November 1992, Page 30, 93

Special Report

Court Case Challenges Tax Inequality Between Israelis and Palestinians

By Glenn Robinson

Refusal to pay taxes to the Israeli occupation authorities was an important element of the Palestinian strategy of civil disobedience in the first two years of the intifada. The town most famous for its ongoing tax boycott, Beit Sahour, near Bethlehem, was put under siege during most of September and October 1989, and $1.5 million of unpaid taxes was forcibly collected, often in the form of furniture, automobiles, or merchandise.

In one case, the entire inventory of medicine and other goods was collected from a pharmacy, effectively putting the owner out of business.

Although Israeli authorities broke the tax boycott in Beit Sahour, the controversy continues. The case has now reached the Israeli High Court of Justice.

Led by Elias Rishmawi, the pharmacist, scores of merchants from Beit Sahour and the surrounding area have filed suit against the Israel Defense Forces and Civil Administration charging that the collection of taxes in the occupied territories is illegal. Because their case is based on earlier High Court decisions, the High Court has demanded that the Israel Defense Forces and Civil Administration reply to the charges.

Imposition of the Value Added Tax

Rishmawi's case is based on the High Court's own arguments permitting the extension of Israel's Value Added Tax into the occupied territories. The VAT, which significantly increased taxes paid by Palestinians to Israel, was imposed in 1976 and was ruled legal by the High Court in 1983 in the twin caes of Abu Ita et al. v. Customs Commissioner of Judea and Samaria et al., and Kansas et al. v. Customs Commissioner, Gaza Strip Command et al.

In these cases, the High Court accepted the applicability of the 1907 Hague Regulations to the occupied territories. The Hague Regulations govern the collection of taxes by an occupying power, permitting such collection only so long as it does not violate principles of customary international law and the funds are used for the benefit of the residents of the territories under occupation.

While the Hague Regulations (and the 1949 Fourth Geneva Convention) clearly prohibit an occupying power from making any significant change in the tax code, the High Court argued that an exception should be made in this case based on the principle of equality. That is, since there were no customs borders between the occupied territory and Israel, it was impractical and unfair to impose such a tax on Israelis and not on Palestinians.

In addition, the High Court argued that the VAT would benefit the local Palestinian population, as that money would be re-invested in the occupied territory. While the High Court accepted the argument that tax collection should be governed by customary international law, with the caveat of equality in taxation between Israelis and Palestinians, the actual practice of tax collection has been neither legal nor equal.

The Inequality of Taxation between Israel and the Occupied Territory

By drawing on the tax codes for both Israel and the West Bank, Rishmawi showed in his petition to the High Court that Palestinians in the West Bank pay significantly more taxes than their Israeli counterparts and that the income threshold for paying any taxes is significantly lower for Palestinians. Specific examples of the disparities in the income tax thresholds were cited in the petition to the High Court:

-An unmarried Palestinian in the West Bank will begin paying taxes on a monthly income of 966 shekels (one dollar equals about 2.4 shekels), while a single Israeli will not pay taxes until his income reaches 1,320 shekels.

-A married couple in which only one spouse works will pay taxes on a monthly income of 1,095 shekels if they are Palestinian, but not until their income is 1,900 shekels if they are Israeli.

-A married Palestinian couple with three children and one breadwinner will begin to pay taxes when their income exceeds 1,158 shekels per month. An Israeli family with the same circumstances won't pay taxes until their monthly income reaches 2,240 shekels.

-A Palestinian family with five children pays taxes on 1,200 shekels' income per month. An Israeli family with five children only begins to pay taxes at an income level of 2,580 shekels.

Not only is the threshold level much lower for Palestinians, but the total tax bill for Israelis and Palestinians with the same income is vastly different. Even though the gap decreased somewhat because of reforms which took effect Jan. 1, 1992, it remains highly discriminatory. Prima facie, it appears that the new tax codes equalize the tax rates. However, the various deductions afforded Israelis-which do not apply to Palestinians-continue to place a far greater actual tax burden on Palestinians. Again, Rishmawi's petition draws on the most recent tax schedules published by Israel:

-A single Palestinian earning 4,000 shekels per month will pay 1,999 shekels in taxes, while an Israeli with a similar income will pay 719 shekels.

-A Palestinian couple earning 2,500 shekels per month with five children will pay 404 shekels in taxes, while an Israeli couple in the same circumstances will pay no taxes at all. If the same Palestinian couple earns 4,000 shekels, their tax burden increases to 1,087 shekels, while the Israeli couple will pay only 443 shekels.

-A Palestinian couple earning 2,500 shekels per month and supporting three children will pay 424 shekels in taxes, while their Israeli counterparts will pay 69 shekels.

It is important to remember that the Israeli tax rates also apply to Jewish settlers in the occupied territories. So, under Israeli tax code rules, a Jew living in the settlement of Kiryat Arba will pay perhaps half the taxes that his Palestinian neighbor living in adjacent Hebron will pay, even though their incomes are identical. Such a favorable deal for Jewish settlers does not even take into account the array of subsidies given to settlers by the former Shamir government, and some of which have been continued by the new Labor government.

Violations of Customary International Law

Rishmawi has shown in his petition to the High Court that the discriminatory tax codes violate the High Court's arguments which emphasized the need for equality in taxation between Israel and the occupied territories. In addition, Rishmawi argues that the Israeli tax system in the West Bank violates customary international law. In the 1983 Abu Ita case, the High Court accepted the validity of imposing new taxes in the occupied territories only if section 48 of the Hague Regulation is met. It provides that all such tax monies must be used to the benefit of the population under occupation, and not be redirected to the occupying power itself.

Rishmawi's petition points out that the Israeli occupation authorities have never published a detailed budget for the occupied territories, and therefore cannot account for the expenditures of tax monies. The suspicion, of course, is that much of the tax money collected by Israel has been redirected to Israel or has been used to pay for Jewish settlements and for the infrastructure which supports the settlements.

Palestinians paid the costs of their own occupation.

By not accounting for the use of taxes collected from Palestinians, Israel has violated the same provisions of international law that the High Court explicitly stated in 1983 apply to the occupied territories. Thus, the petition asserts, the occupation authorities "have no right to collect income tax payments until they reveal complete details of the use made of the amounts collected as taxes from the residents of the [occupied] territories, and until they prove that the taxation monies that were collected in the past were expended for their benefit."

A number of researchers who have examined the tax issue have concluded that, at least up until the intifada, Israel made a profit from the occupation. That is, Palestinians paid the costs of their own occupation, with a surplus of tax revenue going into Israel's treasury. That surplus, prior to the intifada, was estimated by Israeli scholar Meron Benvinisti to average about $50 million per year. Palestinian editor Hanna Siniora and others believe the annual tax profit for Israel was closer to $150-200 million.

Another violation of international law concerns the method of tax collection, which cannot be done in an arbitrary and unjust manner. During the intifada, tax collection became another tool by which Israel sought to crush the uprising. By assessing taxes arbitrarily, imposing new taxes as a method of collective punishment (such as the daribat al-hijara, the so-called 'stone tax' on cars), and using tax collection as a method of harassment, Israel has violated customary international law, according to Rishmawi, and has therefore lost its right to collect taxes from Palestinians.

The Likely Outcome

The petition was filed in February of 1992, and the High Court instructed the IDF and the Civil Administration to respond within 45 days. The two respondents asked for and received a 30-day extension, and then another 15-day extension. By the beginning of June there still had been no response. Seemingly, the IDF and Civil Administration were waiting until after the Israeli elections. There are suspicions that the two respondents are dragging out the case until some kind of autonomy agreement is reached, making the case moot.

When I spoke with Rishmawi in Beit Sahour in June, he was not optimistic that he would win the case-but he didn't think that it really mattered:

"Obviously we do not expect to win-but we have other aims. First, we wanted to expose this unjust tax policy in front of the world and in front of the Israelis themselves. We have kept a number of consulates informed about the case. And we wanted to show the Israelis that we Palestinians won't just accept everything they do to us anymore. Second, we needed a legal cover to be able to address the tax issue openly. Without this case, the Israeli authorities would just say we are inciting trouble and put us in prison."

The outcome of this case, and the general handling of the tax issue, will go a long way toward showing how serious the Rabin government is about making peace with the Palestinians.

Glenn Robinson is an assistant professor in the Department of National Security Affairs of the Naval Postgraduate School of Monterey, CA. The views expressed are those of the author and do not necessarily represent the views of the Department of the Navy or any other agency of the U.S. government.