Smuggling and Evasion of Custom Duties and Taxes: The Cost to the Palestinian Treasury and Market - Roundtable(6)

What renders the topic of this paper highly sensitive and important is twofold: first, it attempts to examine ways of minimizing the Palestinian Treasury’s financial leakages. Second, it examines methods of reducing the adverse effects of smuggling on the Palestinian market. Reducing smuggling helps in cutting the Treasury’s deficit, protecting law-abiding taxpayers, and establishing fair business competition. There are many sources for trade-related leakages, such as: indirect imports, smuggling of goods from the Israeli market, smuggling of goods (especially cigarettes and tobacco) from the Jordanian market (i.e. shuttle trading), as well as tax evasion through misdeclaration or under-invoicing of goods imported from the Israeli market or from third countries.

Different studies, reports, and statements by officials of the Palestinian Ministry of Finance (MoF) and the Customs Police (CP) demonstrate that smuggling is on the rise in various geographical regions of Palestine. CP raids are frequently reported in the news, showing seized smuggled fuel and foodstuffs, whether expired or edible, from Israel and its settlements. However, in recent years, fuel smuggling has become a major issue due to its significant spread. Evidently, smuggling cases reported by CP reached 5,672 in 2017, while the number reached 5,348 in the first eight months of 2018. Moreover, these figures do not include the many cases that were already resolved before filing them, along with their judicial proceedings. These figures include different types of customs duties and tax evasion cases, whether of goods that enter without import documentation or whose declared values are manipulated, or those that concern tradesmen who evaded taxes or did not register officially. According to CP, smuggling covers a wide range of goods, such as: fuel, tobacco, poultry, dates, agricultural goods, and building materials.

Mostly, smuggled goods are either sensitive goods (revenue-generating goods, such as fuels and cigarettes) or essential goods (basic commodities for everyday life). Generally speaking, smuggling of goods causes harmful economic and social consequences, including Treasury losses, negative effects on law-abiding taxpayers, and price distortions in the market, in addition to other ramifications caused by expired goods that reach the market or goods that do not comply with Palestinian standards and specifications.

This part of the paper sheds light on the impact of financial leakages resulting from smuggling and customs duties and tax evasion. Many studies associate these types of leakages with the Paris Protocol on Economic Relations and the partial application of its provisions by Israel, especially those pertinent to Palestinian presence at the borders and crossings, the clearing system mechanism, and the withholding of Palestinian financial revenues. All these factors have added to the deficit of the Palestinian Treasury. The latest MoF report estimated Palestinian trade-related leakages and withheld revenues in 2018 at around USD 711 million, some USD 120 million of which resulted from the clearing system enforced by the Paris Protocol and falsely declared clearance invoices. These estimates do not include the value of leakages resulting from smuggling unregistered goods from the Israeli or Jordanian markets. An UNCTAD study issued in 2014 estimated the annual value of goods smuggled from the Israeli market at more than USD 725 million, translating into more than USD 190 million in losses for the Palestinian Treasury, in addition to other losses resulting from indirect imports.

Through this Roundtable session, the Palestine Economic Policy Research Institute (MAS) aims to focus on the aforementioned two important sources of financial leakages, namely smuggling and customs duties and tax evasion of imported goods, especially from the Israeli market. In addition, the paper looks into the reasons behind the spread of this phenomenon and the associated economic and social risks. The paper also touches upon the noticeable rise in fuel smuggling and the potential reasons for its spread lately. Hopefully, the discussion among specialists and experts will generate recommendations and policies for curbing this phenomenon.