## Legislating for Fair and Effective Tax Collection (tltnea2025001) ## Source details **Canonical URL:** [Legislating for Fair and Effective Tax Collection (tltnea2025001)](https://www.imf.org/-/media/files/publications/tltn/2025/english/tltnea2025001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tltn/2025/english/tltnea2025001.pdf.md) - [Structured JSON version](/-/media/files/publications/tltn/2025/english/tltnea2025001.pdf.json) --- ### Executive summary — purpose and overarching principles - Fair and effective tax collection is critical to the success of any tax system and should be properly legislated. - Voluntary payment of taxes by taxpayers is preferred and should be encouraged and supported by the tax procedure legal framework. - Law should provide protective measures to prevent taxpayers from taking themselves or assets out of the tax administration’s reach. - As a last resort, the tax administration should be able to compel recovery of outstanding tax debts from taxpayers or certain third parties through legislative measures, complemented by adequate safeguards for taxpayers. - The note focuses on key issues in designing tax law provisions to support fair and effective tax collection. ### Causes of nonpayment and initial remedies - Key causes: lack of tax certainty and ineffective deterrence. - Remedies to these causes: - comprehensive, clear, and simple substantive and procedural tax rules; - a well-designed advance tax rulings regime; - an effective interest and tax penalties regime. - Where taxpayers want to pay but cannot due to financial constraints, legislated mechanisms include: - offsets against credits and amounts owed by the government (including VAT refunds and other credit balances); - installment arrangements or payment facilities when offsets are insufficient. ### Encouraging voluntary payment — supporting features - A carefully designed set of incentives and disincentives is essential for voluntary and timely payment. - Key supporting features: - effective interest and tax penalties regime; - advance tax ruling regimes; - administrative guidance and transparent procedures for payment facilities. ### Offsets and installment arrangements — legal design points - Offsets: - Typically applied against tax refunds and other credit balances (including VAT). - Require a specific legal provision interacting appropriately with general (civil) law. - Offsetting against other public monies owed to the taxpayer can be considered with safeguards (for example, to protect social benefit payments). - Installment arrangements: - May be granted either on request or via statutory programs; must have clear legal basis and transparent procedures. - Conditions may include demonstration of genuine hardship based on a financial statement. - Tax administration may require collateral or other security based on clear risk assessment criteria. - Interest is generally necessary on the running balance to preserve real value and horizontal equity; some countries waive part or all interest to encourage immediate payment. - Design considerations: number and frequency of installments, duration, consequences of missed payments — generally keep installments and duration to the minimum necessary. - Common safeguards: require filing compliance as a condition; acceleration clauses making the whole balance immediately payable upon default; avoid successive installment arrangements. ### Waivers and write-offs — limits and governance - Discretionary waivers of part of the main tax liability are permitted in some countries but are not generally recommended because they: - compromise horizontal equity; - create disincentives for timely payment by generating expectations of compromise; - risk abuse without clear criteria and governance. - Where waiver powers exist, safeguards should be highly circumscribed and include clearly defined limited circumstances (for example, proven undue hardship) and administrative guidance on supporting documentation. - Tax debts that become unrecoverable should be able to be written off, but write-off processes must ensure transparency and accountability. - Governance for write-offs: - Decisions taken only by tax officers of sufficient seniority; - Subject to internal review; - Tax administrations should keep records of and regularly publish any amounts written off as uncollectible. - Except where irrecoverable at law, the debtor is not absolved from ever having to pay the liability; debts may be re-raised if the debtor’s financial position improves. ### Protective measures — tools and safeguards - Legislative tools to prevent dissipation of assets and remove taxpayer from administration’s reach: - Tax liens supported by a proper lien registration system to secure claims on properties (including future acquisitions during the lien). - Powers to instruct third parties holding taxpayer assets to refrain from dealing with those assets (preservation orders), with appropriate safeguards (generally require court order; automatic expiry if assessment not made within a prescribed period, for instance, within six months). - Ability to disregard fraudulent conveyances for tax collection purposes while not invalidating bona fide transfers. - Travel restriction orders (departure prohibition orders) to prevent taxpayers leaving the jurisdiction, subject to constitutional constraints and due process safeguards. - Partial payment mechanisms for disputed tax amounts to mitigate nonrecoverability risks, designed to protect impecunious taxpayers with legitimate disputes. - Design features and safeguards highlighted: - Lien registration systems should notify the public; taxpayers should receive adequate written notice prior to filing unless notification jeopardizes collection; right to fair review by independent tribunal or courts. - Preservation: third parties breaching preservation orders without reasonable cause may be personally liable; preservation usually requires court order or expires if assessment not made (example six months). - Tax clearance certificates: may be mandatory for certain transactions; may be issued where arrears are covered by installment arrangements; IT systems must support on-time delivery. - Fraudulent conveyances: transfers made for no or inadequate consideration to defeat tax collection should be disregarded; safeguards to protect genuine transfers and allow purchasers to recover consideration as a debt owed by the taxpayer. - Receivership and custodial arrangements: administrators, executors, receivers, and liquidators should inform the tax administration of appointment; custodians should generally be allowed to dispose of assets only after outstanding tax liabilities are settled; personal liability for custodians required to set aside amounts for tax liabilities. ### Compelled recovery of taxes — measures and principles - Compelled recovery is a last-resort measure; reliance on it rises when super-priority status for tax debts over other debts is reduced. - Common measures: 1. Ability to recover tax debts directly from third parties who owe or will owe money to the taxpayer, including employers and banks (garnishee orders, direct bank recovery). 2. Power of distraint (seizure) and sale of taxpayer assets. 3. Imposing secondary liability on managers and controlling members of entities. - Design and safeguards: - Given intrusiveness, measures must be carefully designed to protect legitimate interests of taxpayers and bona fide third persons. - Apply measures proportionately, prioritizing less intrusive measures first. - Statutory due process safeguards: notice, opportunity to appeal, and court oversight where appropriate. - Consider trade-offs where court systems are overburdened; tax law should generally allow direct recovery without prior court approval, subject to due process safeguards. - Preferential creditor status may be limited (for fairness) or retained for specific tax types (for example, value-added tax or payroll tax). ### Design considerations and institutional context - Design influenced by: - the jurisdiction’s broader debt recovery legal provisions; - capacity of the court system to authorize powers without undue delay; - nature and burden of each specific power on taxpayers or third parties. - Where appropriate, relying on well-developed broader debt recovery provisions may be preferable to special tax-specific powers. - Ultimate provisions must account for the country’s legal tradition, constitutional and other domestic laws, political and administrative structure, and fiscal policies. ### Role of courts and oversight - Distribution of powers between tax administration and courts depends on country circumstances. - Balance required between efficient administration and adequate, timely taxpayer protections, including effective appeals. - Design choices: - more active court role for more pervasive measures; - ensure access to judicial review of tax administration measures. ### Safeguards and governance — consolidated checklist - Key safeguards when designing protective or compelled recovery measures: 1. Clear legal framework on collection and recovery powers, preferably consolidated in a separate tax procedures act. 2. Robust governance structures with clear and transparent conditions for discretion. 3. A statutory collection due process framework, including prompt taxpayer access to emergency recourse against recovery actions. 4. Staged and proportional application of intrusive measures, including court oversight where appropriate. ### Unifying tax procedures - Unifying procedures across tax types improves transparency and predictability, supports voluntary compliance, facilitates consistent collection and debt management policies, and reduces overall legislative complexity. ### Appendices and organization - Sample provisions illustrating legal techniques are provided in appendices: - Appendix 1: sample protective measures; - Appendix 2: sample compelled recovery provisions. - The remainder of the note is organized into sections: “Encouraging Voluntary Payment of Taxes,” “Protective Measures,” “Compelled Recovery of Taxes,” and a brief discussion of tax collection during crises with lessons from the COVID-19 pandemic. ### Internal checks, transparency, and time-limit examples - Waiver decision controls and documentation: - Decisions should be signed off by an official of sufficient seniority, fully documented, and subject to review (perhaps by committee), particularly for large debts. - Consider limiting aggregate amount of tax that can be waived in any given period. - Transparency and accountability: - public reporting of total amounts waived; - subjecting the tax waiver system to audit by the Auditor General (or similar). - Time limits and recovery examples: - Canada adopts an initial recovery period of up to 10 years. - South Africa adopts a recovery limitation period of 15 years from the time the assessment of tax becomes final. - Conditions for writing off unrecoverable tax debts (examples count and ordering preserved): 1. Debts not yet legally time-barred but uncollectible after all legal recovery measures exhausted (for example, after final dividend in bankruptcy). 2. Recovery cost would disproportionately exceed value (for example, very small amounts or taxpayer cannot be located or assets overseas without cross-border agreements). 3. Taxpayer has no funds or other assets (for example, company ceased operations with no assets or debtor died and left no assets). - Governance for write-offs: decisions by sufficiently senior tax officers, internal review, publication of amounts written off; debt may be re-raised if circumstances change. ### Crisis lessons (Box 1) — COVID-19 implications for tax collection - Crisis-era measures used during the COVID-19 pandemic applicable to other emergencies: - Payment extensions, longer installment periods, relaxing requirements for delayed payment of arrears, deferral of installment commencement. - Remission—in whole or in part—of penalties and interest to encourage compliance. - Expedited refunds, including by tax debt offsets, to provide short-term cashflow relief. - Temporary suspension of enforcement actions, within limits to avoid permanent unrecoverability (for example, statute of limitations). - Administrative vs legislative implementation: - Many measures can be introduced administratively; legislative action may be required for statutory deadlines. - Existing legal frameworks often allow quick administrative approaches supported by guidance and automation. - Protective measures in crises reiterate need for legislative powers to prevent dissipation of assets (see sample provisions in Appendix 1). ### Selected illustrative statutory timings and operational details (from Box 2 and subsequent provisions) - Asset preservation and court interaction: - Director-General may secure assets pending an application to the [Court], and must make the application within 24 hours from taking steps to secure the person’s assets. - The [Court] may issue an asset preservation order valid for [30] days; the Director-General may apply to extend the order. - A person may, within [15] days of being served with the order, apply to the [Court] to discharge or vary the order. - Director-General shall, within [30] days of service of notice of the order, determine the tax due and serve a notice of tax assessment and commence recovery; the asset preservation order automatically expires upon service of a notice of assessment unless extended. - Fraudulent conveyances timeframe: - Transfers are disregarded when transfer occurs within [2] years before the due date of payment (subject to other specified conditions). - Appointed persons notification: - An appointed person must notify the Director-General within [14] days after being appointed. - The Director-General shall notify the appointed person of the amount sufficient to provide for payment within [two months] of receiving the notification. - Garnishment limits and thresholds: - Garnishment from salary or wages is capped at [20] percent of each payment of salary or wages (after payment of income tax). - Distraint (seizure) detention period: - For any non-perishable goods, a detention period of not less than [21] days after issuance of the distraint notice; perishable goods: such period as the Director-General considers reasonable. - Definitions and relevant time for secondary liability: - “Controlling member” defined by holding fifty percent or more of voting rights, dividend rights, or capital rights. - “Relevant time” is [6] months before the events that gave rise to the entity’s tax liability. ### Compelled recovery procedural and third-party safeguards - Recovery from third parties (garnishee and bank recovery): - Tax administrations should be able to direct third parties owing or holding money for a taxpayer to pay the tax administration directly, often administratively without prior court approval. - Amounts subject to recovery should include present and future amounts: owed to the taxpayer; held for or on account of the taxpayer; held on account of a third person for payment to the taxpayer; held by a person with authority from a third person to pay the amount to the taxpayer. - Third parties must cease payments to the taxpayer and pay the tax administration up to the outstanding tax (including interest and penalties); payments treated as discharge to the extent paid to the administration. - Direct recovery from bank accounts common but must include protections: - typically applied to taxpayers with established tax debts who have failed to pay or reached unacceptable arrangements; - notice to taxpayer when order served on bank (same time or immediately after); - right to urgent court review; - jurisdictions may set a threshold before direct recovery and a minimum amount to be retained in the account to avoid undue hardship; - exclusions for necessities of life and items essential to earning income; employers: reasonable salary exclusion to meet basic needs. - Distraint safeguards and conduct: - Exclude properties subject to secured interests unless preferential creditor status applies; - Penalize obstructing distraint (for example, removing or hiding property); - Tax officers should distrain only to the extent reasonably necessary; - Protections: minimum tax debt threshold before distraint; exclusion of basic household goods and jointly owned assets; ensuring best reasonable sale price (for example, public auction) and prompt refund of excess; adequate notice and right to challenge; urgent court review available. - Secondary liability of managers and controlling members: - Managers and controlling members can be jointly and severally liable where an entity fails to pay tax by due date. - Defenses: liability does not apply to those who exercised the degree of care, diligence, and skill that a reasonably prudent person in the position would have exercised. - A manager or controlling member who pays under secondary liability may recover the payment from the entity as a debt. - A manager may not be assessed after the period of limitations for collecting the relevant tax from the entity has expired. ### Procedural compliance with third-party notices and distraint (sections highlighted) - Third-party compliance: - Third party who pays Director-General pursuant to third-party debtor notice is treated as acting with authority of the person and indemnified against civil or criminal proceedings despite contrary provisions in any written law, contract, or agreement. - A third party claiming inability to comply must notify Director-General in writing within [7] days of receiving the notice, setting out reasons. - Director-General may accept and cancel or amend the notice, or reject the notification. - Failure to pay within [15] days of the later of service or receipt of funds (or if notification rejected) converts the amount into tax due and payable by the third party under the Part. - Distraint mechanics and application of proceeds: - Director-General issues distraint notice specifying person, tax liability and unpaid amount, property and its location. - Director-General or authorized officer may enter premises, engage assistants at person’s cost, and request police presence. - Distrained property detained at cost of person; detention period not less than [21] days for non-perishables. - Property may be sold by public auction or other manner; proceeds applied to costs, specified unpaid tax, other unpaid tax liabilities, with remainder paid to person; Director-General may recover shortfall where proceeds insufficient. - Immunity: no proceedings may be instituted against Government, Director-General, authorized officers, police officers, or others for anything lawfully done under the section. - Distraint notice revoked when person pays in full; affected person may apply to Director-General for revocation and appeal in Court if refused. *Source: tltnea2025001.* ### Executive Summary ...................................................................................................... ### Executive Summary ### Overview - Fair and effective tax collection is critical to the success of any tax system in raising revenue and should be properly legislated. - Voluntary payment of taxes by taxpayers is always preferred and should be encouraged and supported by the tax procedure legal framework. - The law should provide protective measures to prevent taxpayers from frustrating tax collection efforts by taking either themselves or their assets out of the tax administration’s reach. - As a last resort, the tax administration should be able to compel recovery of outstanding tax debts from taxpayers or certain third parties through different legislative measures, complemented by adequate safeguards for taxpayers. - This note focuses on key issues to consider in designing tax law provisions to support fair and effective tax collection. ### Causes of Nonpayment and Initial Remedies - Nonpayment can arise from lack of tax certainty or ineffective deterrence; these can be addressed with: - comprehensive, clear, and simple substantive and procedural tax rules, - a well-designed advance tax rulings regime, - an effective interest and tax penalties regime. - Where taxpayers want to pay but cannot due to financial constraints, legislated mechanisms include: - Offsets against credits and amounts owed by the government. - Installment arrangements or payment facilities when offsets are insufficient. ### Encouraging Voluntary Payment of Taxes - A carefully designed set of incentives and disincentives is essential for voluntary and timely payment. - Key supporting features include: - effective interest and tax penalties regime (Waerzeggers, Hillier, and Aw 2019), - advance tax ruling regimes (Waerzeggers and Hillier 2016), - administrative guidance and transparent procedures for payment facilities. ### Offsets and Installment Arrangements - Offsets: - Typically applied against tax refunds and other credit balances (including VAT) owed to the taxpayer. - A specific legal provision is commonly adopted to support offsetting and should interact appropriately with general (civil) law. - Consideration can be given to offsetting against other public monies owed to the taxpayer, but safeguards may be needed (for example, to protect social benefit payments). - Installment arrangements: - Tax administrations should be able to grant payment extensions or enter into installment arrangements, either on request or via statutory programs. - Arrangements should have a clear legal basis, transparent procedures, and administrative guidance. - Conditions for installment arrangements may include demonstration of genuine hardship based on a financial statement. - The tax administration may require collateral or other security based on clear risk assessment criteria, particularly for lengthy installments. - Interest is generally necessary on the running balance to preserve real value and horizontal equity, but some countries waive part or all interest to encourage immediate payment, including through electronic means.2 - Design considerations: number and frequency of installments, duration, consequences of missed payments. Generally keep installments and duration to the minimum necessary. - Common safeguards: require filing compliance as a condition for installment programs; acceleration clauses making the whole balance immediately payable upon default; avoid successive installment arrangements. ### Waivers and Write-Offs - Some countries permit discretionary waivers of part of the main tax liability, but this is not generally recommended because: - It compromises horizontal equity. - It creates disincentives for timely payment by generating expectations of compromise. - Without clear criteria and governance, discretionary waivers risk abuse or inappropriate pressure on officials.3 - Where waiver powers exist, safeguards should be highly circumscribed and include: 1. A limited number of circumstances, clearly defined in law, in which a waiver can be granted, such as in the case of proven undue hardship, further clarified in administrative guidance (including, for instance, on the nature of the supporting documentation to be provided by the applicant).4 - Tax debts that become unrecoverable should be able to be written off, but write-off processes must ensure appropriate transparency and accountability. ### Protective Measures - Tax legislation should include measures to prevent taxpayers from moving assets outside the reach of the tax administration, with appropriate safeguards. - Effective tools include: - Tax liens supported by a proper lien registration system to secure the tax administration’s claim on properties of noncompliant taxpayers. - Powers to instruct third parties holding a taxpayer’s assets to refrain from dealing with those assets; such preemptive measures require appropriate safeguards because they can apply before tax liability has fallen due. - Ability to disregard fraudulent conveyances for tax collection purposes, while not invalidating bona fide transfers. - Travel restriction orders to prevent taxpayers from leaving the jurisdiction, subject to constitutional constraints and due process safeguards. - Partial payment mechanisms for disputed tax amounts to mitigate nonrecoverability risks, designed to protect impecunious taxpayers with legitimate disputes. ### Compelled Recovery of Taxes - Compelled recovery is a last-resort measure; its importance rises when super-priority status for tax debts over other debts is reduced. - Common compelled recovery measures include: 1. Ability to recover tax debts directly from third parties who owe or will owe money to the taxpayer, including employers and banks. 2. Power of distraint and selling taxpayer assets. 3. Imposing secondary liability on managers and controlling members of entities. - Given the intrusiveness of these measures, they must be carefully designed to safeguard legitimate interests of taxpayers and bona fide third persons. - Tax administrations should apply these tools proportionately, generally prioritizing less intrusive measures first. ### Design Considerations for Protective and Recovery Powers - Design is influenced by: - the jurisdiction’s overall debt recovery legal provisions, - capacity of the court system to authorize powers without undue delay, - nature and burden of each specific power on taxpayers or third parties. - Where appropriate, relying on well-developed broader debt recovery provisions may be preferable to special tax-specific powers. - The ultimate form of provisions must account for the country’s legal tradition, constitutional and other domestic laws, political and administrative structure, and fiscal policies.1 ### Role of Courts and Oversight - Distribution of powers between tax administration and courts depends on country circumstances. - A balance is required between efficient administration and adequate, timely taxpayer protections, including effective appeals. - Key design choices: - a more active court role for more pervasive measures, - ensuring access to judicial review of tax administration measures. ### Safeguards and Governance - Appropriate safeguards when designing protective or compelled recovery measures include: 1. A clear legal framework on collection and recovery powers, preferably consolidated in a separate tax procedures act to ensure uniform application for all tax debts. 2. Robust governance structures, including clear and transparent conditions in the exercise of discretion. 3. A statutory collection due process framework, including prompt taxpayer access to emergency recourse against recovery actions. 4. Staged and proportional application of intrusive measures, including court oversight where appropriate. ### Unifying Tax Procedures - Unifying tax procedures across tax types (particularly where administered by the same tax administration) offers advantages: - Improves transparency and predictability, supporting voluntary compliance. - Facilitates development of modern tax collection and debt management policies consistent across taxes. - Reduces overall complexity of tax legislation, regardless of legal instrument choice. ### Appendices and Structure of the Note - Sample provisions illustrating legal techniques are provided in the appendices: - Appendix 1: sample protective measures discussed in “Protective Measures”. - Appendix 2: sample compelled recovery provisions discussed in “Compelled Recovery of Taxes”. - Sample provisions are general and simplified and do not account for individual tax or legal system circumstances. - The remainder of the note is organized into sections: “Encouraging Voluntary Payment of Taxes,” “Protective Measures,” “Compelled Recovery of Taxes,” and a brief discussion of tax collection during crises, focusing on lessons from the COVID-19 pandemic. *Source: Executive Summary of the provided content unit.* ### 2. Internal checks and balances for granting waivers, such as the requirement that waiver decisions (a) be ### 2. Internal checks and balances for granting waivers, such as the requirement that waiver decisions (a) be ### Internal checks and documentation - Waiver decisions should: - Be signed off by a tax official of a sufficient level of seniority. - Be fully documented and reviewed—perhaps by a committee—particularly in the case of large debts. - Consideration could be given to limiting the aggregate amount of tax that can be waived in any given period. ### Transparency and accountability arrangements - Public reporting of total amounts waived. - Subjecting the tax waiver system to audit by the Auditor General (or other similar body). - Some countries distinguish between the time limit(s) for raising tax assessments and for collecting tax once a timely assessment is raised. ### Time limits and recovery examples - This includes a time bar on collection once an assessment has been raised but recovery has been unsuccessful, which can be restarted or extended in certain circumstances. - Examples: - Canada adopts an initial recovery period of up to 10 years. - South Africa adopts a recovery limitation period of 15 years from the time the assessment of tax becomes final. ### Conditions for writing off tax debts as unrecoverable - Tax debts that have become unrecoverable or the recovery of which has become unreasonable should be able to be written off. This should apply to tax debts: 1. Which, while not (yet) legally time-barred, have become uncollectible after all legal recovery measures have been exhausted (for example, after a final dividend has been paid under bankruptcy or liquidation proceedings). 2. For which the cost of collection would disproportionately exceed their value (for example, very small amounts, or in situations where the taxpayer cannot be located, or where the taxpayer’s assets are located in another jurisdiction with which there is no agreement for cross-border assistance in the collection of taxes). 3. When the taxpayer has no funds or other assets (for example, where a company has ceased operations and there are no assets or where a debtor has died and left no assets). - Purpose: ensure public accounts reflect a “true and fair view” of the government’s fiscal position. - Governance for write-offs: - Decisions should be taken only by tax officers with a sufficient level of seniority. - Should be subject to internal review. - Tax administrations should keep records of and regularly publish any amounts written off as being uncollectible. - Except where the amount has become irrecoverable at law, the debtor is not absolved from ever having to pay the liability (the debt may be re-raised and action taken to collect it if, for example, the debtor’s financial position improves). ### Role in crisis events - Tax administrations have an important role in easing pressures on taxpayers facing unforeseen crisis events. - The COVID-19 pandemic provided lessons for acute crises affecting large sections of the taxpayer population (presented in Box 1). *Legislating for Fair and Effective Tax Collection 3* ### Box 1. Tax Collection in Times of Crisis: Lessons from the COVID-19 Pandemic ### Box 1. Tax Collection in Times of Crisis: Lessons from the COVID-19 Pandemic ### Crisis-era tax collection measures and rationale - Extraordinary health emergency measures (for example, lockdowns and travel and other restrictions on business operations and government services) caused acute difficulties to both taxpayers and tax administrations. - Measures used to ease tax collection pressures in response to the COVID-19 pandemic can be applicable in other emergencies (for example, natural disasters or calamities that prevent large sections of the taxpaying population from meeting tax obligations). - Commonly considered measures: - Payment extensions for taxpayers facing cashflow difficulties, including longer installment periods, relaxing the requirements for granting delayed payment of arrears and deferral of the commencement date of installments payments. - Remission—in whole or in part—of penalties and interest to encourage compliance. - Expedited refunds—including by way of tax debt offsets—to provide taxpayers with short-term cashflow relief. - Temporary suspension of enforcement actions, within limits to avoid circumstances in which tax debts would become permanently unrecoverable (for example, as a result of statute of limitations). ### Administrative vs legislative implementation - Many measures can be introduced relatively quickly through administrative action. - Legislative action may be required where statutory deadlines are concerned. - Existing legal frameworks often allow tax administrations to develop administrative approaches quickly, supported by taxpayer guidance (for instance, by relaxing conditions for—and automating as much as possible the processing of—payment extensions, installments, refunds, and so on). ### Protective measures to prevent dissipation of assets - Tax legislation should provide for protective measures to prevent taxpayers from taking themselves or their assets out of the tax administration’s reach. - Sample protective provisions are set out in Appendix 1 (as referenced in the source). Subcomponents: - Tax Liens - Tax administrations should be empowered to file a tax lien on properties and property rights of noncompliant taxpayers, including those acquired in the future for the duration of the lien. - Lien registration systems should notify the public of tax liens (via existing security registration frameworks or a separate tax lien register). - Taxpayers should receive adequate written notice prior to filing unless notification jeopardizes tax collection; taxpayers should have the right to a fair review by an independent tax tribunal or the courts. - Preservation of Assets - Temporary preservation prevents taxpayers and third parties that hold, control, or manage assets from dealing with them when there is good reason to believe the taxpayer will frustrate recovery. - Third parties who breach preservation orders without reasonable cause should be personally liable for the taxpayer’s tax liabilities to the extent covered by those assets. - Preservation should generally require a court order to confirm it is warranted; if no prior court order is required, the preservation measure should automatically expire if the tax administration fails to make an assessment within a prescribed period of time (for instance, within six months), with the taxpayer retaining a right to separately challenge the measure. - Tax Clearance Certificates - Issued as confirmation that a taxpayer’s tax affairs are in order at their date of issue and may be legislated as mandatory requirements for transactions (for example, applications for grants, public sector contracts, starting a business, or applications for employment in public office). - May be issued to taxpayers who have tax arrears where the arrears are covered by an installment arrangement. - Where widely applied, IT systems must support on-time delivery to avoid hindering ordinary activities and business transactions. - Use cases include withholding mechanisms for nonresidents and company dissolution/winding down processes to ensure corporate assets are not dissipated before taxes are accounted for and paid. - Fraudulent Conveyances - Transfers made for no or inadequate consideration to related parties or third parties to defeat tax collection should be disregarded for tax recovery purposes. - Safeguards: ensure genuine transfers are not invalidated; relevant requirements could include (1) the transferor taxpayer is liable for tax at the time of transfer and (2) the transfer occurred within such period as provided under domestic bankruptcy laws allowing conveyances made for the purpose of defeating creditors to be disregarded. - Purchasers should be able to recover consideration paid and incidental costs as a debt owed by the taxpayer to provide relief to bona fide third-party purchasers. - Receivership and Custodial Arrangements - Administrators, executors, receivers, and liquidators should inform the tax administration of their appointment in a timely manner for tax assessment to be raised. - Custodians generally should be allowed to dispose of assets only after outstanding tax liabilities are settled. - Personal liability (including joint and several liability where applicable) should be provided for custodians required to set aside amounts for tax liabilities. ### Special considerations for nonresidents - Compelling recovery of taxes from nonresidents is often constrained by limited in-jurisdiction assets. - Withholding and tax clearance certificate mechanisms are commonly used to ensure proper collection of tax on gains derived from disposals of in-jurisdiction assets by nonresidents; purchasers or other parties (for example, notaries) may be required to withhold tax unless presented with a tax clearance certificate. - The tax clearance certificate mechanism can be deployed in company dissolution and corporate reorganizations (example: Belgium transferee liability unless transferor obtained a tax clearance certificate prior to transfer). ### Travel restrictions and departure prohibition orders - Tax legislation may give tax administrations the power to impose travel restrictions on persons with outstanding tax debts, but these are measures of last resort and should be limited to justified situations with due process protections. - Departure orders should apply only where personal exposure exists and should not be imposed on legal representatives or other persons where no personal liability exists. - Constitutional constraints and rights to freedom of movement may require judicial processes; travel restriction orders are generally considered appropriate when granted or confirmed by a court. - Less intrusive alternatives include requiring the taxpayer to provide security (bond, deposit, letter of guarantee, or other satisfactory manner) for tax payable or becoming payable. ### Collection of disputed amounts - Allowing recovery of some or all of a disputed amount pending resolution can reduce the risk of nonrecoverability and discourage frivolous litigation, but the “pay now, argue later” approach can operate unfairly against taxpayers with legitimate claims who lack funds. - Design options and safeguards: - Require payment of a percentage of the disputed amount (for example, 30–50 percent) to enable appeal in some jurisdictions. - Some jurisdictions allow appeal after payment of nondisputed amounts but suspend collection only if a certain percentage of disputed amounts is paid (for example, 30–50 percent). - Other jurisdictions permit recovery pending appeal but vest the tax authority with discretion not to pursue recovery depending on circumstances (for example, documented inability to pay or principled nature of dispute). - Interest and refunds: - If collection of disputed amounts is suspended, interest should generally accumulate on outstanding amounts. - If the taxpayer’s appeal is ultimately upheld, paid amounts should be refunded, including interest. - To prevent systematic appeals to postpone payment, tax administrations could require taxpayers to post security for whole or part of the disputed amount. ### Compelled recovery of taxes: principles and safeguards - Compelled recovery tools include seizure of financial and nonfinancial assets and interception of third-party amounts owing to the tax debtor (wages, bank deposits and securities, accounts receivable, movable and immovable property). - Compelled recovery should generally be a last resort after other collection attempts (telephone/email reminders, legal warning letters, contemplation of installment arrangements). - Use of disruptive measures should be limited and exercised by authorized officers of sufficient seniority, consistent with published policies and fairness. - Statutory due process safeguards should be provided (notice, opportunity to appeal). - Considerations regarding court authorization: - Requiring court orders for recovery can be impractical where judicial and bailiff systems are overburdened and may produce slow and low recovery rates. - Where tax administrations are not preferential creditors, court proceedings may yield little recovery. - Tax law should generally allow direct recovery without prior court approval in all cases, subject to due process safeguards. - Preferential creditor status: - Some jurisdictions have removed super-priority status for tax debts for fairness to other creditors and because tax administrations have other enforcement tools. - Middle-ground options include preferential status except against registered secured creditors or retaining super-priority for specific tax types (for example, value-added tax or payroll tax). ### Recovery from third parties (garnishee orders and direct bank recovery) - Tax administrations should be able to direct third parties that owe or will owe money to the taxpayer to pay the tax administration directly (garnishee order), often on an administrative basis without prior court approval. - Amounts subject to recovery should be defined comprehensively to include present and future amounts: - (1) owed to the taxpayer; - (2) held for or on account of the taxpayer; - (3) held on account of a third person for payment to the taxpayer; - (4) held by a person who has authority from a third person to pay the amount to the taxpayer. - Third parties should be required by law to cease payments to the taxpayer and pay the tax administration up to the amount of outstanding tax debt (including interest and penalties), and be deemed to have discharged their debt to the extent of payments made to the tax administration. - Direct recovery from bank accounts is common but must include adequate protections: - Typically applied to taxpayers with established tax debts who have failed to pay or reached unacceptable payment arrangements. - Notice should be given to taxpayers at the same time or immediately after the order is served on the bank. - Taxpayers should have the right to make an urgent application to the court for review. - Jurisdictions may set a threshold amount before direct recovery is considered and a minimum amount to be retained in the bank account to avoid undue hardship. - Exclusions commonly apply for necessities of life (for example, residence and personal effects up to a threshold) and items essential to earning present and future income (for example, tools of trade). - Employers: law may provide for a reasonable amount of salary and wages to be excluded from payment to the tax administration to meet basic needs. ### Distraint (seizure) of movable property - Distraint allows taking control of movable properties and selling them to discharge tax debt; excess sale proceeds are refunded to the taxpayer. - Design safeguards for fairness and effectiveness: - Exclude properties subject to secured interests unless tax administration has preferential creditor status. - Penalize obstructing distraint (for example, removing or hiding property). - Tax officers should distrain only to the extent reasonably necessary. - Protections can include: - (1) minimum tax debt threshold before distraint; - (2) exclusion of certain properties (basic household goods, jointly owned assets); - (3) ensuring best reasonable sale price (for example, public auction) with prompt refund of excess to taxpayer; - (4) adequate notice and right to challenge; - (5) ability for urgent court review of the distraint order. - Limited circumstances may allow sale without public auction (for example, perishable property). ### Secondary liability of managers and controlling members - To improve recoverability from entities, managers and controlling members can be made secondarily liable for entity tax debts. - Some jurisdictions (for example, United States and Canada) can hold corporate directors personally liable where they were required but knowingly failed to collect and remit withholding taxes. - Safeguard: secondary liability should not apply to directors or managers who have exercised the degree of care, diligence, and skill that a reasonably prudent person in the position would have exercised in preventing the failure to pay tax. - A manager or controlling member who pays taxes as a secondary liability should be allowed to recover the tax paid from the entity as a debt owed to them. *Italicized source: Box 1. Tax Collection in Times of Crisis: Lessons from the COVID-19 Pandemic (from the provided content unit).* ### Box 2 consolidates the key considerations when designing appropriate safeguards for the application of pro ### Box 2. Key Considerations When Designing Appropriate Safeguards for the Application of Protective and Compelled Recovery Measures ### Core legal and procedural safeguards - Set out in legislation the tax administration’s collection enforcement powers and the general rules for their application. - Offer procedural protections to taxpayers (including third-party debtors) through appropriate notice and swift appeal recourse. - Ensure compatibility between the administrative appeals process and any emergency judicial recourse against enforced collection action. - Provide legal safeguards against improper exercise of powers, including that at every escalation point in the collections process the taxpayer be notified (in writing) and given the opportunity to pay prior to implementation of harsher measures. - Limit circumstances in which tax authorities can prohibit a taxpayer from leaving the country and ensure legislation includes due process safeguards such as requiring judicial approval before or shortly after the tax authorities issue a departure prohibition order. - Extend third-party liability to company managers and controlling members under clearly prescribed conditions. - Provide for active internal oversight, especially where collections action may have significant consequences (such as closing down a business or seizing/selling assets). - Include an offsetting provision to enable any amounts owed to a tax debtor by the tax authorities to be applied or offset against the taxpayer’s debt. - Offer the possibility of settling tax debt in installments, while providing for clear and transparent eligibility and access criteria, minimizing discretion. - Set up a framework to ensure that recovery powers do not lead to undue hardship for taxpayers, with examples for distraint proceedings: - a minimum tax debt threshold before an act of distraint is taken; - the ability for taxpayers to make an urgent application to the court for review of the distraint order; - ensuring the taxpayer’s minimum necessary for living, by providing that a minimum amount is retained in one designated bank account; - the exclusion of certain properties from a distraint action (for example, basic household goods and assets that are jointly owned with another person). ### Illustrative statutory design elements (high-level) - Require written notices specifying taxpayer name, Taxpayer Identification Number, assets covered, extent of lien, tax to which the lien relates, and details regarding power of sale. - Make lien registration on land or buildings effective only after filing with the [Registrar of Titles]; require the [Registrar of Titles] to remove a released lien within [15] days and without fee. - Exempt transactions by the Director-General under lien provisions from [stamp duty and any other transaction taxes]. - Provide that liens are not valid against third-party purchasers where interest arises before actual knowledge of the lien or before notice has been duly registered in an official register of security interests, whichever first occurs. - Permit the Director-General to file an action in the [Court] to enforce liens and allow affected persons to apply for release of a lien, with decisions appealable to the [Court]. ### Time limits, emergency powers, and review rights (exact statutory timings retained) - Asset preservation: - Director-General may secure assets pending an application to the [Court], and must make the application within 24 hours from taking steps to secure the person’s assets. - The [Court] may issue an asset preservation order valid for [30] days; the Director-General may apply to extend the order. - A person may, within [15] days of being served with the order, apply to the [Court] to discharge or vary the order. - Director-General shall, within [30] days of service of notice of the order, determine the tax due and serve a notice of tax assessment and commence recovery; the asset preservation order automatically expires upon service of a notice of assessment unless extended. - Third persons preserving funds pursuant to the order are indemnified; a third person who, without reasonable cause, fails to comply is personally liable for the amount specified in the order. - Fraudulent conveyances: - Transfers are disregarded when transfer occurs within [2] years before the due date of payment (subject to other specified conditions). - Appointed persons: - An appointed person must notify the Director-General within [14] days after being appointed. - The Director-General shall notify the appointed person of the amount sufficient to provide for payment within [two months] of receiving the notification. - Recovery from persons leaving the country: - Director-General may issue notices requiring payment, security, or a departure prohibition notice to the [Chief Immigration Officer]. - Departure prohibition orders remain in force until revoked by the Director-General; the person may apply to the [Court] to discharge or vary the notice. - Revocation must occur if the tax specified is paid in full or a satisfactory arrangement for payment is made. - Only the Director-General may exercise powers under this section. - “Controlling member” is defined by holding fifty percent or more of voting rights, dividends rights, or capital rights. ### Compelled recovery: third-party debtor safeguards and limits - Director-General may require certain third parties to pay amounts specified in a notice if they: - owe or may owe money to the taxpayer; hold or may hold money for or on behalf of the taxpayer; hold money on account of some other person for payment to the taxpayer; act as guarantor; or have authority to pay money to the taxpayer. - Limits and protections in third-party notices: - Amount specified shall not exceed the amount of the unpaid tax by the due date. - Third party liability is limited to amounts the third party owes or holds for the person. - Date for payment by the third party cannot be before the date that the amount owed by the third party to the person becomes due or held on the person’s behalf. - Notices remain in force until the person pays the amount or the Director-General revokes the notice. - Notices may specify amounts under more than one tax law. - Garnishment from salary or wages is capped at [20] percent of each payment of salary or wages (after payment of income tax). - A notice can be served on a third party in relation to a joint account only when all holders have unpaid tax liabilities, or when the person can withdraw funds without other holders’ authorization; for non-partnership accounts the person’s proportion is deemed equal shares unless proven otherwise. - Director-General must serve a copy of the notice on the person as soon as practicable; non-receipt does not invalidate the notice. - Amounts paid by a third party are treated as tax and credited against the taxpayer’s liability. - The Director-General shall revoke or amend a third-party notice by written notice if the person has paid the tax due or made an arrangement satisfactory to the Director-General. *Legislating for Fair and Effective Tax Collection — Box 2 (Key Considerations and illustrative sample provisions).* ### 7. Compliance with Notice ### 7. Compliance with Notice ### Third-party payment and indemnity - A third party who pays the Director-General pursuant to section [X] (Third-Party Debtors) is: - treated as having acted with the authority of the person and of all other persons concerned; and - indemnified in respect of the payment against all proceedings, civil or criminal, and all processes, judicial or extrajudicial, despite any provisions to the contrary in any written law, contract, or agreement. ### Notification of inability to comply - A third party who claims to be unable to comply with a notice under section [X] (Third-Party Debtors) may notify the Director-General, in writing and within [7] days of receiving the notice, setting out the reasons for the third party’s inability to comply with the notice. ### Director-General’s options upon receipt of notice - Upon receipt of a notice by a third party the Director-General may: - accept the notification and cancel or amend the notice under section [X] (Third-Party Debtors); or - reject the notification. ### Effect of third-party notice and consequences of nonpayment - The notice filed by a third party under this section shall have no effect unless the Director-General cancels or amends the third party notice issued under subsection [X] (Third-Party Debtors). - Where a third party: - fails to pay an amount of tax specified in a notice within [15] days of the later of the date: - (i) of service of such notice; or - (iii) on which any money comes into their hands or becomes due by them to the person; and - has: - (i) not given a notification under subsection (2) of this section; or - (ii) given such notification which has been rejected by the Director-General, - then the provisions of this Part shall apply to such amount as if it were tax due and payable by the third party, the due date for the payment of which was the date upon which such amount should have been paid to the Director-General under this section. ### 8. Distraint Proceedings ### Issuance and content of distraint notice - If a person fails to pay tax by the due date for payment, the Director-General may issue a written distraint notice for recovery of unpaid tax by distraint and sale of the movable property of the person. - A distraint notice shall specify: - the person against whose property the notice is issued; - the tax liability to which the notice relates and the unpaid amount; and - the property against which the distraint proceedings are to be executed, and the location of the property. ### Powers in executing distraint - For executing a distraint notice, the Director-General or authorized officer may: - at any time, enter any house or premises described in the notice authorizing the distraint proceedings; - at the cost of the person, engage such persons as the Director-General considers necessary to assist in the execution of the distraint notice; and - request a police officer to be present while the distraint is being executed. - The property that is the subject of the distraint notice shall be identified by attaching a notice stating the property has been impounded for failure to comply with a tax obligation. ### Detention, sale, and application of proceeds - Subject to payment of tax, the property distrained shall be detained, either at the premises where the distraint was executed or at such other place as the Director-General may consider appropriate, at the cost of the person for the following period: - for perishable goods, such period as the Director-General considers reasonable having regard to the condition of the goods; or - for any other goods, a period of not less than [21] days after the issuance of the distraint notice. - The property distrained may be sold by public auction or in such other manner as the Director-General may direct when the person does not pay the tax due, together with the costs of the distraint, within the detention period under subsection (5). - The Director-General shall apply the proceeds of a disposal under subsection (6) in the following order: - toward the cost of taking, keeping, and selling the property distrained upon; - toward the unpaid tax liability of the person as specified in the distraint notice; - toward any other unpaid tax liability of the person; - the remainder of the proceeds, if any, shall be paid to the person. - Where the proceeds of disposal are less than the sum of the costs of the distraint and the tax payable, the Director-General may recover the shortfall. ### Immunity, revocation, and appeal - No proceedings, criminal or civil, or any processes, judicial or extrajudicial, may be instituted or maintained against the Government, the Director-General, an officer authorized to act under this section, or a police officer, or any other person for anything lawfully done under this section, despite any provisions to the contrary in any written law, contract, or agreement. - A distraint notice shall be revoked when the person pays in full the amounts referred under subsection (1) to the Director-General. - An affected person may apply to the Director-General for a revocation of the distraint notice and a decision by the Director-General not to revoke a distraint notice may be appealed in Court. ### 9. Liability for Tax Payable by an Entity ### Joint and several liability of managers and controlling members - If an entity fails to pay tax by the due date for payment, every person who is or has been a manager or a controlling member of the entity at any time since the relevant time is jointly and severally liable with the entity and every other such person for payment of the tax. - Subsection (1) applies irrespective of whether the entity ceases to exist. ### Defenses and recovery - Subsection (1) does not apply to a manager or controlling member who has exercised the degree of care, diligence, and skill that a reasonably prudent person in the position of the manager or controlling member would have exercised in preventing the initial and continuing failure to pay tax. - Amounts payable to the Director-General by a manager or controlling member under this section are a personal tax liability of such persons. - If a manager or controlling member pays tax by reason of a liability under subsection (1), they may recover the payment from the entity and from other such persons who were liable for the claim as a debt due. - A manager or controlling member of an entity may not be assessed for an amount under this section after the period of limitations for collecting the relevant tax from the entity has expired. ### Definitions and relevant time - “entity” means any taxpayer other than an individual, including a partnership, a trust, or an unincorporated body; - “controlling member”, in relation to an entity, means a member who beneficially holds, directly or indirectly, either alone or together with a related person or persons: - fifty percent or more of the voting rights attaching to shares or other ownership interests in the entity; or - fifty percent or more of the rights to dividends attaching to shares or other ownership interests in the entity; or - fifty percent or more of the rights to capital attaching to shares or other ownership interests in the entity. - “manager” of an entity includes a person purporting to act as a manager of the entity and, in the case of an entity, includes a director, the chief executive officer, and the chief financial officer of the entity; and - “relevant time” is [6] months before the events that gave rise to the entity’s tax liability. *Source: tltnea2025001 - 7. Compliance with Notice* --- _Source: https://www.imf.org/-/media/files/publications/tltn/2025/english/tltnea2025001.pdf_