 billion.[26]

A 2022 Washington Institute analysis reported an additional Israeli announcement of a US$180 million deduction from clearance revenues, representing approximately 4 percent of the PA's total net revenue.[22] Israel's stated rationale was that the funds would otherwise have been used for stipends to Palestinian security prisoners and their families.[22]

By April 2026, Israel had not transferred any PA clearance revenues for approximately one year, according to reporting attributed to Israeli Finance Minister Bezalel Smotrich's policy.[27] The clearance revenues withheld included import VAT, customs duties, purchase taxes, and fuel excise on goods destined for the West Bank, which by that point represented roughly 60 percent of the Authority's income.[27] The PA disputed the deductions and their broader fiscal effects.[27]

Reports from different periods give varying estimates of the transfers' fiscal weight. A 2019 account described them as about 40 percent of the PA budget.[25] A 2022 analysis put Israeli-collected revenues at 60–70 percent of PA revenues, while a 2023 report gave 60–70 percent of an approximately US$5 billion annual budget.[22][23] In 2025, Globes and Ynet each reported a figure of about 65 percent.[21][26] These figures reflect different dates, denominators, and scopes and should be understood as period-specific estimates rather than fixed ratios.

Sami Hadawi's 1970 explanatory edition of the 1945 Village Statistics cautions that fiscal records shaped its land classifications: because the Rural Property Tax was the criterion for land inclusion in village lists, non-taxable land was often omitted, and differences between fiscal records and actual village areas were entered as "Public" for administrative convenience.[7] These limitations affect how land ownership and classification appear in statistics derived from fiscal surveys.

For community-level tax-burden analysis in the Mandatory period, Metzer's study explicitly notes that conclusions depend on the denominator chosen — whether taxes are measured against income or against total resources including net capital imports — and on incomplete measurements of services provided within each community.[2] Two estimates for the Jewish share of government revenue in 1944/45 (approximately 63 percent from official sources cited by Metzer and approximately 65 percent from Zionist Organization and Jewish Agency reports cited by the Center for Israel Education) rest on different source bases and reflect the difficulty of constructing precise community-level fiscal accounts from the available records.[2][16]

For the Oslo-era arrangements, the available sources are primarily the treaty texts, official government reports, and financial journalism, with varying levels of granularity and different reference dates. The cumulative transfer figures and PA revenue shares cited across sources span different periods and use different denominators, reflecting the complexity of an arrangement that involves import taxes, fuel excise, VAT clearance, income-tax shares, and varying deductions, all subject to political negotiation and periodic disruption.