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Maliyat Journal, No. 11 - Spring 1996
IN
THE NAME OF GOD
FROM
THE PRESIDENT
Tax
compliance is regarded everywhere as a great ideal and standard of perfection
for the tax administration. Those responsible for managing the taxation affairs
have always been endeavoring to elevate the degree to which taxpayers respond
to their statutory duties under the tax laws.
The
subject of tax compliance is of several dimensions, and a thorough study is
needed to comprehend its various aspects. One thing is certain, however, and it
is the simple fact that the tax compliance is to be sought from the taxpayer.
So, the psychological conditions of taxpayers and their probable reactions are
to be taken into account as most important considerations.
What
factors, then, may potentially affect the attitude of taxpayers? Several points
might be raised in response to this question. Among them one can undoubtedly
refer to the behavior of tax organization in relation to taxpayers. This is a
determinant element that can provide critical effects on accomplishments and
acquirements of tax organization.
Such
a vital and important matter must be carefully organized and kept under a
viable order. This requires, first and foremost, designating clear and
realistic goals to the behavior of tax authorities.
Otherwise
such behavior would deviate to directions contrary to the objectives of tax
administration and might, most probably, be subjected to personal
considerations.
It
is the business of policy makers to decide upon, and determine the objectives
of taxation system, including the manner of action of tax organization.
Existence of clear, and properly enforceable, directives in this regard would
prevent the officials to stray from reasonable behavioral norms.
Some
directives issued recently by tax administration contain instructions that may
be interpreted as guidance towards a lawful and objective way of acting.
A
ministerial circular, for instance, deals with the subject of taxpayers'
appeal. Taxpayers dissatisfied with tax assessment may appeal the decision to a
body called the Board of Settlement of Tax Disputes. The statement of appeal
must be submitted in writing and be signed by the appellant.
Most
of those Boards have been so far rejecting the appeals on basis of sole excuse
that they were not signed, or signed improperly. The ministerial circular
disapproves that procedure and instructs the Boards to consider the appeals
valid, and to review them, even if they are somehow defective as far as the
signature is concerned. Only when there are sufficient grounds to believe that
the appeals are unreal and forged, they must, according to the ministerial
circular, be rejected accordingly.
The
instruction contained in the circular takes into account the real intention of
the law. To grant the right of appeal to taxpayers is a principle recognized
throughout the world. The same has been adopted by the Iranian tax regulations.
This basic and significant rule of justice must not be rejected on basis of a
weak excuse such as defects in signing.
Some
other directives of the same character are also being issued by the Finance
Ministry, most of them emphasizing the need to observe the spirit, instead of
appearance, of the law. Tax officials are instructed to pay attention to
substance of regulations and realities of cases, and to avoid resorting to
superficialities of law and outward aspects of cases involved. It might be
alleged that adhering to such attitude would weaken the ability of tax
organization in assessment and collection of taxes, and thereby the fall of
revenue would occur.
This
argument does not seem to be strong enough. Demanding payment of taxes on basis
of weak and superficial grounds would, on the contrary, induce tax evasion.
People would lose their confidence on impartiality and objectiveness of tax
organization; a situation that might seriously impair the spirit of compliance
among various groups of taxpayers.
Dr. Aliakbar Arabmazar
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NATURE OF "ADDITIONAL 10%" ENVISAGED UNDER
THE ARTICLES 211 AND 215 OF THE DIRECT TAXATION ACT
By Dr. Mohammad Tavakkol
Chapter ten of the
Book four of the Direct Taxation Act (DTA) defines the ways and means of tax
recovery by the Finance Department: A notice shall be served on the taxpayer
whose liability is determined in a final mode. If he would fail to pay such
finalized tax within 10 days from the date of notification, then a second
notice called "the sheet of execution" (meaning approximately the
"writ of execution") is to be notified to him. The writ of execution
would demand the taxpayer to pay the sum of finalized tax plus the applicable
fine. The taxpayer must pay, or arrange for payment of, his liability within
one month from the date he receives the writ of execution. In case of failing,
his property, real or personal, to the amount of his tax "liability"
plus 10% of the same will be seized.
The term seizure under
Article 211, DTA means taking into the custody of law the property of a liable person,
in order that such property may be sold, by authority and due course of law, to
settle his liability.
The phrase
"taxpayer's liability" comprises - according to the wording of
Article 211 - the tax assessed plus the applicable fines. So the seizure of
property would take effect up to an amount covering not only the total
liability of delinquent taxpayer, but it also would include an extra amount of
10% of the "liability": assessed tax + applicable fines + 10% of the
first and second items.
The aim of the present
article is to analyze the third element of the above equation, and to reach a conclusion
about its implications. What is the essence of this extra amount of 10%? Three
answers are conceivable to this question:
1. It is a guarantee
for insuring the recovery of what is called "the cost of execution",
2. It has the nature
of a fine, and constitutes an additional penalty imposed on delinquent taxpayer,
or
3. It is a substitute for the interest
accruable to the period during which the tax was in default.
There is some
evidence, as we will see later, to support the first and second assumptions,
but no ground does exist to attest the reliability of the third supposition. It
is worth mentioning, in addition, that demanding interest for late payment of
money is considered by religious authorities to be a kind of usury, and
therefore is prohibited under the Islamic Canon Law (fiqh). So we have to leave
it and concentrate on the first and second assumptions.
The first assumption
is based on the fact that the execution process requires some expenditure, which
should be naturally born by those who are responsible for them. Where a
taxpayer fails to settle his liability on time, nobody except him is to be
considered responsible for execution operations, and he personally has to bear
the cost.
But those operations
would not usually take place at once, and they need time to be carried out. The
exact amount of execution cost can not be determined at starting; therefore a
provisional amount is expedient to receive from the taxpayer to guarantee the
final recovery of the cost.
Such is the meaning of
the first assumption. The additional 10% is a means for guaranteeing the payment
of the execution cost. Natural result of this assumption is to consider that
additional 10% an advance and provisional receiving. If it is an advance
against the execution expenditures, then the balance, if any, should be
adjusted and settled when the execution operations come to conclusion.
We would call this
first assumption as the "assumption of guarantee".
The second assumption,
which we would call "assumption of fine", implies that the said
additional 10% is a kind of penalty imposed on the failing taxpayer. The total
liability of the taxpayer, according to this assumption, equals to: assessed
tax + applicable fine + additional fine + execution cost.
ASSUMPTION OF
GUARANTEE
Several indications
and evidence might be presented in favor of this particular assumption. Those include:
1. Article 211, DTA,
states clearly that the seizure of taxpayer's property would take place to an amount
equal to: tax + fine + additional 10%. No reference is made by the article to
the execution cost, while the cost of execution should be certainly recovered
from the delinquent taxpayer. So we can infer easily that the additional 10% referred
to in this article, is undoubtedly connected to the element of execution cost.
It can not be anything except a guarantee against the expenditures of
execution. Without such assumption it would become extremely difficult to
justify the absence of execution cost among the components enumerated by
Article 211.
2. Note 1 to Article
212, DTA declares the following rule:
"In cases where
the value of the property to be seized is more than the "tax
liability", and it is not susceptible to division, then the whole property
shall be sold and the balance of price shall be refunded to the taxpayer,
unless he would offer another indisputable property of the value equal to the
said tax liability."
The term "tax
liability" in this Note refers to the assessed tax plus applicable fine.
It does not include the extra 10%. This is a meaning given to the phrase
"tax liability" by Article 211, which explicitly defines it and
separates it from the new element of additional 10%.
The Note 1 to Article
212 does not pay attention to that element of extra 10%, since it is not a component
of tax liability. It is a guarantee for the cost of execution and not a
liability by itself.
3. Let us turn to
Article 215 of the Direct Taxation Act. This article pertains to the process of
property seizure. It reads as follows:
"As far as the
real property is concerned, if after two times publication of auction
advertisements...no purchasers were found, the Ministry of Economy and Finance
may transfer to its ownership a part of the seized property, the value of
which...is equal to the total tax liability of the taxpayer plus the applicable
cost..."
As we can see from the
wording of Article 215, no mention is being made here of the said extra 10%. The
"applicable cost" is substituted for that component. The situation is
reversed in Article 211, where no reference is made to cost of execution, and
the additional 10% is substituted for it. Once more we sum up the content of
these two articles in the following formulae:
Article 211: assessed
tax + applicable fine + extra 10%
Article 215: assessed
tax + applicable fine + applicable expenditures
Since both articles are from the same chapter of DTA, and both are pertaining to one and the same subject, they can not be interpreted, except in a way to convey equal understanding and compatible meaning. This obvious reasoning would lead us to conclude that the element of extra 10% is completely connected to the applicable costs, namely the cost of execution. In other words, it is a guarantee for recovery of execution cost.
ASSUMPTION OF
FINE
As it was explained
above, there are at least three indications in favor of the assumption of guarantee.
As far as the assumption of fine is concerned, however, it is only the Note 1
to Article 215 that might convey such understanding. This Note is pertaining to
a case where no purchaser is found for the seized real property, and the
Finance Ministry is going to own it or to transfer it to other purchaser. If
before transferring of ownership, "the taxpayer would volunteer to pay his
liability, and then the Ministry of Economy and Finance shall restore the
property to him upon receipt of taxpayer's liability plus 10% thereof and the
applicable costs."
This article, if
looked at by itself and separated from the rest of the relevant provisions of
the law, might be understood to mean that the amount receivable, in such cases,
from the taxpayer comprises the following items: tax + fine + cost + 10%
This result is
consistent with the assumption of fine. The additional 10% is a secondary fine
that the taxpayer must pay.
INCONSISTENCIES
The formula so
deducted from the appearance of Note 1 to Article 215 is in contradiction with
other relevant provisions of the law. None of those regulations combines the
execution cost and extra 10%. They either refer to the cost exclusively, or to
the additional 10% solely. Therefore, by adhering to the assumption of fine, we
have to confine our assumption to a particular case. That is where the Ministry
is on verge of transferring the seized real property, and the taxpayer volunteers
to pay his liability.
Even in this isolated
case, the assumption of fine would involve logical inconsistencies. Firstly, it
implies the punishment of a taxpayer who volunteers at this stage to comply
with his legal duty. This punishment would not be applicable to the same
taxpayer if he would continue to ignore his duties even at this last stage.
Secondly, the extra
punishment so deducted from Note 1 to Article 215, would apply to the owners of
real properties. In case of personal properties such additional punishment can
not be applied!
Thirdly, Note 1 to
Article 215 is in contradiction with Note 1 to Article 212 as well. The latter
provides explicitly that where the value of property seized is more than the
taxpayer's liability, and the property is indivisible, then the entire property
shall be sold and the balance of price shall be refunded to the taxpayer
"unless he offers another indisputable property, the value of which is
equal to the said tax liability."
The case foreseen under
the Note 1 to Article 212 may overlap the case of Note 1 to Article 215. A taxpayer
whose real property is seized, and the Finance Ministry is going to sell it,
might be subject to both Notes. One might say that Note 1 to Article 212
pertains to a case where the value of property exceeds the liability, while the
Note 1 to Article 215 relates to a situation where such difference of value
does not exist. Such argument would leave us with an illogical and very
tasteless result.
THE SUPREME
COUNCIL OF TAXATION
The subject analyzed above
was referred to the Supreme Council of Taxation (SCT) for reviewing. The SCT
reviewed the matter and concluded that the seizure of property, as far as the
additional 10% is concerned, does not mean necessarily that it is a liability
for the taxpayer. The verdict of SCT up to this point is correct and admirable.
The SCT, however, failed to solve the discrepancy of Note 1 to Article 215, and
receded by stating that the said Note is to be confined to the specific case
foreseen by it. Thus, the SCT accepts all inconsistencies and illogical consequences
associated with this kind of literal interpretation of the law.
CONCLUSION
Interpretation of law
is not advisable to be confined to strict wording of its provisions. The
logical method of construing is, in most cases, much more expedient way of
interpretation. An article, or a particular note to it, is not an enclave
inside the code of law. It is a part of the whole and can not be construed
except by referring to the overall logic of the law. A section or chapter of
the law containing that specific article or note is the minimum environment
that should be taken into account.
If a particular
article or note conveys some illogical meaning, the discrepancy must be
resolved by resorting to the said logical interpretation. Even the historical
method of interpretation might sometimes be of great value. It means to refer
to precedence of drafting and legislation of law, to discover the real intent,
behind the appearance, of the law.
The inconsistency
associated with literal construing of Note 1 to Article 215 of the Direct
Taxation Act can, and must, be solved through such appropriate methods of
interpretation.
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Tax
News
BY-LAW ON
SELECTION AND QUALIFICATION OF OFFICIAL ACCOUNTANTS
A law was enacted two
years ago "concerning the Use of Professional Services of Qualified Accountants".
It was stipulated under the law that the detailed regulations about
qualifications of official accountants and other related matters will be
enacted in a later stage (see Maliyat, No. 3. The by-law referred to above has
been recently adopted by the Council of Ministers as complementary regulations
to the said law. It provides for establishment of a special body called:
"The Board
Responsible for determining the Qualifications of Official Accountants".
Members of the Board will be appointed by the Minister of Economy and Finance.
The applicants for the
profession of official accountancy have to pass an examination to be arranged
and supervised by the said Board.
The Board is
responsible for controlling the activities of official accountants. After each
term of five years, the Board has to reconsider and reconfirm the competency
and qualifications of official accountants. It may reject to confirm, in which
case would decide upon temporary or permanent deprivation of the applicant from
practicing this profession. The official accountants should possess the
following qualifications:
- having Iranian
nationality and being allegiant to the constitution of this country.
- Not being convicted
of a crime.
- having a good
reputation for observing religious and social duties, and not being addicted to
narcotic drugs.
- having received BA
or higher degrees in the field of accountancy or similar subjects.
- Having worked for a
minimum period of 6 years as auditor after receiving his/her academic degree.
- having passed the
examination to be arranged by the Board.
The official
accountants who are employed by public or private institutions, or are self
employed, are prohibited to practice the profession of official accountancy in
addition to their principal job. The permission granted to such persons will be
withdrawn, and a new permit will be issued, qualifying them as "engaged
accountants".
TAX ON
TRANSFER OF GOODWILL
Transfer of goodwill
is subject to taxation under the amended Article 95 of the Direct Taxation Act.
Progressive rates of tax are provided by the tax law, which increase depending
on the slices of the price of transaction. The value of goodwill is to be
determined on the basis of what is called "transactional value".
The term transactional
value might not convey reality of the case. More exactly speaking it can be called
taxation value of transaction, since it is determined for tax purposes only.
The transactional (or
taxation) value of goodwill for properties located in different areas is to be drawn
up by the Ministry of Economy and Finance. Before such valuation is effected,
the price actually received by the transferor of the goodwill will constitute
the basis of taxation. A number of taxpayers try to escape the tax, and to that
end underreport, or even deny, the receipt of what has actually paid to them.
To circumvent this
type of evasion, the tax officials resort usually to estimation of taxable
amount by reference to market value of the relevant goodwill.
This procedure might
cause unfairness if it is applied universally and with no exception. There are people
who lease a property against a high rental, and then would either receive a moderate
key money, or no such consideration at all.
A circular issued
recently by the Finance Ministry examines this subject and states that taxation
should take effect when reliable evidence would indicate that taxpayer has
received certain amount of money as consideration for transfer of goodwill. If
such evidence is absent, then no ground does exist to justify taxation, and
officials must refrain applying it to relevant cases.
TAXPAYER'S
SIGNATURE
The Direct Taxation
Act accords the Board of Settlement of Tax Disputes the authority to review and
decide upon tax disputes (Article 244). Any taxpayer dissatisfied with tax
assessment may appeal the same to that Board. The statement of appeal must be
submitted in writing and it should be signed by the appellant. Most of BSTDs
have been so far rejecting the appeals if they were not signed, or signed
improperly.
The Ministry of
Economy and Finance has issued a circular dealing with the same subject. It disapproves
the procedure followed by BSTDs, and instructs them to consider the appeals
valid and to review them, even if they are not properly signed. Only when there
are sufficient grounds to believe that the appeal is unreal or forged, or the
taxpayer is not aware of it, then the BSTDs must reject it accordingly.
MUNICIPAL
SURCHARGE
The Law of the First
National Development Plan had provided for a special surcharge in favor of municipalities
around the country. The rate of the surcharge was 3% of taxable income of
certain categories of taxpayers. The responsibility for collection of the
surcharge was entrusted to tax departments, and they had to apply it in
addition to normal income tax of the taxpayers.
The aforesaid law was
confined to the duration of the first development plan, which expired at the end
of the Iranian solar year of 1372 (March 20, 1994). Therefore the finance
departments were instructed last year to discontinue applying the surcharge.
But recently they were instructed again - under a new ministerial circular - to
collect the same surcharge from the relevant taxpayers.
CHAMBERS OF
COMMERCE, INDUSTRIES, AND MINES
The Law concerning the
Expenditures of the Chambers of Commerce, Industries and Mines was enacted on
November 2, 1993. It provides that 0.03% of the taxable income of all merchants
(those holding trade cards) is to be collected and remitted to the Treasury.
Then the money would be put at the disposal of the said chambers. Tax
departments are responsible for collection of this special item, when
collecting the income tax of the relevant taxpayers. A new circular of the
Finance Ministry reaffirms the contents of the said law, and invites tax officials
to pay due attention to exact enforcement of the same.
EX OFFICIO
ASSESSMENT
The cases of ex
officio tax assessment are mentioned under the Article 97 of the Direct
Taxation Act (DTA). Section 3 of this article pertains to a case where the
books and documents of the taxpayer are deemed to be inadequate for verifying,
or where the books are found to be kept not in accordance with legal standards.
The tax assessor is authorized, in such cases, to make an assessment according
to the best of his judgment. The assessor must inform the taxpayer, and should
refer the case to a board of 3 auditors, designated by the Ministry of Finance
and Economy. The taxpayer may defend his case before the same board. The time
limit for tax assessor, on the other hand, is 14 months after the deadline
provided for filing the tax return (Note to Article 97 and Article 156, DTA). If
the tax assessor would fail to assess the taxes due within one month after
expiration of the aforesaid time limit, he would lose his right of ex officio
assessment, and the tax return submitted by the taxpayer shall be considered
finalized. A ministerial circular addressed to all tax officials, orders them
to pay due attention to the aforesaid time limit. The circular discusses in
particular the subject of referring the case to the Board of Editors. It points
out that such referring can take place only after the ex officio assessment by
the tax assessor. If an assessor fails to assess the tax within the prescribed
time limit, then the right of ex officio assessment will be lost, and no room
will be left for directing the case to the Board of Auditors.
REVENUES
ALLOCATED TO THE MINISTRY OF EDUCATION
According to a decree
adopted by the Council of Ministers, two kinds of revenue have been established
to be collected and paid to the Ministry of Education. They are as follows:
1. The factories,
companies, and entities engaged in the business of production, exchange, or distribution
of certain goods and services, are obliged to collect from the purchasers an
amount equal to 2% of the selling price. The kind of goods and services subject
to this levy is to be determined from time to time by the government. At this
stage, steel, cars, copper, aluminum, petrochemical products, and some other
goods are declared to be subject to the aforesaid sale duty. The money so
collected is to be transferred quarterly to the banking accounts declared by
the taxation authorities. Non compliance with the duties of collection and
transfer of these charges shall be subject to the same regulations and
sanctions provided in respect of ordinary taxes.
B. The second type of
revenue must be collected by the municipalities in each district. Any person willing
to receive permission for construction or renovation of building or demarcation
and separation of land, must pay this specific revenue to the relevant banking
account and submit the receipt to the local municipality, otherwise the
permissions shall not be granted to them. The amount of this second type of
revenue is to be determined by a committee composed in each
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ABSTRACT
OF PERSIAN ARTICLES
EDITORIAL
The editorial in this
issue examines the subject of tax officials' behavior in relation to taxpayers.
It has been considered an important factor that may have critical effects on
accomplishments and acquirements of the tax organization. The English editorial
is also dealing with the same subject.
SALARY TAX OF
EMBASSIES' LOCAL PERSONNEL
According to the
press, the US Embassy in
The article examines
the same subject in
A part of the salary
of embassies' local personnel is paid in hard currencies, which is usually transferred
to their accounts in foreign banks. Therefore the amount of taxes so evaded
from, is proportionately very considerable. The author considers this situation
contrary to law and principles of justice, and suggests that an appropriate
action be taken by the authorities. One way, according to the author, is to ask
the Ministry of Foreign Affairs to contact the embassies and want them to pay
the accrued salary taxes of their local employees. In case the Ministry is reluctant
to do so, could at least demand the embassies to provide a list of such
employees and amounts paid to them in national and foreign currencies.
COMMENT ON
TRANSPORTATION AGREEMENTS CONCLUDED BETWEEN
The Iranian government
has recently become very active in the sphere of such kind of international
relations. Three agreement of this kind, namely those concluded with
CAPITAL GAINS
REALIZED FROM INCREASE IN THE VALUE OF COMPANIES SHARES AND STOCKS
One important source
of capital gains is the disposal of shares or stocks of the companies, which values
have been tremendously increased during the recent years.
Taxation of this
source of income was ignored by the authorities for a long time. It is only a
few years that the government has paid attention to imposition of tax on it.
The rates and base of taxation were changed few times, and some unequal
treatments were evolved during this short period of time. That has led to a
situation where the idea of canceling this taxation has recently put forward by
some authorities. The article examines all these subjects and presents some
proposals for rectifying this situation without the need to cancel these newly
imposed taxes.
COMPARATIVE
STUDIES: CORPORATE TAX RATES
This series of
articles, the aim of which is to examine corporate income tax in different
categories of countries, is continued in this issue of the journal as well.
Countries reviewed are
HISTORY OF
TAXATION
The era of Achemenid
Empire (sixth to fourth centuries BC) is examined in the article. The cuneiform
inscriptions of Achemenid kings, as well as the writings of contemporary Greek
historiographers are reviewed. The tribute used to be the most significant kind
of taxes in that time. A list of tributes delivered to the treasury by each
state of Achemenid vast empire is presented in the article.
SELECTION AND
TRAINING OF TAX OFFICIALS IN
This is a translation
of the paper presented by the General Director of Revenue of Germany to the
twenty first General Assembly of the
A FINANCIAL
DOCUMENT FROM THE ERA OF QAJAR DYNASTY
This is a report from
the head of the Finance Department of Kermanshah Province, addressed to the
Minister of Finance. The document is dated May 28, 1917, when the First World
War was going on and many areas of the country were under occupation of
Russian, British, and Ottoman troops. The head of the Kermanshah Finance
Department reports that the Russian army demanded the purchase of all wheat and
barley which was going to be delivered to the Finance Office, as tax.
LETTERS AND
INQUIRIES OF READERS
The opinions of two
readers regarding certain verdicts of the Supreme Council of Taxation are presented
and commented on in this issue of the journal. The inquiries of our readers
related to different tax matters are also answered by tax experts.
IRANIAN
MINISTERS OF FINANCE IN TWENTIETH CENTURY
Iranian constitutional
reform took place at the first decade of the present twentieth century, and now
we are approaching the end of the century. The modern administration, including
taxation system, was also established from the same time onwards. This journal
begun to print the pictures of the ministers of finance from the date of establishment
of constitutional system. Readers can see them on second and third pages of the
cover of the present issue, and also on the second pages of issues 8 and 9 of
the journal. The names and dates of appointment of the ministers are also
printed inside the journal.
REGULATIONS
AND RULINGS
The texts of latest
laws, regulations, decrees, and opinions of the Supreme Council of Taxation are
reported in the Persian section of the Journal. A summary of the same is
provided in the English section under the heading "Tax News."
SELECTED
CASES BEFORE THE TRIBUNALS
This section is
devoted to the international arena. Cases are selected so that to be of
interest to the Iranian readership.
Book Review
Authors and publishers
are invited to submit one copy of their books and publications to the Editor
for review. In each issue we will review their works and introduce them in both
English and Persian sections of the Journal.
Contribution
of Articles
Comments and articles
are welcomed. Written assurance must be given that the article has not been
published elsewhere. The author will be notified of the acceptance, ejection, or
need for revision as soon as possible. Please submit a brief description of
your educational and professional background and, if possible, a photograph.
TAX INQUIRIES
Readers who may have
questions about the Iranian tax laws and procedures are encouraged to submit
their inquiries for review. The inquiries will be reviewed by high-level tax
specialists and, space permitting; the answers will be published (together with
a summary of questions) in the journal. Otherwise, the answers will be sent
directly to the inquirers.
The End
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