the areas under Israeli tax responsibility, tax may be deducted at source, but only on such income as is attributable to such permanent establishment.

2. No tax shall be deducted at source on income derived by a Palestinian from transportation activities, if the point of departure or the point of final destination is in the areas under Palestinian tax responsibility.
   
   

7. Non - deduction at source in accordance with the provisions of paragraphs 5 and 6 above, shall be carried out through the use of certificates in the form set out in Schedule 1. Such certificates shall be issued on special paper in order to assure that the certificates are authentic. The certificates will be worded in both Hebrew and Arabic and will be filled out in the language of the other side or in English, and the figures will be written in " Arabic " ( not Hindi ) numerals.
   
   
1. In any case, where the appropriate certificate referred to in paragraph 7 has not been presented to the payer prior to the payment of income referred to in paragraphs 5 and 6 above, tax will be deducted at source by the payer according to the applicable law.
   
   
2. With regard to income not referred to in paragraphs 5 and 6 above, tax may be imposed by the tax administration responsible for the areas in which the income was accrued or derived.
   
   

8. Each side will grant its residents a tax relief for income tax paid by them on income accrued in or derived in the areas under the tax responsibility of the other side.
   
   
9. Both sides agree that a special subcommittee will be established to finalize the arrangements and procedures regarding taxation issues ( including issues concerning double taxation ).
   
   

APPENDIX 2  

( Replacing Article VI of the Protocol on Economic Relations )

ARTICLE VI

Indirect Taxes on Local Production

1. The Israel and the Palestinian tax administrations will levy and collect VAT and purchase taxes on local production, as well as any other indirect taxes, in their respective areas.
   
   
2. The purchase tax rates within the jurisdiction of each tax administration will be identical as regards locally produced and imported goods.
   
   
3. While the prevailing concepts and principles of VAT will continue to be applied by both sides in a compatible way, the Palestinian VAT rate shall not be lower than 2% below the Israeli VAT rate ( the present Israeli VAT rate is 17% ).
   
   
4. The Palestinian side will decide on the maximum annual turnover for businesses under its jurisdiction to be exempt from VAT, within an upper limit of 12,000 US $.
   
   
1. Ongoing permanent businesses will register for VAT purposes with the VAT administration of the side exercising responsibility in the place in which they

<204>