The Ethiopian law of tax enforcement experienced a drastic change following the tax reforms of the 2002. Introduction of self-executing tax enforcement mechanisms was among the grand shifts in the country’s tax system. Previously, the only means of ensuring prompt and certain collection of delinquent taxes was through the time taking judicial proceeding. The disapproved judicial means of enforcing delinquent taxes is now replaced by a self-executing enforcement scheme called ‘tax foreclosure.’
Tax foreclosure is by and large an out of court means of recovering delinquent taxes by seizing and selling the asset of delinquent taxpayers’ property. It involves a series of legally inscribed condition precedents that need to be followed in the foreclosure processes. In this article, an attempt is made to closely look at the legal regime governing tax foreclosure in Ethiopia.
Owing to its novelty in the Ethiopian tax system, this article seeks to shed light on the rules governing the foreclosure processes in Ethiopia slightly informed by comparative law. In this respect, the US practice is selected on account of considerable commonalities with the Ethiopian law of tax enforcement.
The very fact that tax foreclosure is a self-executing enforcement scheme could also be a legitimate reason to write about it as both the judge and the enforcer is the tax authority. Undoubtedly, there might be some interest of taxpayers that may be mishandled in the course of foreclosure processes. In this context, the article will draw attention to some lacunas in the foreclosure rules that might be areas of concern. The other aim of this article is to question the constitutionality of tax foreclosure in Ethiopia with respect to some constitutional rights of taxpayers. Since the practice of foreclosing delinquent taxpayer’s property is yet undeveloped, the article is unfortunate to review the implementation of the tax foreclosure regime on the ground.
Accordingly, the article is categorized into five sections. The first section is an introductory part that introduces the various forms of foreclosure followed by a brief discussion on the meaning and nature of tax foreclosure in the second section. In the third section, it will discuss the series of procedures that are involved in tax foreclosure proceedings. The Last section of the article will endeavor to test the constitutionality of the tax foreclosure regime. Finally, a brief conclusion and recommendations will ensue.
Foreclosure in General
Despite variations under which situation and for what purpose they are deployed, there are plenty of devices by which creditors may be secured. Holding security helps creditors avoid the risk of their being no asset available to recover the debt. In this regard, foreclosure is the commonest mechanism by which the interest of creditors is safeguarded. The concept of foreclosure is well enunciated in the following comprehensive definition as:
“A termination of all rights of the mortgagor or his grantee in his property covered by the mortgage, cutting off or prohibition of the mortgagor’s right of redeeming the mortgaged estate, and is a remedy by which the property covered by the mortgage may be subject to sale for the payment of the demand for which the mortgage stands as a security.”
The above definition encompasses three basic facets of foreclosure. First, foreclosure is an instrument by which the secured creditor is entitled to extinguish the right of the debtor over the property charged under the mortgage. Second, it bars the debtor (mortgagor) from redeeming the property foreclosed up on default to pay the debt within the prescribed period. Third, foreclosure allows the secured creditor to recover the debt through sale of the mortgaged estate.
Hence, pursuant to the above enunciation one can safely conclude that foreclosure constitutes a legal right of a secured creditor to gain the privilege to sell the property registered as a security and use the proceeds of the sale to pay off the debt. In other words, it is also explained as the right to proceed against the security and apply it to the payment of the debt.
In the common law jurisdiction, one’s right to foreclose the assets of the debtor arises out of two major security transactions; namely ‘mortgage’ and ‘deed of trust. Furthermore, the Anglo-American legal system has adopted the doctrine of redemption that allows debtors to regain their foreclosed but unsold property. The redemption can be requested by any person who acquired any interest in the property encumbered.
Initially the common law, for instance, had recognized foreclosure capable of making the mortgage in the automatic ownership of the property. But through time the law developed a form of foreclosure that permits the debtor’s right to excess proceeds of the foreclosure sale. This takes us to the next subsection which will briefly discuss the three major forms of foreclosure.
Forms of Foreclosure
There are three major forms of foreclosure; namely ‘Strict foreclosure’, ‘Judicial foreclosure’ and Power of sale foreclosure’. Each form of foreclosure entails its own unique features and brief discussion of each form of foreclosure is in order in the following few pages.
Strict foreclosure is the oldest type of foreclosure developed in the United Kingdom. The notion of strict foreclosure is well described as follows:
“A proceeding which is used to cut off the mortgagor’s right of redemption absolutely and finally unless he pays the amount ascertained within a fixed time and [to vest the absolute title to the mortgagee].”Emphasis Mine
It is a procedure that grants the mortgagee title to the mortgaged property without a sale. As it can be noted from the above descriptions, conferring absolute and unconditional title of ownership of the property mortgaged to the creditor is the underlying notion of strict foreclosure. The debtor will not also have the option to recover the excess proceeds of the sale as the simple transfer of title to the creditor culminates the overall foreclosure proceeding.
Strict foreclosure is considered as the hardest method that may be used if the debtor is totally insolvent. It is often criticized for being harsh, summary and oppressive form of foreclosure since it totally divests the property of the debtor. It is also disfavored for being inexpedient, costly in operation and it also forecloses imperfectly. In some jurisdictions strict foreclosure is still appropriate remedy of enforcing security. It has been reported that in few states of the US, viz., Connecticut, Vermont and Illinois, this type of foreclosure is extensively used as a remedy.
Its persistence in those jurisdictions is due to its merit of eschewing the expenses of advertisement and sale which, in some occasions, may be more than the value of the mortgaged property.It is also commended for being cheaper and its capacity of eliminating most deficiency judgments which often comes into play when the asset is not sufficient to cover up the debt.
Judicial foreclosure is a procedure by which the mortgagee takes an action for the sale of the mortgaged property and applies the proceeds to the mortgaged debt.It is a mechanism by which the mortgaged property is sold through a court procedure requiring many standard legal steps such as filing compliant, service of process, and a hearing.
It is to be noted that the sale of the property has to be confirmed by the court ordering the same and may also be set aside under certain exceptional conditions. These conditions include, for instance, fraud in conducting or publicizing the sale, or when there is no salable interest on the property. In judicial foreclosure, the surplus proceeds of the sale are to be paid to other creditors with subordinate claim on the same property.
It has been stated that judicial foreclosure is the most common mode of foreclosure in many jurisdictions. Though it is acclaimed for being conclusive in determining the right of all interested parties, it is criticized for being complicated, costly and time consuming as it involves a series of steps such as service of process, hearing etc.
Power of Sale Foreclosure
Power of sale foreclosure is one variant of foreclosure by which the creditor executes the power of sale contained in the instrument creating the debt without recourse to courts. Since it must conform to the provisions of the law regulating the sale, it is also called as ‘statutory foreclosure’. The generic term power of sale refers to the clause inserted in mortgages that gives the mortgagee the power, in default of payment, to advertise and sell the mortgaged property at public auction.
Power of sale foreclosure is meritorious for being expedited as it avoids the prolonged and time consuming court procedure. It doesn’t, however, mean that the judiciary is totally secluded from the whole proceeding. It will rather have a supervisory role by reviewing the sale… by ensuring whether the sale was justified, for instance, by checking default on the part of the debtor, strict conformity to the terms of the contract or the existence of fraud or deceit. It is generally felt that foreclosure by power of sale doesn’t provide a solid marketable title as there are risks of dispossession or challenge to one’s title.
Tax Foreclosure: Its Meaning and Nature
There are various schemes of enforcing payment of a debt, most often by selling the property of the debtor. In a similar vein, though taxes are not debts in the ordinary sense of the terms, payment of tax liability can also be secured through distrait and sale of the delinquent taxpayers’ property. Since it is the policy of the law to favor the collection of taxes, there are various remedies for the government to enforce collection of taxes by procedures involving levy and distrait.
And, this procedure of enforcing delinquent taxes through seizure and sale is commonly called as ‘tax foreclosure’. Tax foreclosure is enunciated as a public authority’s seizure and sale of the property for nonpayment of taxes. It is a self executing enforcement mechanism by which the tax authority enforces delinquent taxes without direct judicial involvement.
Although tax foreclosure is often described as having some grave results, it has never been subject to significant scholarly treatment. There seems to exist a dearth, if not a void, of academic literature on tax foreclosure [not just in the Ethiopian legal discourse]. Since it is by and large a self-executing enforcement scheme, there would obviously be some interests that may possibly be mishandled in the course of the foreclosure process. It is, therefore, worthwhile to subject the laws governing tax foreclosure processes to scrupulous positive analysis.
Thomsen states that the purposes of tax foreclosure process are two fold; first and foremost to recover delinquent taxes to secure public revenue and secondly to ensure that taxpayers are not denied their rights to property and due process. Though it is not formally included as one form of foreclosure, tax foreclosure is a replica of power of sale foreclosure. Both schemes of enforcement are essentially self executing which don’t require the imprimatur of the court for their validity.
Nevertheless, the statutory remedy of seizure of taxpayer’s property is restricted in its manner and time of operation. Since seizure is a severe remedy, tax foreclosure proceedings are restricted in their operation to the person who falls in default and the tax authority should always act within the limits of its authority.
As financial institutions in Ethiopia are conferred with the power to ensure collection of unpaid debts by foreclosing debtor’s assets, the tax authority has also the power of sale to ensure prompt and certain collection of taxes. Tax foreclosure is duly recognized in the Ethiopian tax regime following the tax reform undertaken since the year 2002. The reform has introduced various means of tax enforcement mechanisms including tax foreclosure. In addition to foreclosure two other means of tax enforcement are instilled into the Ethiopian tax law regime. These are ‘tax securitization’ and ‘deprivation of government service’.
Tax foreclosure is recognized in almost all of the tax laws of the country. It is also similarly provided in the counterpart tax laws issued by the regional states. With the above preview of the concept of tax foreclosure, in the next sections an attempt will be made to critically examine the condition precedents that should be complied by the tax authority in foreclosing the delinquent taxpayer’s property.
Condition Precedents In Tax Foreclosure Proceedings
Tax foreclosure, as one means of ensuring prompt and certain collection of taxes, involves a series of procedures that need to be complied by the tax authority prior to the sale of the foreclosed asset. In different jurisdictions, the legislature has prescribed certain prerequisites for tax foreclosure proceedings. The critical analysis of these condition precedents under the Ethiopian tax law regime is in order in the following sub sections.
Putting the Delinquent Taxpayer in Default
The primary step, inter alia, in tax foreclosure proceedings is to put the tax payer in default. In general terms, ‘default’ constitutes failure to perform what is required by law or contractual duty. It is neglect towards performing one’s obligation arising out of law or agreement.
The Ethiopian income tax law, for instance, stipulates certain conditions to deem a given taxpayer in default. These conditions can generally be summarized into the following three conditions:
I. Where the taxpayer fails to pay the tax due within 30 days from the receipt of the assessment notice or from the date of the decision of the review committee; or
II. Where the period for lodging appeal on the decision of the tax appeal commission has expired; or
III. Where the court of appeal renders its final decision.
Hence, if the tax payer doesn’t pay the final tax assessment pursuant with the above conditions, he would be regarded by the law as being in default. Nevertheless the recently prepared working manual (herein after the manual) of the tax authority regards default on the part of taxpayers only under two conditions. First, if the taxpayer failed to pay off the assessed tax within 30 days from the receipt of the assessment notification and second, if the taxpayer failed to honor his/its obligation to pay under [agreement for the payment of the tax].
In this connection, one can notice two things under the manual. First, the manual has limited the conditions which are incorporated under the proclamation and the directive issued by the Ministry of Finance and Economic Development [hereafter the directive] and it has added one more condition, viz., failure to honor agreement for payment. In this regard one may be concerned as to the impact that such limitation may have on the interest of taxpayers to exhaust all statutory remedies against the objected assessment. Moreover, there may be a concern as to the legitimacy of the tax authority’s action to limit such statutory requirements by a mere working manual.
The other point worth noting is the second condition envisaged under the manual. It may possibly have a bewildering effect as it hasn’t unequivocally enunciated what agreement for payment [yekifiya simiminet] is intended to connote. Nonetheless, one may construe such phrases to mean any ‘installment agreement’ or ‘agreement for extension of the period of payment’ or perhaps ‘agreement to furnish a bond for the payment.’ Yet, it is of good import to make such phrases clear and intelligible so as to ease the practical implementation.
Moreover, clarification of such ambiguity is also important in a situation where the existing tax law regime in Ethiopia has not provided, in an explicit manner, the way how installment or extension of period of payment has to be made. It is learned that the tax authority, however, practically enter into installment agreement and agreement for the extension of period of payment with tax payers without any procedural regulation.
In sum, ensuring default on the part of the tax authority in discharging their tax liability is a point of departure for the tax authority to exercise its power of sale.
The second important step in tax foreclosure proceedings is notification of taxpayers who fall in default. The notification aims at informing the taxpayer that his delinquency is known and that the tax authority may proceed to ensure the collection of the tax through any possible means.For tax purposes, notice may be served for tax payers under various circumstances. It may, for instance, be served after the assessment of the tax due-assessment notice, to notify the taxpayer the intention of the tax authority to seize the latter’s property-notice of seizure. It is the latter type of notice that is served to tax payers in the course of the foreclosure proceeding.
The Directive defined a ‘notice of seizure’ as:
“A notice issued by the tax authority directly to the taxpayer or his agent expressing the authority’s intention to seize the estate belonging to the defaulting taxpayer and sell the same to pay off the tax unpaid.”[Amharic-translation mine]
There are certain legally inscribed prerequisites that must be included in the notice of seizure. In the first place, it has to be in written form. It is stated that the notice being in written form help to avoid doubt or any ambiguity in the terms of the notice and to preserve evidence of its delivery in case of dishonor by the recipient. However, despite the same requirement under the income tax proclamation and the directive, it is provided in the recent working manual of the tax authority that the latter may make the notification orally through a phone call.
Nevertheless, as it has been hinted above, such a notice may inevitably pose difficulty as to the reliability of whether the notice has been dully served or not. It is susceptible to misuse by some tax officers as there would not be a room to control whether call was actually made to the concerned taxpayer.
Over and above being in written form, a notice of seizure must also contain certain important elements provided under the law. It has been stated that the notice should precisely state, among others, the object for which it is sent. The Ethiopian tax law regime has spelt out exhaustively all the constituent elements of a notice of seizure. These include:
i. the assessment notification previously sent to the defaulting taxpayer;
ii. the actual tax due, interest until the day the notice is sent, any penalties, etc
iii. the fact that the proceeds of the sale of any seized property may be used to pay the actual tax due and any costs that may be incurred while executing the enforcement task;
Hence, the tax authority is incumbent to include all the aforementioned elements within the notice. In other jurisdictions, however, the so called ‘the notice of intent to levy’ incorporates other important constituent elements that are quite beneficial to taxpayers. In the USA, for instance, it is provided that it must contain a description of, inter alia, the administrative appeals available to the taxpayer with respect to such seizure and sale and the procedures relating to such appeals, the alternatives available to prevent seizure on the property including installment agreements etc.
It is evident that the inclusion of such an informative and yet protective elements within the notice of seizure play a significant role in protecting the interest of taxpayers amid the risk of administrative impropriety. It is therefore worthwhile to reckon the inclusion of these information into our tax law regime. They would make the overall foreclosure proceeding equitable and eschew any possible rooms for arbitrariness.
The third important requirement envisaged under the law relates to the service of process. Pursuant to the directive, delinquent taxpayers may be served with notice of seizure either actually or constructively according to the circumstances of the case. Primarily, the notice of seizure shall be served directly to the tax payer in person if he is a physical person or to its employees or agents if it is an entity or where the taxpayer can’t be found in person the notice shall be served to any adult member of his family.
The other possible means to serve notice is by posting the notice of seizure in any conspicuous place where the taxpayers or their agent perform their professional work or trading work or in residential abode of either of them. It is also expressly provided that the publication of the notice has to be made in the presence of independent third parties. In addition, any person who has received the notice has to confirm the same by affixing his signature and name on the notice served. It is obvious that the confirmation has a pivotal role in making the evidence against any possible maneuver.
The other noteworthy point relates to the period of the notice. It is provided under Art. 77(4) of the income tax proclamation that the notice period is a minimum of 30 days. It transpires from this provision that the tax authority is at liberty to grant a period of notice more than 30 days; but it can’t in any case be below 30 days. Nevertheless, a slightly contrary stipulation is provided under the directive which seems to have made the 30 days notice period the maximum threshold. This minor, albeit significant, discrepancy may perhaps give rise to a question as to hierarchical legitimacy of the directive.
The Manual has schemed three phases of notification for defaulting taxpayers. Firstly, the tax enforcement officer would notify the defaulting taxpayer following the assessment notification or up on failure to comply with the installment or extended period of payment through phone call. This notification, however, presupposes having delinquency list- a list of individual taxpayers who fall in default.
Second, if the taxpayer failed to respond to the phone call notice, the enforcement officer would send a ‘notifying letter’ to the latter to pay his tax liability. The tax authority may serve such a letter in two circumstances; one, if the taxpayer hasn't paid the assessed tax within ten days period, or second, if he can’t be found through the phone call.
Third, the tax authority would send the last written notice to the taxpayer informing the latter that the tax authority may seize the property of the delinquent taxpayer should the tax is not paid within 30 days. The Manual provides that the overarching rational for granting this notice lies on to inform the taxpayer the consequences that follow default and to give a last chance to be abided by law.
At this juncture it is good to note the very commendable effort being made in extending the period of notice and it is a leap forward in safeguarding the interest of those defaulting taxpayers. It would give an option to resort to some possible means of challenging the assessment. Nevertheless, despite the legal prescription of period of notice before any seizure, there are two cases where the tax authority may not be required to comply with the prior notice prescriptions. The first instance is when an event that may jeopardize the collection of the tax happens; for instance when the tax authority realizes that the taxpayer is engaged in concealing his assets to impede the collection of the tax.
Despite the sign of jeopardy however, the tax authority has to make a demand for the immediate payment of the tax. It is also provided in the same provision that if the tax payer failed to make the payment on the basis of the request, the tax authority is authorized to seize the taxpayer’s property without regard to the notice requirement. In other jurisdictions such as the US for instance, it is provided that the taxpayer can prevent seizure by furnishing a bond to the tax authority. It appears that though the collection of the tax seems to be in jeopardy, the US law duly honored the constitutional right to property of the taxpayer. It is also worthwhile to reckon the propriety of this procedure in the Ethiopian tax law regime.
The second scenario where service of notice of seizure is not legally prescribed is where the tax authority doesn’t have sufficient information to identify the person to whom the notice should be served. It is provided that the tax authority may deem as if notice is served and proceed to seize the property. It is good to note that this sort of notice is completely distinct from what is conventionally called as constructive notice.
It is the writer’s concerned opinion that the above proviso seems perhaps coercive in that it may probably encroach on the rights of taxpayers to have, among others, one’s voice heard. It may also be susceptible to maladministration in the enforcement continuum which may in turn generate a prejudicial effect on some taxpayers as their property can, without due process, be divested thereby rendering the provision unconstitutional. It is also highly recommended either to delete or amend the provision in due time.
Inquiry Into Taxpayers’ Assets
It is the third important step in tax foreclosure proceedings by which the tax authority collects information with regard to the assets and any transactions of the taxpayer. It is provided in the directive that the inquiry has the following significance: It helps, for instance, to know the nature and number of the assets of the taxpayer and the whereabouts of the assets, the manner of ownership (whether it is usufractaury, lease, etc), under whose custody the property belongs, whether it is registered security (whether it is previously mortgaged/pledged or encumbered in any other possible manner) etc..
Moreover, inquiry involves investigation of any property registered in the name of the entity in default from the latter’s records, identifying bank accounts registered in the name of the taxpayers property. It is provided that the core objective of the inquiry is to ease and simplify the seizure and the subsequent sale of the property as the type and the location of the property is once well identified. I submit that this prescription of inquiry is very crucial in making the tax foreclosure proceeding successful and to enforce the payment of taxes without delay.
Attachment is the other important condition precedent in tax foreclosure proceedings. The concept of attachment can easily be explained as follows:
“The act or process of taking, apprehending, or seizing…property by virtue of a writ, summons, or other judicial order and bringing the same into the custody of the law…to furnish a security for a debt or costs, or to arrest a fund in the hands of a third person who may become liable to pay it over.”
Attachment is all about arresting or keeping the assets of a person liable or a third party who owes something to the person liable out of his disposal. It is principally used against any absconding, concealment or any fraudulent acts of debtors. The Ethiopian tax law regime has also prescribed attachment of property belonging to the taxpayer in default as one prerequisite for collecting delinquent taxes through seizure and sale.
It is evident that attachment of taxpayers property presupposes the existence of good working cooperation among entities, for instance with the property registering authority. In this regard the law imposes an obligation on all governmental and non governmental entities to cooperate with the tax authority in the enforcement of the law.
It is, however, good to note that attachment may not apply to all property or rights to property of the debtor. There are certain categories of properties exempted from attachment. The Ethiopian tax law regime on attachment identified illustrative list of properties exempted from attachment.
It is evident that seizure of delinquent taxpayer’s property comes into picture where the taxpayer failed to comply with the notice delivered. The generic term seizure can literarily be defined as ‘the act of taking possession of goods in consequence of a violation of public law’. Though seizure is often regarded as a hostile act, it doesn’t necessarily involve capture. Seizure can therefore be either actual or constructive in the sense that the tax authority undertaking the seizure may actually capture the property or constructively depending on the circumstances of the case.
Seizure for tax purposes involves seizure by any means including the collection from the person who owes money or property to the taxpayer. Seizure can thus be made either directly from the taxpayer or from third parties who are in custody of the taxpayer’s property. It is generally required that a distress for taxes shall always be preceded by a demand to the taxpayer for the payment of the tax due.
Moreover, seizure shall extend only to property possessed and obligations existing at the time of the distress. However, in few exceptional circumstances the seizure may extend beyond the obligation existing at the time the distress is made.In other jurisdictions such as the US, however, the seizure may extend beyond property or right to property possessed at time of the seizure only with regard to a levy on salary or wage as oppose to the Ethiopian law where a levy even in the case of successive seizure.
As it has been hinted earlier, seizure of taxpayer’s property is not made right after the default on the part of the taxpayer. There are rather certain legally prescribed preconditions. The Ethiopian tax law regime sets forth the following possible conditions to make the seizure;
· Where the taxpayer has not paid the tax within 30 days from the receipt of the notice of the intent to seizure; or
· Where the delinquent taxpayer has not requested for extension of payment; or
· Where the delinquent taxpayer has not furnished a sufficient bond to the tax authority;
· Where the delinquent taxpayer has not deposited money in a bank or if he doesn’t owes money from third parties or where it is meager to satisfy the tax liability;
· Where it is certain that the proper warehousing to keep the property is readily arranged;
· Where it is certain that the delinquent taxpayer owns nonexempt saleable property.
Hence, seizure has to be undertaken in consonance with the aforementioned legally inscribed procedures. In this regard, it is noteworthy that the mentioned conditions are commendable in safeguarding the interest of both the taxpayer and the government. The first four conditions, for instance, pretend by and large beneficial to the interest of taxpayers as they allow some options of preventing the seizure of one’s property.
On the other hand, the last two conditions are in the best interest of the government as they are very important in avoiding unnecessary costs of seizure where the taxpayer has no saleable interest or warehouse for placing the seized property is not prepared. In other jurisdictions too, no seizure would be made on any property if the amount of the tax estimated by the tax authority could be incurred in respect of the levy.
Generally, seizure may be made on any property or right to property, whether real or personal, tangible or intangible property of the taxpayer. However, the law may exempt certain properties from seizure. The Ethiopian income tax proclamation even extends the provisions exempting properties from attachment under the directive and the civil procedure code.
It is to be noted that though the tone of the laws seems to provide an open ended list of exempted properties, the list can hardly capture other properties whose exemption from seizure may appear legitimate. For instance, certain business assets of the taxpayer may be mentioned. Neither the directive nor other relevant laws such as the civil procedure code exempted such kind of properties from seizure.
It appears that this kind of conditional exemption seems to have been made having regard to the effect of seizure on the industry of the business of the taxpayer which may, in turn, have a considerable influence on the overall business environment. It is worthwhile to reckon the inclusion of such conditional exemption in Ethiopia with the same goal of avoiding possible harm on the business.
The other concern relates to the possibilities of redeeming the seized properties. The Ethiopian tax law provides only two scenarios through which the property seized may be discharged. Firstly, where the tax liability is fully paid and second where the tax liability is waived or cancelled by the appropriate authority. It is submitted that the aforesaid possibilities of rescuing the sale of one’s property can hardly be adequate. In this connection, it is highly important to see the rule under the US Internal Revenue Code which enumerated around five major instances under which the levy may be released.
i. If the tax liability to which the levy was made is satisfied or become unenforceable by the reason of lapse of time;
ii. If the taxpayer entered into an installment agreement with the tax authority;
iii. If it is determined that the levy is creating an economic hardship due to financial condition of the taxpayer;
iv. If the release of the levy would facilitate the collection of the tax already due;
v. If the market value of the property exceeds the liability and release of the levy on the part of the property could be made without hindering the collection of the tax liability;
Furthermore, the tax authority may make an expedited determination for the release of the levy if the levy is made on certain properties which are essential in carrying on the trade or business of the taxpayer or if the taxpayer would be prevented from his trading activity. It is obviously evident that it is necessary to broaden the possibilities of redemption of seized assets. Its import is not limited only to taxpayers but also to the government as it enables the latter to ensure prompt collection of taxes without unreasonable cost.
Valuation or appraisal of the seized properties is the other important subsequent step in tax foreclosure proceedings. In this context, appraisal is meant to refer to the determination of what constitutes as a fair price, valuation or estimation of worth attached to a thing. As a matter of principle, appraisal is made right after the seizure of the property. The overarching rational behind prescribing appraisal as one condition precedent for tax foreclosure is to use the estimated value of the property as a minimum price at the sale of the property. It is stated that appraisal of the value of a property seized is one means to prevent sacrificial sale of the property.
The only prerequisite in making valuation is the prior seizure of the property. It has been said that the appraisal of the property has to be made with all necessary care so that a fair price may be obtained out of the sale of the property. The tax authority is also incumbent to make sure that the valuation is not highly aggrandized or undervalued either.
As it has been hinted above the valuation of the property has to be made, as a rule, after the seizure is effectuated. However, there are certain exceptional cases where the appraisal may be made simultaneously with the seizure of the property. The first case is when the seizure is made on ‘invaluable minerals’ such as diamond, gold, silver etc..., in which case the valuation is made right after the seizure of the property.
The tax authority in the US, for instance, is incumbent even to make valuation of perishable goods and to inform the taxpayer such a value of the property appraised prior to the sale of the same. However, our tax law declined to put explicit rule on this; it rather simply authorizes the tax authority to sale any perishable goods through possible mechanisms. It is, however, evident that making the appraisal and informing the taxpayer the appraised value of the property would make the whole process equitable and it would not pave the way to impropriety.
The ultimate penalty for non-payment of taxes is loss of one’s property to a buyer at a tax sale. A sale of property for tax purposes constitutes a transfer of property in exchange for money to satisfy the taxes levied by the government which have remained unpaid after the legal period of their payment has expired. The sale of delinquent taxpayers property can generally be conducted into two modes; first ‘sale by auction’ and secondly ‘sale through tender’.
In addition, under exceptional cases tax sale may be made through ‘private arrangement’. It is provided under Art. 77(2) of Ethiopian income tax law that tax sale may be made either through public auction or in any other manner approved by the tax authority. Accordingly, the premise of the proclamation is realized under the directive and the manual prepared under the auspices of the tax authority by devising a sale through tender and private arrangements.
Tax sale involves a series of steps that need to be complied by the enforcing officers. The tax authority has, for instance, to wait at least 10 days from the day of the seizure so as to give the last chance to pay off the tax arrears. However, the tax authority is not bound to wait for ten days where the seized property is perishable good or where the warehousing cost of the property requires excessive outlay than its appraised value. The other important precondition in tax sale is valid valuation of the property.
It is provided that a tax sale may be conducted in a single auction sale or through successive auctions. Where it appears to the tax authority that the tax liability could not be recovered at the first auction or it happens to be simple to administer the sales, the sale of the property can be made through consecutive sales. Here it should be noted that the sale through consecutive auction is highly beneficial for taxpayers since they may not lose all their assets in a single sale.
If the tax liability can be covered through sale of some of the properties, there would not be any reason to lose the other assets in the name of tax sale. It is, however, true that Art. 12(2) of the directive provides that the tax authority has to make the seizure proportionally with the tax liability of the taxpayer. It is therefore appropriate to exalt the position taken under the law.
Proclamation of Sale
Proclamation of sale is all about pronouncing or advertising to the public the tax authority’s intention to conduct a sale of seized assets of delinquent taxpayers. The principal purpose in publicizing notice of sale is to inform to the public that auction will be conducted so that bidders may be present at the sale and fair price be obtained. Hence, if once the tax authority is determined to cause the sale of the seized estates, the first step is to proclaim the sale.
It is clearly provided in the directive that the tax authority has to proclaim its intention to sell through a newspaper that has a wide circulation. The law also sets the option of proclaiming the sale by affixing the copy of the notice (already published in a newspaper) in any conspicuous place with the view to increase the number of potential buyers. Moreover, the tax authority may also have the notification made through a televised advertisement but only where the appraised value of the seized property is very high.
A cost benefit analysis seems to have underpinned the need to make the proclamation of the sale through televised broadcast and this seems a commendable legal stand that may possibly avoid unbearable costs that can’t be recovered through a sale by making a costly advertisement. However, it would also be one possible way out to make an arrangement with television and advertising agencies to make the pronouncement of the sale for free or low or with special charges as tax sales are made for public purposes.
It is, however, noteworthy that very large number of potential buyers can hardly be secured at all times, particularly there may be a societal pressure on bidders to purchase a tax sold property. It may possibly raise enmity as between the delinquent taxpayer and potential bidders as a result of which the sale may not find buyers since they would hesitate to buy a tax sold property. In this connection, it might be necessary for the tax authority to create awareness as regards the rational behind the sale.
The proclamation of the sale should also contain certain legally set elements. Among others, the notice of sale should provide the following important facts:
i. the kind of property to be sold;
ii. the minimum selling price of the property which is often called as usually ‘mini bid’;
iii. the situs of the property;
iv. the preconditions to participate in the auction; and
v. the fact that the tax authority has the right to cancel the sale.
Conducting Auction/ Tender
As it has been hinted earlier, the tax authority may cause the sale of the seized property principally through public auctions though it is also authorized to make the sale through tender. In simple parlance, auction denotes the sale of property to the highest bidder. The Louisianan civil code provides a very informative definition of auction which reads as follows:
“A sale which takes place when the thing is offered publicly to be sold to whosoever will give the highest price.”
This very precise and yet comprehensive enunciation comprises three basic features which an auction embodies. In the first place, there should always be something to be sold. Secondly, the sale must be conducted publicly in that there has to be an invitation to all interested to bid. Thirdly, the sale must be effected to the highest bidder.
The Ethiopian tax regime sets forth two general conditions for conducting public auction in any tax sale. First, all persons (including the delinquent taxpayer) interested to participate in the auction sale has to furnish the tax authority a bond either in the form of a check accredited by banks or CPO or in the form of cash. Second, there has to be at least two persons or bidders who are willing to bid in the auction. An auction can’t be conducted where only a single bidder is present.
It is apparent that the rationale behind the first condition lies on enabling the tax authority to cover costs that may probably be spent while preparing to conduct the auction which has latter failed to succeed. This may happen, for instance, if the winner of the auction failed to pay the whole amount of the property sold. On the other hand, increasing the worth of the property foreclosed to cover all the costs, penalties etc... seems to have necessitated having at least two bidders.
Adjustment of the Tax Liability
Adjusting the tax liability of the taxpayer is the last step in any tax foreclosure proceeding. Its prime purpose is to know whether the proceeds of the sale adequately cover the tax liability. The tax authority refunds the excess proceeds of the sale to the taxpayer and issue receiptsor decides to make successive seizure if the proceeds of the sale are insufficient to settle the tax account.
Hence, successive seizure comes into picture when the proceeds of the sale are insufficient. However, the directive lacks clarity as to how should the successive seizure has to be made, viz, should all the preliminary steps be followed or immediate seizure is allowed. But, the manual clearly stated that the successive seizure needs not to follow all the preliminary steps, such as the notices. The tax authority may, rather, directly embark to seize other assets. In this regard, the writer is of the opinion that such possibility of accidental seizure may not perhaps be justified. Its constitutionality can also hardly be justified since it may pave the opportunity for arbitrary seizure. Hence, it is good to prescribe a sort of prior notification though not similar with the notice proper.
Tax Foreclosure and Some Constitutional Issues
This section makes a concluding discussion on the constitutionality of the Ethiopian tax enforcement regime, particularly the tax foreclosure proceeding. Accordingly, an effort will be made to analyze the constitutionality of tax foreclosure in light of ‘one’s right to privacy’, ‘right to property’ and ‘right of access to justice’.
With Ones Right to Privacy
The right to privacy is among the most important human rights recognized under Art.26 of the FDRE constitution. It is one of the areas on which a question of constitutionality is raised. Art.26 (1) of the FDRE constitution party read as:
“Everyone has the right to privacy. The right shall include the right not to be subjected to … seizure of any property under his personal possession.”
Pursuant to this sub-article, the right to privacy belongs to everyone regardless of his/her nationality and that right involves one’s right not to be subjected to seizure of one’s property. However, the right is not absolute, it may, rather, be restricted in accordance with specific laws on certain compelling circumstances. The restriction can be made only if two conditions are met. They are; first, there must be compelling reasons necessitating the seizure, and second, there must be specific laws authorizing such restriction.
Given the above conditions and scope of the right, it is seems appropriate that the constitutionality has to be determined on a case-by-case basis. On top of having tax laws authorizing seizure it is highly necessary to make the seizure only in those circumstances compelling the action. It is clear from the wordings of Art.26 (3) that the two conditions are cumulative suggesting that any restriction has to be exceptional.
One may dare to construe those compelling circumstances to include those cases jeopardizing the collection of the taxes. It should be underscored that a sheer existence of tax laws authorizing seizure and a mere default on the part of taxpayers cannot itself warrant the constitutionality of seizure. Seizure should be undertaken only when delinquent taxes can’t be recovered in any other possible means without affecting the fiscal interest of the government.
In this regard, the experience in USA revealed that seizure of taxpayer’s property violates the right to privacy unless the tax authority (IRS) obtains a prior judicial warrant save the exception when seizure is made at public places. Moreover, in the summary judicial proceeding to obtain ‘tax seizure warrant’, the IRS has to demonstrate a probable cause for the seizure. The application for the warrant must sufficiently be specific to enable the judge to make independent determination. Moreover, the IRS has to sufficiently indicate in the application particular items of property that the government intends to seize.
It is evident that such a legal requirement is pivotal in safeguarding the right to privacy of taxpayers. Nevertheless, the Ethiopian law doesn’t provide a sort of similar requirement. However, though some lawyers at the tax authority uphold the argument for the constitutionality, they concede that the existence of such requirement plays an important role.They accept that such prescription would have significance in making the overall procedure equitable and accountable as well.
Some persons hesitate to accept the prescription of prior court warrant. According to these persons, if such a requirement is inserted in the laws, it may distort the process since all the effects of the disapproved court procedure might follow.
Generally, in spite of the significance behind enforcing payment of taxes, it is obviously true that the enforcement procedure should not override the constitutional right of taxpayers; nor should it be superfluous. It is also highly recommended to reckon the US experience of ‘tax seizure warrant’ in undertaking seizure.
Since one’s right to privacy constitutes the most delicate constitutional right, this writer also shares the supposition that seizure must be taken as a last resort. Moreover, the concern that any attempt to secure prior court warrant may cause delay is untenable since the summary proceeding to obtain court warrant is practically ex parte and involves no complex issues that may cause delay.
Furthermore, though there might be lengthy process in obtaining warrant, one should also note the positive effect that the involvement of the judiciary may have. It may considerably increase the confidence of taxpayers on the overall proceeding that may, in turn, have the effect of encouraging voluntary tax compliance. In sum, it is the writer’s concerned belief that the constitutionality of tax foreclosure can be warranted only when the legally set requirements are interpreted and applied very strictly and with due care having regard to the right to privacy of taxpayers.
With Ones Right to Property
The other question of constitutionality relates to one’s right to property envisaged under Art.40 of the FDRE constitution. Art 40(1) which gives the underling principle of the right partly reads as:
“Every Ethiopian citizen has the right to the ownership of private property. [unless prescribed otherwise by law on the account of public interest] this right includes the right… in a manner [compatible with the right of others citizens to…]” Emphasis added.
Generally, the constitution bestows the right to property to every Ethiopian and the right is subject to restriction only when public interest as expressed in the law requires the restriction. Hence, the legitimate grounds to restrict one’s right to property will be determined by any specific law upholding public interest. There is no question, at this juncture, as to whether tax claims are of public interest or not. However, one can hold that the mere existence of a law even issued on the account of public interest should not affect one’s right to property.
Some, on the contrary, argued that ‘since default in paying taxes affects the interest of each and every individual and is, therefore, incompatible with the right of other citizens, it may not be unconstitutional to enforce payment of taxes via tax foreclosure.However, the above argument seems erroneous and seems to have resulted from unheeded construction of Art.40 (1) (Last limb). What the latter phrase clearly states is that one’s right to property should not be exercised incompatibly with the right of other citizens. It can hardly be related with non-payment of taxes and with the restriction on the right since the seizure may affect even one’s right exercised in congruity with the right of other citizens.
Generally, it is writer’s opinion that the very Art.40 (1) of the FDRE constitution seems to have broadened the possibilities of restriction of the right compared to Art.26 (right to privacy). According to Art. 40 (1), the mere existence of any specific law authorizing the restriction (on the account of public interest) suffices to put restriction of the right. Hence, the mere existence of tax laws suffices to conform to the constitution. However, the writer advocates for the inclusion of another cumulative requirement as in the case of one’s right to privacy. Otherwise, one can hardly think of full-fledged constitutional protection for taxpayer’s right to property amid self-executing tax enforcement procedures.
With One’s Right of Access to Justice
The tax enforcement regime particularly tax foreclosure is also questioned as to its constitutionality in relation to one’s right of access to justice as enshrined under Art.37 of the FDRE constitution. Art.37 (1) of the constitution reads as:
“Every one has the right to bring a justiceable matter to and to obtain a decision or judgment by a court of law or any other competent body with judicial power.”
According to this constitutional provision, the right to bring ones matter to judicial body is the right of every one so long as the matter is justiceable. However, one may well question the reinforcement of this constitutional right under the tax enforcement regime. In this regard, Yoseph argued that the issue of access to justice is unquestionable under the tax foreclosure proceeding since the law has devised the mechanism to lodge one’s grievance. Moreover, as mentioned earlier some of the lawyers at the tax authority contend that law has not prohibited any person dissatisfied to recourse to courts.
It is a true that the tax laws have devised three levels of lodging one’s grievances on tax issues, viz, ‘review committee’, ‘tax appeal commission’ and ‘court of law’. However, in spite of all these panels/tribunals of presenting one’s protest, one can hardly say that any taxpayer dissatisfied with the tax foreclosure proceeding can lodge his objection to these tribunals. For instance, the taxpayer can present his grievances to the ‘review committee’ only to request ‘waiver of tax liability’ and/or ‘compromise of penalty and interest’. Similarly, one can lodge his appeal to the tax appeal commission only where he has ‘objection on the assessment of the tax’. The last resort is the ‘judiciary’ to which a taxpayer can appeal only when he is dissatisfied with the decision of the tax appeal commission.
Therefore, it seems that one cannot resort to either to the administrative tribunals or courts up on dissatisfaction with the tax foreclosure proceedings. This will also defy those arguments raised above by some persons who insist on the possibility of lodging one’s appeal up on dissatisfaction with the tax enforcement proceeding.
In this connection, it may be worthwhile to consider as to whether Art.16 (1) of the directive provide the possibility of presenting one’s grievance on the tax foreclosure proceeding. Art 16(1) reads as follows;
“የግብር ባለዕዳው የተያዘው ወይም የተከበረው ንብረት በሕግ የማይከበር ወይም የማይያዝ ነው በማለት የንብረቱ ሽያጭ ከመካሔዱ በፊት አቤቱታ ሲያቀርብለት አቤቱታን በማጣራት ውሳኔ ይሰጣል፡፡
Pursuant to this sub-article, the scope of the right to present one’s objection is limited to cases when the taxpayer raise the objection that the seized property is exempted from seizure or/and attachment. Hence, according to the article other possible objections may not have a place even administratively let alone judicially. The same provision is not also clear as to whether the decision of the tax authority is final or not so that one can resort to courts.
In sum, it appears that our tax laws significantly limit taxpayer’s right of access to justice. Hence, the writer concludes the discussion by calling up on the concerned authorities to reckon the existing appeal procedures under the tax laws in light of the constitutional provisos.
Conclusion and Recommendations
Tax foreclosure is essentially a self executing tax enforcement mechanism that considerably avoids the involvement of the court in the overall continuum. In this piece the author has endeavored to introduce the regime of tax foreclosure in Ethiopia. It begins with an introductory discussion on the various forms of foreclosure. The largest part of this article meticulously analyzed the various legally stipulated condition precedents for tax foreclosure ranging from the very first phase of putting the delinquent taxpayer in default, the series of statutory notices, seizure to the tax sale.
In so doing, the author scrutinized the relevant tax legislation and a recent working manual prepared by the tax authority which contains some modifications to what is provided in the legislation. The Last section of the article examined the constitutionality of the existing Ethiopian tax foreclosure regime. It has questioned the constitutionality of tax foreclosure with the constitutionally guaranteed ‘rights to privacy’, ‘right to property’ and ‘right of access to justice’. As it has been hinted at outset, the tax authority has not yet enforced delinquent taxes through seizure and sale. It may be attributed to various factors that require meticulous empirical research.
The author has attempted to point to a number of issues that require a second thought by the concerned bodies. For instance, it is the writer’s concerned recommendation to review the existing tax laws dealing with tax foreclosure in light of the recent working manual. As mentioned earlier, the manual has made slight but significant modifications on the tax laws (including the directive). It is also necessary to examine some of the mentioned contradictions on the laws and the manual since they may pose considerable impact in the practice. The comparative review also revealed a number of lessons that are worth considering by the tax authority.
Finally, concerning the issue of constitutionality; this writer recommends the inclusion of the requirement of tax seizure warrant into our tax laws. It plays a pivotal role in safeguarding the constitutional right to privacy of taxpayers. It may also create confidence and sense of accountability on the overall tax enforcement regime. Regarding one’s right of access to justice, it appears that there is no room for aggrieved taxpayers to lodge complaint on tax foreclosure proceedings. The existing panels under the law are not, in the strictest sense, meant to hear grievances that may arise out of tax foreclosure proceedings. As a result, this writer recommends prompt inclusion of clear guidelines on the appeal procedures under the tax legislation.