Finance Minister Yuval Steinitz yesterday defended his decision to freeze the transfer of tax revenue to the Palestinian Authority, saying it was meant to act as a warning to the PA against moving closer to Hamas.

The Finance Minister stressed that the first meeting with the Palestinians to discuss the transfer of money collected as VAT and customs by Israel on behalf of the Palestinian Authority was due to take place last Sunday, but the second meeting, during which the Palestinians were to be given the money, was scheduled for Tuesday - a day before the signing of the agreement between the PA and Hamas in Cairo. According to Finance Ministry sources, it would have been ridiculous for Israel to transfer the funds to the Palestinians on that day.

Therefore, last Saturday Steinitz ordered the Tax Authority to cancel the meeting with the Palestinian Authority scheduled for the following day. Steinitz informed Prime Minister Benjamin Netanyahu of the details of his decision.

According to the Paris Agreement of April 1994, or to give it its full title, "Protocol on Economic Relations between the Government of Israel and the PLO," it was agreed that the land of Israel - in other words the State of Israel and the territories (Gaza Strip and the West Bank ) - would constitute a single tax area in relation to the outside world.

Israel would collect all taxes at the border crossings, mostly at Ashdod port, on behalf of the Palestinians. These include VAT and customs duties and, once a month following the calculation of revenues, Israel would transfer to the Palestinians what was due them. The taxes also include customs duties in the trade between Israel and the Palestinian Authority.

According to the Paris Agreement, the Palestinians are granted a number of exemptions, including the right to import certain materials in limited quantities outside the customs rates of Israel.

In recent years, at the end of each month two meetings take place between Israeli customs officials and their Palestinian counterparts to decide the amount of money that Israel will transfer to the Palestinians. In the first meeting each side presents its demands on the basis of receipts it holds. During the second meeting the sum is decided.

The average annual sum being transferred to the PA is more than NIS 300 million. Israel serves as a conduit for the transfer of Palestinian money to the Palestinians.

Were Palestinian imports to be handled through a Palestinian port of entry, for example in the Gaza Strip, or through a Palestinian-controlled land border crossing, from Egypt or Jordan, the role of Israel as a conduit would be reduced and possibly come to an end.

Over the year the transfer comes to NIS 3.6 billion, which is a substantial sum especially for the Palestinian Authority. This sum is meant for use in the annual budget for regular expenses, such as education, health, policing, salaries, etc.

'Demonstrative patriotism'

In essence Israel has no legal right to block the transfer of the money to the Palestinians. However, occasionally, for various political reasons, prime ministers and finance ministers opt to use the blocking of the tax money in an act of "demonstrative" patriotism. This gains them headlines, and once that is over they transfer the money.

During the second intifada Ariel Sharon froze the transfer of Palestinian tax monies for nearly two years. Israel then returned all the funds. In February 2006, when Hamas won the elections and a Palestinian government was set up with its participation, Israel once more froze the money transfers for a long period - until July 2007, at which time President Mahmoud Abbas dispersed the unity government. There have also been shorter periods during which the transfers were frozen.

At the treasury they noted that Steinitz wants unequivocal assurances that the funds Israel releases to the Palestinians will not serve Hamas or Palestinian terrorism against Israel. For Steinitz the Paris agreement reflects a peace agreement, and the minister is unwilling to accept the fact that Hamas has thousands of missiles and rockets aimed at Israel.

According to ministry sources, the freezing of the funds sends the message to the world that Israel views the agreement between the PA and Hamas gravely and that the Palestinians will have to choose what they prefer: A shared account with a terrorist organization, or continued cooperation with Israel.

At the treasury they point out that Israel is not the sole country in the world that has frozen assets. The U.S., for example, froze the assets of Iran and Libya due to their support of terrorism.

Steinitz's move is not supported by everyone in the government. Defense Minister Ehud Barak, for example, was quick to express his opposition since it runs contrary to the Paris agreement.

International sources are also pressuring Israel to allow the transfer of the funds.