SHOULD THE LEGAL AND JUDICIAL SYSTEM OF PALESTINE KEEP, AMEND OR ABOLISH INCOME TAX?

• Author: Daraghma, Zahran "Mohammad Ali"

INTRODUCTION

The income tax law is considered globally as one of the main references for accountants due to the reality that tax rates and brackets determine the income tax expenses. Tax deductions and exemptions influence the financial statements figures. At this point, it has been proved worldwide that the accounting research assists the lawmakers to keep or amend or abolish income tax. Various authors state that the accounting profession is based on true and fair view. A lack of true and fair of tax system increases taxpayers' dissatisfaction which also leads to tax evasion (Al-Omoor, 2007; Yonas, 2016).

Howell (2005) study implemented by the International Monetary Fund (IMF), comes out with a motivated thought that help to convert both the flat Personal Income Tax (PIT) and the flat Corporate Income Tax (CIT) into consumption taxes with a single common rate by the member countries of the Organization for Economic Co-operation and Development (OECD). This motivation hence helps in increasing the taxpayer satisfaction.

Similarly, it is worth mentioning that the lawmakers should follow the following Smith (2007) canons on taxation: (1) canon of equity which means that the tax must be levied on the populace on the basis of equality. (2) Canon of certainty which means that the tax should be certain to the tax payer (tax amount, to whom, and the time the tax is to be paid). (3) Canon of convenience or ease means a good taxation policy must be convenient for the taxpayer. (4) Canon of the economy, this principle means the tax revenues must be greater than the cost of collection.

In Palestine, Yadak (2006) shows that there is a lack of social justice in respect with the Palestinian income tax law No. 17, of 2004. In 2011, Palestine issued a new version of the income tax law (income tax law No. 8, of 2011). The study of Mahani's (2010) shows that law makers in Palestine should reduce tax rates. Similarly, the paper shows that the current income tax brackets and rates, exemptions, and deductions lead to tax evasion. Further, Vadde and Gundarapu (2012) show that tax in emerging economics is a difficult issue and has concerned increasing consideration in the last two decades. Many troubles observed such as weak administration, failing to gather enough tax revenues, tax structures where tax horizontal and vertical equity considerations are not integrated, lack of government and economic stability.

Martins and Gomes (2014) show that taxpayer compliance and behavior (tax morale) is influenced by a multidisciplinary set of factors, namely political, economic, psychological and behavioral factors. Al-Ttaffi and Abdul-Jabbar (2016) show that the level of tax non-compliance and lack of taxpayer satisfaction in developing countries is found much more than that in the developed countries. Thus, this manuscript evaluates the satisfaction degree of the Palestinian natural taxpayer with the current income tax law No. 8, of 2011.This means that this paper also comes with actual evidence examined through the reality of the Palestinian taxpayer's reaction towards this issue. Consequently, this paper comes to explore this issue through the opinions of the natural person taxpayers in Palestine because Palestine suffers from a lack of empirical efforts in this regard.

The outcomes of this manuscript are expected to be used as a concrete proof that unveil the justice of the income tax law that currently applied in Palestine, and to show the satisfaction of taxpayers as well. In addition, this paper comes to explain the satisfaction of taxpayers on the following three issues:-Firstly: The satisfaction degree of the Palestinian natural taxpayer with the income tax brackets and rates based on the income tax law No. 8, of 2011.Secondly: The satisfaction degree of the Palestinian natural taxpayer with the income tax exemptions based on the income tax law No. 8, of 2011.Thirdly: The satisfaction degree of the Palestinian natural taxpayer with the income tax deductions based on the income tax law No. 8, of 2011.

The findings of this study enable the policymakers and decision-takers to redeem the shortcomings. They will also help lawmakers to take the right decision to keep the law or amend it or abolish it. What's more, the methodology of this paper relies on prior studies such as (Abadi, Abadi, & Jafari, 2017; Awaluddin & Tamburaka, 2017; Al-Ttaffi, and Abdul-Jabbar, 2016; Puthur, Mahadevan, & Mahadevan, 2016; Shikhaliyev, 2016; Yonas, 2016; Gupta, 2015; La'lawi, 2015; Hastuti, 2014; Hidayat et al., 2014; Lamberton, Neve, & Norton, 2014; Martins & Gomes, 2014; Meswadi & Khawaldi, 2014; Rajeswari & Mary, 2014; Chawla et al., 2013; Vadde & Gundarapu, 2012).

This study consists of the following successive seven sections: - section one: an introduction, section two: addresses the theoretical background, section three: describes previous literatures, section four: describes the hypotheses, section five: addresses methodology, section six: presents the results and section seven reports the conclusion.

THEORETICAL BACKGROUND

This part of the study displays the theoretical issues that related to the income tax based on the latest version of the income tax law No. 8, of 2011. It also provides theoretical framework linked to the topic of this paper.

Income Tax Concepts in Palestine

In Palestine, there are many written income tax concepts that relate to the income tax law No. 8, of 2011.This paper uses many terminologies and concepts based on the sources of the income tax. The following is an explanation of these concepts. The income tax law No. 8, of 2011 (ITL8-2011) defines the person as a natural or legal person. The taxpayer is defined as "each person obliged to pay, withhold, or transfer the tax according to the provisions based on the income tax law No. 8, of 2011. The (ITL8-2011) sets a distinction between the natural taxpayer and legal taxpayer as follows: Firstly, Natural Person: Individual taxpayer or any sole proprietorship or partner in a joint-liability company or simple limited partnership or others specified by law. Secondly, Legal Person: each organization or corporation which enjoys the legal form by the law, such as associations, public shareholding corporations or limited liability corporations, partnerships limited by stocks and foreign firms.

In fact, the income tax law No. 8, of 2011distinguishes between income tax deductions and income tax exemptions as follows: Firstly, deductions: the costs and expenses that are spent or incurred in order to produce income during the tax period. Secondly, exemptions: Amounts excluded from net income. However, tax compliance is determined by five issues: (1) Deterrence. (2) Norms (both personal and social). (3) Fairness and trust (in the tax administration). (4) Complexity of the tax system. (5) The role of government and the broader economic environment (Walsh, 2012).

The Feasibility on Income Taxes in Palestine

The feasibility of imposing the income tax in any country relies on two factors, (Tanzi & Zee, 2001; Awaluddin & Tamburaka, 2017; Al-Ttaffi, & Abdul-Jabbar, 2016; Puthur, Mahadevan, & Mahadevan, 2016; Shikhaliyev, 2016). These factors are: Firstly: Taxpayer's satisfaction. Secondly: the income tax revenues should be greater than the costs of collection and managing. The income tax revenues represent around 7% of total tax revenues in Palestine. In effect, the income tax revenues do not cover the costs of managing and collecting the income taxes (Ministry of Finance-Palestine, the website, 2016).

This fact encourages taking a decision to abolish the income tax or its incorporation into indirect taxes. Also, this study provides real evidence from Palestine regarding the natural taxpayer satisfaction with the current income tax. Various authors show that the existence of a lack of taxpayer satisfaction leads to tax evasion (Hidayat et al., 2014; Al-Ttaffi & Abdul-Jabbar, 2016).

The income tax department in Palestine refers to and subject to the ministry of finance. Thus, the financial data that's published by the ministry of finance during the period of 2004 - 2016 shows that the income tax revenues are less than the costs. This fact proves having an infeasibility regarding the income taxes in Palestine.

Tax Rates and Practices in Palestine

It's worth mentioning that since the tax law No. 8, of 2011 has been put into action till now, 2018, and according to the latest version of the income tax law No. 8, of 2011, the tax rates and practices that used for computing income taxes on the natural taxpayer's income are:

1 The first interval is from 1 to 75,000 New Israel Shekel (NIS) and the tax rate is 5%.

2. The second interval is from 75,001 to 150,000 NIS and the tax rate is 10%.

3. The third interval is greater than 150,000 NIS and the tax rate is 15%.

4. The latest version of the income tax law in Palestine shows that an annual exemption is 36,000 NIS on the income of the natural resident person. The law shows that a rate of 15% shall be levied on the taxable income of any legal person.

   Income Tax Exemptions in Palestine for the Average Resident

   In order to compute the value of income tax, the average individual shall be granted the following exemptions (Income Tax Law No. 8, Article 12, 2011):

1. An annual exemption of 36,000 NIS for average resident person.

2. The real total paid for fixed transportation to the workers by the government,

3. Value paid for transportation or 10% of the gross yearly salary, whichever is lower, for the workers of the private sector.

4. High education exemption of 6000 Shekel per year. The exemption applies to a maximum of two students in each year.

5. A once exemption of 30,000 Shekel for buying or constructing a home, or an exemption from the amount of actual interest paid on a loan from a lending institution that has been spent on a house, with a maximum of 4,000 Shekel yearly, for a time not to exceed ten years.

6. The contributions of workers to...