Capital Gains and Value-added Taxes on Acquiring Immovable Collateral and Resale of the Acquired Property by Banks: the Law and the Practice
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Date
2023-05
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Addis Ababa University
Abstract
When banks lend money to customers, they need collateral as a guarantee that the debt will
be paid, and if the borrower defaults, the Property Mortgaged or Pledged with Banks
Proclamation No. 97/1998 allows the creditor banks to foreclose the collateral through a
public auction and use the proceeds to pay off the borrower's debt. Furthermore, if no buyer
shows up at the second auction, Property Mortgaged or Pledged with Banks (Amendment)
Proclamation No. 216/2000 permits the creditor banks to acquire the collateral property at
the floor price set for the second auction and transfer ownership of the property into their
names.
However, banks sometimes might not transfer the legal ownership of the property from the
name of the mortgagor to the bank after acquiring the collateral until they resale it, which
leads to the question of how taxes, particularly CGT and VAT, are being treated during the
process of acquisition and resale of the acquired property by the banks. To appropriately
address the issues, qualitative and doctrinal methods of conducting research have been used.
As a result, the research's findings show that the five banks used as a sample do not transfer
ownership of the property they acquire; instead, they sell it later while the title deed is still in
the name of the mortgagor. This practice of the banks results in the non-payment of CGT and
VAT both during the acquisition and resale of the acquired property, which causes the
government to lose a sizable amount of revenue. The finding also reveals that the government
agencies in charge of tax collection and payment are unaware of this activity on the part of
the banks.
This research examines how CGT and VAT are handled when banks acquire collateral
property and later resell the acquired property.
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Keywords
Banks, Acquisition, Collateral, Mortgagor, Commercial Immovable Property, CGT, VAT, Resale,