Question

University: The question: Choosing two types of taxes that were taught in this chapter, one of which is a direct tax and the other an indirect tax, and made a comparison between them based on the tax law in Palestine? You can be guided by book material or by searching online from other references. The number of assignment pages must be at least two pages.

Answer 1

Direct Tax

To improve the income tax system and reduce the tax burden on individuals, the State of Palestine passed new legislation on income tax brackets for individuals and companies in 2004, followed by a presidential decree to amend the income tax law No.8 for 2011. For companies, this is a change from a 20% rate to a 15% flat rate. For individuals, this is a significant change from a progressive bracket of 5-20% to 5-15%. The following sections briefly outline the taxation laws.

Individual Income Tax Rates
Corporate Income Tax Rate
Foreign Dividend Tax

Individual Income Tax Rates
A new income tax law has been drafted and was passed in 2001, followed by a new amendment on the income tax law as presidential decree No. 8 for 2011. Income tax is withheld at source from salaried employees and individuals earning wages. Personal credits and other deductions, which the employee may be due, are factored into the calculation. If the annual income of the individual taxpayer is below the low-income tax-exempt status (adjusted annually), the taxpayer is exempt from filing an annual tax report.

The tax rates payable by Palestinian residents as of 2011 are as follows:
Annual Income, NIS Income Tax Rate

Annual Income, NIS	Tax Rate
1 - 75,000	5%
75,001-150,000	10%
150,001 and up	15%

Special exemptions and/or credits are given to the unemployed, spouses, children, dependents, and university students. The above tax rates are calculated before the applicable tax credits are applied.
Employers are required to withhold tax from salaries paid to employees. The employer is required to report and to remit the withholding tax monthly.

Corporate Income Tax Rate

Palestinian companies and businesses are primarily subject to a 15% tax on income, Excluding telecommunication companies and pure monopolistic companies in the Palestinian market which is primarily subject to a 20% tax on income. Losses, equipment depreciation, and business expenses are also factored into the calculation of taxes.

Foreign Dividend Tax

A 15% tax is withheld at source from dividends distributed in Palestine to shareholders of a foreign company. There are, however, no taxes due on dividends distributed to shareholders of Palestinian companies regardless of where they live or their nationality, and regardless of whether they are an individual or a company. An automatic deduction at the source of 25% is withheld from companies unless companies or individuals obtain a Deduction at the Source Certificate, which grants a reduced rate that ranges between zero and five percent. Applications for these certificates are available from the district tax offices.

Direct taxes on income are of great importance in both advanced and developing countries. The percentage contribution of direct taxes to revenues is an indicator of a country’s economic advancement. They are more significant in advanced countries than in developing ones; they contribute up to 50 per cent of public revenues in advanced countries, but do not exceed 30 per cent in developing countries (Al-Wadi, 2007; Khalaf, 2007). Advanced countries mainly rely on direct taxes to fund general expenditures, unlike developing countries, which rely more on indirect taxes because direct taxes are dependent on the production and exporting capacity of persons and corporations, thus their ability to pay taxes. These taxes are characterized by abundant collection due to the broad taxation base in advanced countries. Indirect taxes, however, mainly focus on the trade sector, and the end user is the one who pays for those imports. There are several reasons why developing countries depend on revenue from indirect taxes to fund their current expenditures: x Weak production and industry and low salaries in the public sector sometimes make a country more of an importer rather than a producer. Therefore, the contribution of external trade to GDP grows, leading to larger customs revenues (Taqa and Al-Azawi, 2007); x Easier collection of indirect taxes, especially since a large portion of them are collected on imported goods at borders through customs documentation; 17 x Low taxation awareness in developing countries and lack of commitment in paying direct taxes and announcing them due to negative public opinion towards government services and its weak collection abilities; x Because of the low levels of household income and poor income distribution of income in many developing countries, taxation policies tend to focus on indirect taxes. Since Palestine is characterized as a developing economy with low income levels, the Palestinian National Authority has reconsidered income tax laws to reduce the taxation burden on citizens. Personal income taxation rates were changed so as not to exceed 25 per cent, compared with ceilings of 38 per cent in Israel (Palestinian Income Tax Law of 2005). The contribution of indirect taxes to the total tax revenue of the Palestinian National Authority exceeds 85 per cent of total revenue, while direct taxes contribution to the Palestinian National Authority treasury in the period 1996–2011 varied from 4–6 per cent of total tax revenues. This confirms that many obstacles remain to developing Palestinian taxation policies, public awareness and commitment (Sabri, 2004; Othman, 2007). The Paris Protocol did not impinge on the Palestinian National Authority’s direct taxation policies except those relating to Palestinian workers in Israel, taking into consideration the existence of illegal, undocumented workers in Israel, as the Protocol did not address this issue. As a result, the Palestinian National Authority did not collect income tax from these workers. Some studies estimate that around 30 per cent of workers enter Israel without a work permit, which leads to yet another channel of fiscal leakage from the Palestinian National Authority treasury (Palestine Economic Policy Research Institute (MAS), 2013). Additionally, the Israeli policies of siege, closure, confiscation of land and control over Palestinian water resources have led to diminished investment, production and employment, and in turn, a shrunken tax base and smaller direct tax revenues for the Palestinian National Authority treasury.

Indirect Tax

Indirect taxes Indirect taxes (customs duties on imports, purchase taxes, VAT and excise taxes) are those taxes that are imposed on goods and services when they are produced, sold, purchased, traded, consumed or imported. These taxes directly and indirectly are reflected in prices; therefore, they are the consumers’ disposable income, especially that of the middle and lower strata of society. A large portion of the Palestinian National Authority’s fiscal leakage originates from these taxes due to importing from or through Israel. Palestinian indirect taxes can be broken down into two categories: x Indirect taxes on imports from Israel. According to article VI of the Paris Protocol, VAT resulting from purchasing products from the Israeli market should be calculated based on the clearance bill mechanism, a document that proves purchase or sale of goods between the two markets and is a condition for clearance revenue between the two sides. This bill with both the Israeli form (I) and Palestinian form (P) is the only official trade document accompanying the movement of goods and services flowing between the two markets. Additionally, the purchase tax on locally produced goods is subject to clearance between both sides based on the principle of collecting tax according to the intention or end use of the good. 18 x Indirect taxes on imports from countries other than Israel. Article III (15) of the Paris Protocol states that all revenues from taxes on imports from countries other than Israel, that come through Israeli crossings, must be transferred to the Palestinian National Authority within six working days, as long as the end use is the Palestinian territory. These revenues include all taxes and duties listed in the customs declaration accompanying the imported goods (customs duties, purchase taxes, VAT and excise taxes).