Israel's freeze on Palestinian tax transfers — What does it mean?

OCCUPIED JERUSALEM — Israel has decided to block tens of millions of dollars in tax transfers to the Palestinian Authority over payments to prisoners jailed for attacks. 

Here is a series of questions and answers on what it means:

What taxes?

In 1994, Israel and the Palestinians signed the Paris Protocol, which would become part of the landmark Oslo peace accords. It governs economic relations and established a customs union between Israel and the Palestinian territories, with Israel controlling the borders.

Israel levies VAT and tariffs on products imported into the Palestinian territories and transfers them to the Palestinian Authority.

The transfers make up around 70 per cent of the PA's revenue, according to Palestinian political scientist Jihad Harb.

Israel's finance ministry says it collects around 700 million shekels ($190 million, 170 million euros) in taxes each month on Palestinian imports.

From that, it deducts 100 million shekels to cover various services delivered to Palestinians.

The arrangement was meant to be temporary as the two sides worked towards a final agreement, but it remains in place with peace efforts stalled and the Palestinian economy remains heavily dependent on Israel.

What did Israel decide?

Israeli Prime Minister Benjamin Netanyahu's government decided Sunday to withhold $138 million in tax transfers to the PA over its payments to the families of prisoners, or the prisoners themselves, jailed for attacks on Israelis.

The amount is to be deducted incrementally over 12 months. Israel says it is equal to that paid by the PA last year to those "imprisoned in Israel, to their families and to released prisoners".

A law passed in July allowed the government to take the step, and Netanyahu vowed to implement it after a recent deadly attack on a young Israeli woman.

Israel has also used the measure in the past to sanction the Palestinian Authority (PA).

What are prisoner payments?

Palestinian President Mahmud Abbas’ administration provides money to families of Palestinians killed or jailed as part of the conflict with Israel, with the amount depending on their sentences.

Israel as well as the United States allege the payments to those who have carried out attacks encourage further violence and undermine Abbas’ argument that he is committed to peace.

The PA has never divulged the amount it pays out. An Israeli lawmaker behind the 2018 law alleged it was 1.2 billion shekels last year.

The PA says the payments are a form of welfare to the families who have lost their main breadwinner and denies it is seeking to encourage violence.

Sahar Francis, head of Palestinian prisoners NGO Addameer, said the money constitutes “social insurance”.

More than 5,000 Palestinians are detained in Israel, Addameer says.

What are the financial consequences? 

“Even without this decision, the PA was already facing large budget deficits,” said Robert Tchaidze, IMF representative for the occupied West Bank and Gaza Strip.

The IMF in September forecast a deficit of $620 million in 2018.

For 2019, anticipating a freeze in transfers larger than what was announced on Sunday, the IMF predicted a deficit of around $1 billion.

The freeze comes on top of a dramatic drop in direct foreign aid to the Palestinian Authority budget, which has gone from 10 per cent of GDP five years ago to 3.5 per cent last year.

In 2018, the United States cut hundreds of millions of dollars in Palestinian aid.

The financial crisis could worsen further if Abbas sticks to his ultimatum announced on Wednesday, when he said the PA will refuse to accept a partial transfer from Israel.

Palestinian economist Nasser Abdelkarim spoke of “the start of an enormous financial and economic crisis”.

What are the security implications?

Security officials in Israel, which is in the midst of an electoral campaign, worry over the impact that the freeze could have on the stability of the West Bank and the blockaded Gaza Strip.

UN Envoy for the Middle East Peace Process Nickolay Mladenov said on Wednesday that the freeze and other financial pressures “put at risk the financial stability of the Palestinian Authority and ultimately the security of both Israelis and Palestinians alike”.

According to Harb, even if Arab countries extend financial help, the crisis threatens to affect the PA’s ability to contain “violence or protests against the Israeli occupation”.