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Modern Proclamation Burdens Doing Business

 

The enforcement of the new proclamation that governs the registration licensing of businesses has started at the federal and regional levels at the beginning of February 2011. The proclamation’s provisions, under Article 6(6), require all persons licensed to do business, whether registered under previously existing laws or not, to be reregistered within 12 months from date the proclamation became effective.

It is not clear why this requirement has been on hold for the past eight months.

Thanks to armchair business process re-engineering (BPR) studies conducted by experts with a “changed attitude,” the new proclamation, supposedly aimed at “creating conducive situations for commercial activities,” has introduced cumbersome, and in most cases unattainable, requirements which are not warranted under the applicable laws of the country and the facts on the ground.

Under the new proclamation, business persons, whether sole proprietors or share or private companies, carrying out or intending to do business by leasing business premises, must produce lease contracts “authenticated by notaries.” They also need to produce verification issued by lower administrative units - in this case the kebele - on the address of the office.

This new proclamation is not confined to requiring lease contracts to be authenticated by notary offices as a condition for commercial registration for local traders. It also demands foreign business persons to produce notarised documents from the “contracts and acts authentication office” in their respective countries.

In the past, the requirement for registration and notarisation of lease contracts of business or residential premises was not provided for under the Ethiopian civil or commercial codes as a condition for its validity.

Neither the public notary office, which has been renamed the Documents Registration and Authentication Office (DRAO) in Addis Abeba and Dire Dawa, nor court registries were required to authenticate, register, and deposit such contracts.

This further exacerbates the burden on the ease of doing business to its extreme.

Applicants for new business licences or renewal of existing ones would have to enter into new lease contracts and submit these to one of the six branches of DRAO. However, the branch offices have several customary and some legal requirements that must be met before authenticating lease contracts.

Contracting parties will soon find themselves with the numerous requirements “necessary for authentication” of the lease contract.

The leaser and the renter would have to be ready to fulfil all the requirements to prove their right to enter into a lease or sublease contract of the business premise. This would be apart from the unpredictable substantive and editorial corrections of the instruments that are normally imposed by officers there.

The officer is empowered “to make necessary investigation in a way he thinks proper to find out whether or not the signatory has the capacity to sign.” Ultimately, the decision to authenticate lease contracts would fall under the whims or will of the officer concerned, which leaves the door wide open to delays and even the potential for corrupt manipulation.

Most premises suitable to conduct business in Addis Abeba are either under private or public holdings. Convincing the owner to visit the notary office every now and then will be very challenging.

A building owner with several rooms to lease for the purpose of doing business will be obliged to produce an original title deed. She must appear in person or through his agent to sign the contract and fulfil other requirements as they may arise, to authenticate documents.

Lease contract authentication will start to suffer numerous predicaments due to the requirement by the notary office to ensure the capacity of the contracting parties to enter into such agreements. The notary will require the title deed for the building, as well as an authority to sign lease or sublease contracts.

Most properties in the city do not have title deeds and their owners may not be in a position to present such documents. The capacity of the leaser to rent the house will be questionable despite the failure being attributable to municipal administrative bodies.

Undoubtedly, the requirement for the authentication of lease contracts may be prompted by the need to ensure whether or not the signatories are authorised, lawful, and proper parties.

Officers may have to ask and confirm that the parties are allowed to enter into a lease contract on the premises. There may also be compelling reasons to ensure the existence of a legitimate address, to prevent bogus lease contracts, and require compliance with tax laws.

Even though a lot has been said on the modernity of this proclamation, implicit in the numerous requirements of the various provisions is the need to control and fight “rent seekers” among the business community. There could also be a motive in expanding the tax basis and an interest towards creating new taxpayers among rent collectors.

A contract of lease for business and residential premises generates income for the leaser in the form of rent. Theproportion of rent collected and the amount of rental tax paid are questionable. There are individuals, including public officials, who let out premises for high amounts in local and foreign currency, taking undue advantage of small or no rental tax.

The recent announcement by the Ethiopian Revenues and Customs Authority (ERCA) in providing incentives in the form of VAT and rent tax registration appears to have been motivated by the interest to bring these and other unregistered taxpayers into the tax net.

Over the past several years, most kebele administrations in urban and rural areas have been merged or separated several times. A wereda structure was recently created by the Addis Abeba City Administration combining many kebeles.

Many kebeles and their independent legal personality have ceased to exist. As a result, there are many duplications and confusion surrounding house numbers in each wereda. Worse is that the issuing of new house number to newly built, replaced, and previously existing expanded homes have been abandoned and most “new” ones are without numbers.

How each kebele could verify house numbers for the purpose of fulfilling the requirement remains homework that should have been done before issuing the law.

A lease contract is one of the legal acts subjected to the Stamp Duty Proclamation. Stamp duty must be paid on each lease instrument at a rate of 0.5pc of the value of the rent. It is payable on lease contracts before or during signing by the parties to the contract.

The payment of stamp duties on lease contracts makes the instrument legitimate, acceptable, and admissible as evidence while generating revenues for the government. By registering the lease contract, the ERCA can also access the leaser for the collection of rent tax.

It could be considered quite proper, sufficient, and reasonable to impose stamp duty to ensure the legal validity and admissibility of lease contracts. Yet, it is entirely weird for the new proclamation to additionally require authentication of lease contracts by public notary as a condition for the registration of businesses.

The policy reason behind requiring authentication by notary can be best served by the payment of stamp duty. On the other hand, the unprecedented requirement for the authentication of lease contracts generates bureaucratisation, long queues, a lack of interest on the part of the leaser to go and produce plethora of documentary requirements to such offices, and uneasiness to do business.

Leasers are particularly uninterested to spend time at notary offices to enter into lease contracts. The requirement is likely to be dictated on each clause of the contract by the notaries through editorial correction or may otherwise not tally with the needs of the leaser.

Leasers may have adopted their own contract in a language other than the working language of the respective federal or regional notary office. While parties are free to enter into a lease contract in the language of their preference, another difficult issue is whether the concerned notary office will authenticate such a contract or require a translation. This has to be addressed in the interest of expediting registration and licensing.

Ethiopia ranked 104th out of the 183 countries in ease of doing business, according to a World Bank (WB) survey. The new proclamation was supposed to improve and modernise the existing law and procedure in order to scale up the country’s standing in ease of doing business.

However, the law and the facts on the ground do not seem to be compatible. How the responsible executive body handles this challenge in the face of the mandatory requirements and rules of the proclamation will be interesting.

 

BY YOHANNES WOLDEGEBRIEL

Yohannes Woldegebriel is a lawyer and has served the public sector in various positions, including as special public prosecutor and chief prosecutor for the Federal Ethics and Anti-corruption Commission (FEAC) and the Ethiopian Revenues and Customs Authority (ERCA). He can be reached at johnwaa@hotmail.com.

 
 
 
 
 
 

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