1. The powers and responsibilities of the Civil Administration in the sphere of VAT on local production in the West Bank will be transferred to and will be assumed by the Palestinian Authority.

2. For the purpose of this Annex the term "VAT" shall refer to Value Added Tax on local production imposed on the sale of assets and the provision of services by dealers.

3. The sphere of VAT shall include all matters dealt with in the laws, regulations and military orders listed in Appendix A, subject to the principles set forth in this Annex.

4. In accordance with Protocol IV of the Gaza - Jericho Agreement, while the prevailing system and principles of VAT in the West Bank will continue to apply, the Palestinian VAT rate shall not be lower than 15% to 16% and the maximum annual turnover for dealers to be exempt from VAT will be decided by the Palestinian Authority, within an upper limit of 12,000 US dollars.

5. Subject to paragraph 6 below, each side will register for VAT purposes dealers who are subject to its powers and responsibilities, notwithstanding the place of their activity.

6. a. Ongoing permanent businesses will register for VAT purposes with the VAT administration of the side exercising powers and responsibilities in the place in which they are situated.

b. Notwithstanding subparagraph 6.a, ongoing permanent Israeli businesses situated outside the settlements and military locations will be registered for VAT purposes with the Civil Administration. The rules of Palestinian VAT legislation will apply to these businesses. The Civil Administration will transfer to the Palestinian Authority the net VAT collected from these businesses, after deduction of their refunds.

7. For the purpose of this Annex, and for the purpose of the application of Appendix B of Annex V to this Annex pursuant to paragraph 17 below

a. A corporation will be regarded as either a Palestinian or an Israeli if the majority of its shares which grant rights to distribution of profits are held by Palestinians or by Israelis, respectively.

b. For the purpose of subparagraph a. above, shares held by foreigners will be considered as shares held by Palestinians, except with regard to corporations operating within the settlements and military locations.

c. The above mentioned principle regarding corporations will apply to partnerships, with the necessary adjustments.

d. The registration for VAT purposes of corporations and partnerships in which Israelis and Palestinians hold equal rights to distribution of profits, will be according to the place of registration of the corporation or the partnership. Each side may bring such cases for discussion before the joint committee referred to in paragraph 16 below, if it considers that the place of registration for VAT purposes should be different.

8. Foreign dealers will be registered for VAT purposes in accordance with their place of activity.

9. The VAT levied on dealers registered for VAT purposes will accrue to the VAT administration with which the dealer is registered and the tax code of that side will apply.

10. The principles set out in paragraphs 1-9 and 16-17 of this Annex shall also apply to wage-and-profit tax on financial institutions.

11. There will be clearance of VAT revenues between Israel and the Palestinian Authority according to the following principles:

a. The VAT clearance will apply to VAT on transactions between dealers registered with different VAT administrations. For the purpose of this paragraph, dealers registered with the Civil Administration shall be considered to be registered with the Palestinian Authority.

b. The following procedures will apply to clearance of VAT revenues accruing from transactions by dealers registered for VAT purposes:

1. To be acceptable for clearance purposes, special invoices, clearly marked for this purpose, will be used for transactions between dealers registered by the different sides.

2. These invoices will be worded either in both Hebrew and Arabic or in English and will be filled out in any of these three languages, provided that the figures are written in "Arabic" (not Hindi) numerals and that the amounts filled out in the invoice are stated also in NIS.

3. For the purposes of tax rebates, such invoices will be valid for six months from their date of issue.

4. Representatives of the two sides will meet once a month, on the twentieth day of the month, to present each other with a list of invoices submitted to them for tax rebate, for VAT clearance. This list will include the following details regarding each invoice:

a. the number of the registered dealer issuing it;

b. the name of the registered dealer issuing it;

c. the number of the invoice;

d. the date of issue;

e. the amount of the invoice - with a separate reference to the amount of VAT, specified both numerically and in words; and

f. the name and the VAT registration number of the recipient of the invoice.

5. The clearance claims will be settled within six days from the meeting, through a payment by the side with the net balance of claims against it, to the other side.

6. Each side will provide the other side, upon request, with invoices for verification purposes. Each tax administration will be responsible for providing invoices for verification purposes for six months after receiving them.

7. Each side will take the necessary measures to verify the authenticity of the invoices presented to it for clearance by the other side.

8. Claims for VAT clearance which will not be found valid will be deducted from the next clearance payment.

9. Once an interconnected computer system for tax rebates to dealers and for VAT clearance between the two sides is operational, it will replace the clearance procedures specified in subparagraphs (4) and (5) above.

10. The two tax administrations will exchange lists of the dealers registered by them and will provide each other with the necessary documentation, if requested, for the verification of transactions.

11. The subcommittee established under Article VI paragraph 5 of Annex IV of the Gaza - Jericho Agreement will deal with the implementation of the provisions of this paragraph.

12. Pending the Interim Agreement, the following provisions shall apply with regard to VAT on imports:

a. In addition to the clearance described in paragraph 11 above, VAT on imports paid by dealers registered with the Palestinian Authority who deduct input tax on such imports shall be remitted to the Palestinian Authority.

b. The clearance shall be effected in the framework of the monthly settlement referred to in paragraph 10 above. For this purpose, the Palestinian Authority shall provide Israel with a list containing the following details.

1. the VAT registration number of each dealer;

2. the number of each import entry document; and

3. the VAT amount included in each import entry document.

c. The Palestinian Authority shall verify and confirm that the list referred to in subparagraph (b) does not include imports the final destination of which is the Gaza Strip or the Jericho Area. The remittance of VAT payments in respect of these imports shall continue to be in accordance with the Gaza-Jericho Agreement.

13. VAT paid on transactions with dealers registered with Israel by not-for-profit Palestinian organizations and institutions registered with the Palestinian Authority, or by the Palestinian Authority where the transaction relates to powers and responsibilities transferred under this Agreement, will be remitted to the Palestinian Authority in accordance with the clearance system set out in paragraph 11. The same principle will apply to VAT paid on such transactions by Palestinian local authorities, once the powers and responsibilities regarding them are transferred to the Palestinian Authority.

14. VAT paid on transactions with dealers registered with the Palestinian Authority by not-for-profit Israeli organizations and institutions, by Israeli local authorities, or by Israel, will be remitted to Israel in accordance with the clearance system set out in paragraph 11.

15. Where the zero VAT rate on transactions by dealers registered with the Palestinian Authority is conditional upon the submission of proof by the dealer that foreign currency has been deposited with a financial institution, the deposit will be made in a financial institution operating in the West Bank. The definition of foreign currency for the purposes of this paragraph may be determined within the JEC.

16. The two sides will establish a joint committee composed of representatives of both VAT administrations. This committee will deal with all issues requiring coordination and cooperation with regard to this Annex.

17. VAT enforcement by the Palestinian Authority shall be in accordance with the principles set out in Appendix B attached to Annex V.

Appendix A

Laws, Regulations and Military Orders in the Sphere of VAT

1. Law of Excise on Local Production, No. 16, 1963, except for the following articles (Hebrew Version):

2(A), 2(B), 2(E), 3, 6A(2), 6A(5), 6A(6), 6A(8)

6A(7) - will be subject to principles regarding the tax enforcement

2. Regulations Regarding Excise on Local Production (Judea and Samaria), 1985, except for the following articles (Hebrew Version):

2, 33, 118, 137, 147, 127

31(A)1, will not apply in relation to authorizing use of "other document"

53 (B), 70, 85, 86, 87A, 89, 92, 94, 103, 116, 116A(D)-(E), 117, 119(D), 129(C), 139(B) - will be subject to the principles regarding tax enforcement

35(A)2, 35(A)3, 112, 115A, 116A(C), 119, Chapter 16, 139(A) - will be subject to principles regarding tax enforcement

3. Regulations regarding Bookkeeping (Judea and Samaria), 1985

4. Notification regarding Excise on Local Production (designating Egypt as bordering country) (Judea and Samaria), 1987