It is also the other way around: Israel doesn't have any incentive to formally annex a territory that is full of Palestinians because that would make it more co

It is also the other way around: Israel doesn't have any incentive to formally annex a territory that is full of Palestinians because that would make it more complicated to deprive them of rights (as they did with the residents of Jerusalem). But Israel also doesn't have an incentive to define a narrow permanent border and therefore renounce more territory acquisitions. For example, illegal settlements outside the internationally recognised borders are defended and taxed as territory of the State; their residents are considered residents of Israel. So the solution is to keep vague and say that borders are "contested".