The Federal Inland Revenue Service (FIRS) has hit its first obstacle in its decision to freeze taxpayers’ bank accounts for tax liabilities and its appointment of banks as tax-collecting agents for certain listed customers.
This comes on the heels of a recent Federal High Court (FHC) judgment in the case between Ama Etuwawe (plaintiff) and the Federal Inland Revenue Service (FIRS) and Guaranty Trust Bank plc (jointly referred to as the defendants).
The Federal High Court said it is unlawful for the FIRS to appoint the bank as its collecting agent to recover alleged Companies Income Tax (CIT) liability from the plaintiff.
The court further held that the plaintiff is not liable to pay CIT, being an individual who carries on legal practice in its name. It issued an order of perpetual injunction restraining the FIRS, its agents, privies, employees, etc from demanding the payment of CIT from the plaintiff.
The FHC also awarded monetary sum as damages against the defendants for illegal and unlawful freezing of the plaintiff’s bank account.
While the FIRS must be commended for its various initiatives to expand the tax net and improve voluntary compliance level, such actions must be within the confines of the law, analysts said.
The Federal High Court judgment further demonstrates that a risk of exposure in the form of an award of damages may crystalise on the banks where the freeze order is determined to have been wrongly issued and executed, especially where the bank failed to obtain adequate comfort from the FIRS that the liability is indeed final and conclusive before executing the lien.
In 2018, the FIRS commenced the issuance of Letters of Substitution to banks in Nigeria, pursuant to Section 49 of the Companies Income Tax Act, Cap. C21, Laws of the Federation of Nigeria, 2004 (as amended) and Section 31 of the Federal Inland Revenue Service Establishment Act, 2007.
By the letter, the FIRS alleged that certain listed customers (affected companies) maintaining bank accounts with such banks failed to fulfill their tax obligations, and therefore appointed the banks as tax-collecting agents for the deduction and remittance of the alleged tax liabilities.
The FIRS also requested the banks to “freeze” the accounts of affected companies and demanded that the banks should not execute any mandate on those accounts without its prior approval.
“While the power of appointment is a very important tool for the FIRS in recovering unpaid taxes, this power must be exercised with caution and in accordance with the law to avoid negative impact on businesses and ease of paying taxes,” Taiwo Oyedele, tax lead at PwC Nigeria, had said following the FIRS order for banks to freeze accounts of taxpayers.
“Even where the tax authority has powers to deem tax payable under certain conditions as specified in the law, this power is not to be exercised arbitrarily,” he said.
Wole Obayomi, partner and head, tax, regulatory and people services, KPMG Nigeria, said the Federal High Court judgment declaring the FIRS’ action as unlawful, null and void is not surprising “given the plethora of issues associated with the FIRS’ directive, some of which we had highlighted in February 2019”.
“For instance, the judgment confirms that the FIRS’ appointment of banks as agent for collection/remittance of taxes when the taxes are not proven to be due is premature and exposes the banks to risk if such taxes are not actually due, or are lesser than the sum actually paid to the FIRS,” Obayomi said.
“The FIRS must also demonstrate that the alleged liability is final and conclusive, and that the taxpayer has failed to pay the liability within the statutory time limit before it can validly appoint an agent of collection for that purpose. In any case, such enforcement must be limited to the amount of the valid liability and not the total funds in the affected taxpayer’s bank account,” he said.
The expert believes that banks should protect their fiduciary obligations to their customers, failing which the customers have a right in law to seek legal redress whenever they perceive a breach of their statutory rights.
He noted that taxpayers must also ensure that they promptly fulfil their civic obligations by paying the right amount of taxes and complying with all statutory filing requirements as and when due. This will, expectantly, engender trust in the Nigerian tax system.
Iheanyi Nwachukwu
