The increased volatility and steady dip in crude oil prices, which is the mainstay of the Nigerian economy, and the resultant adverse impact on government revenue has increased the focus on taxation as an alternative source to raising the finance required to meet government expenditure.
Yet, despite the government’s effort to ramp up internally generated revenue, tax collection has continued to fall below budgeted revenue and Nigeria’s tax to gross domestic product (GDP) ratio still hovers around 6 percent – one of the lowest in the world and far below the African average of 17.2 percent. To reverse this trend, the Federal Government has developed revenue generating initiatives to fund the national budget.
One of such initiatives that has been adopted by the Federal Inland Revenue Service (FIRS), the primary body responsible for tax administration and collection of federal taxes, is the involvement of commercial banks in tax administration.
In 2018 and 2019, the FIRS issued letters to Nigerian banks, appointing them as agents of collection of taxes due from alleged tax defaulters. The FIRS also directed the banks to set aside the tax amount due from the bank accounts of the alleged defaulting taxpayers and remit same to the accounts of the FIRS in full or partial settlement of the tax debts. Despite the controversies that this initiative generated, some state governments, through their respective State Internal Revenue Services (SIRS), adopted similar approach to enforce tax collection and have amended state laws to legitimize this initiative in their respective states.
The involvement of banks in tax recovery cast doubts on the credibility of the Nigerian tax system and negatively impacted the Federal Government’s drive to improve the ease of doing business in Nigeria. As such, the FIRS has recently modified this initiative to align with the provisions of the tax laws. However, the SIRS have continued to make incessant demands on Nigerian banks for information and recovery of taxes. For example, one of the SIRS appointed banks, operating in its state, as agents for collection of capital gains tax (CGT) and requested the banks to deduct and remit capital gains tax on capital payments made through them.
This article examines the role of banks in tax administration, as defined by relevant laws. The article also emphasizes the need to define limits to banks’ involvement in the tax affairs of their customers and highlights the downside of this trend, while offering workable recommendations to improve tax administration in Nigeria.
The role of commercial banks in tax administration in Nigeria as provided by the Nigerian tax laws a. Banks as information providers
According to the provisions of Section 61 of the Companies Income Tax
Act, Cap C21, LFN 2004 (as amended in 2007) (CITA). , Section 49 of the Personal Income Tax Act, CAP P8, LFN 2004 (as amended in 2011) (PITA) and Section 28 of the FIRS Establishment Act, banks are required to render returns on their customers to the tax authorities on a periodic basis. The information required to be submitted is limited to the names and addresses of their customers. However, the tax laws empower the executive chairman of the relevant tax authority to request for additional disclosures on banks customers for the purpose of obtaining information relative to taxation.
Similarly, banks are also required to submit, to the FIRS, certain information on their customers who are resident in reportable jurisdictions. This requirement is based on the provisions of the Common Reporting Standard (CRS) Regulations enacted as a result of Nigeria becoming a signatory to the Multilateral Competent Authority Agreement for the automatic exchange of information. The information to be reported under the CRS Regulations is also limited to names and addresses of affected customers resident in reportable jurisdictions, tax identification number (TIN) in the jurisdiction of residence, amount of interest earned in a tax year and other similar information.
b. agents Banks as tax debt recovery
Banks may be required by tax authorities to act as tax debt recovery agents of taxable persons. Specifically, Section 31 of the FIRS (Establishment) Act (FIRSEA), Section 49 of the CITA and Section 50 of the PITA empower tax authorities to appoint any person to be the agent of a taxable person for the purpose of recovering tax debts or tax payable from such taxable person. The agent appointed may be required to pay any tax payable by the taxable person from any money held by the agent on behalf of the taxable person. This is referred to as the “power of substitution” and the exercise of this power is subject to the objection and appeal process established under the various tax laws.
c. Banks as gatekeepers for tax registration
Banks are now required by law to obtain the tax identification numbers of customers using their bank accounts for the purpose of business activities; ensuring that businesses are registered with the tax authorities before operating or opening bank accounts. This requirement is codified in the Finance Act, 2019.
d. Banks as agents for revenue (including tax) collection
Commercial banks also act as agents of collection for tax revenue and levies, such as income tax, value added tax and other statutory remittances, paid by third parties to Federal and State Government agencies/parastatals. This role was delegated by the Central Bank of Nigeria to commercial banks in 1999.
As collection agents, they are required to remit the funds collected to the appropriate government agency account within 24 hours of collection
Key issues arising from the increasing involvement of banks in tax administration
The provisions of the tax laws on the role of banks in tax administration are unambiguous. Based on the tax laws, banks do not, and should not be involved in the process of tax dispute resolution between their customers and the tax authorities. Also, information required to be submitted by banks to tax authorities should be limited to those specified in the tax laws or requested by the tax authorities in connection with taxation of their customers.
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However, in recent times, the heavy reliance on banks by revenue authorities to drive tax collection may have caused the banks to breach their fiduciary duty to their customers and incur significant litigation costs, as well as damages to their reputation – the cost of which may be unquantifiable. For example, in the case between GTB/ FIRS and Ama Etuwawe, the Federal High Court (FHC) awarded damages against Guaranty Trust Bank for honouring the FIRS’ demand to freeze the customer’s account. The FHC ruled that 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 when the taxes are not proven to be due. The court affirmed that such a move is premature and exposes the banks to risks, if such taxes are not actually due or are less than the sum actually paid to the FIRS. The ruling in this case clarifies the limit of banks’ involvement in tax assessments and provides guidance to tax authorities in exercising their power of substitution.
Furthermore, the increasing reliance on banks to obtain information on taxpayers creates a disproportionate administrative burden on the banks. For example, a bank operating in all the thirty-six (36) states in Nigeria and the Federal Capital Territory will have to respond to the various information requests of the state tax authorities and the FIRS as well as manage its own tax obligations to the local, state and federal governments. There is also added responsibility for the banks to ensure that customer information provided to the tax authorities is transmitted securely to avoid breaching data privacy and confidentiality rules.
In addition, the responsibility placed on banks as agents of collection for tax revenues has also placed a disproportionate burden of tax compliance on commercial banks. As collection agents, banks are subject to multi-agency audits and verification exercises, examples of such include the stamp duties investigation exercise by the National Assembly and the verification exercise on collections carried out by the Revenue Mobilization Allocation and Fiscal Commission. As a result of these multiple audits, banks invest significant resources in managing the compliance demands of being a taxpayer and a collecting agent.
The effect of the issues discussed above is creation of hostile business environment for banks in Nigeria and there is no doubt that fulfilling this administrative obligation is a major source of distraction from core banking activities. Failure of the government to address the issues noted above may undermine the drive towards improving the ease of doing business in Nigeria, diminish the credibility of the Nigerian tax system, and ultimately erode investors’ confidence in the Nigerian economy.
Involvement of Banks in tax administration – Lessons from other jurisdictions
We have examined the practices of tax authorities in other jurisdictions who, to some degree, rely on banks in collect information and back duty taxes from taxpayers:
Her Majesty Revenue and Customs (HMRC) is the sole agency charged with the function of administering and collecting taxes in the United Kingdom. To verify the accuracy of a taxpayer’s tax returns/remittances, the UK laws give the HMRC powers to obtain information from third parties, including banks and other financial institutions. To obtain such information, the law requires the HMRC to issue a ‘third party notice’ to the bank or financial institution, as data security and other rules may prevent them voluntarily supplying such information. However, HMRC cannot issue such third-party notice without first obtaining the approval of the taxpayer or the tribunal.
The HMRC also has the power to recover taxes owed by a taxpayer, directly from their bank accounts, subject to fulfilling certain conditions which include repeated refusal by the taxpayer to pay the established liability; face-to-face visit from the HMRC to discuss the debt; among others.
The South African Revenue Service (SARS) has a formal process for recovering taxpayer debts through banks. The legislation guiding the SARS requires that a final demand for payment is to be delivered to the taxpayer at least 10 business days before a request is made to the bank for collection of the tax due. The tax laws also give the taxpayer some time to approach SARS prior to the issuance of a recovery to negotiate repayment options; in which case, an agency appointment may no longer be required.
This simple process achieves the same revenue objective without creating unintended consequences.
United States of America
The Internal Revenue Service (IRS) has a formal process for the involvement of third parties, including banks in the recovery of tax debts by a taxpayer. The IRS is allowed, under the law, to issue a tax levy on the property of a tax defaulter that is held by a third party to satisfy or use as a security for a tax debt. However, a tax levy can only be issued by the IRS when a tax assessment is raised and a notice and demand for payment has been issued to the taxpayer; the taxpayer refuses to pay the tax assessed; and the IRS has sent a ‘Final Notice of Intent to Levy’ to the taxpayer. The law also requires that a ‘Notice of Right to A Hearing’ is sent to the taxpayer at least 30 days before the tax levy is raised or sent to a third party.
The common thread that runs through the countries examined above is the exhaustive engagement with taxpayers on their tax position before a third party is involved in the collection of information or recovery of tax debts. Also, it is evident from the above that the approach adopted by the tax authorities in Nigeria falls short of global best practices and therefore remains an area that should be addressed in order to improve collaboration between tax authorities and other relevant stakeholders
The tax landscape is changing rapidly due to the increased drive to ramp up government revenue and tax authorities must rise to this challenge. While the power of substitution is a particularly useful tool for the tax authorities in recovering unpaid taxes, this power must be exercised with caution and in accordance with the provisions of the law to avoid a backlash on banks. It is, therefore, imperative that the FIRS and other state tax agencies review existing practices by taking a cue from other jurisdictions with similar but well-developed tax systems, in order to achieve a coherent balance between the right of the tax authorities to obtain information/recover debts and the protection of taxpayers and commercial banks against unwarranted intrusion.
There may also be a need to amend existing laws to define limits to information that may be provided by banks to ensure alignment between tax laws and data privacy law; as well as provide a clear structure for the application of the power of substitution – for instance, when the power of substitution can be evoked, the process of objection to the discharge of such powers, the right of taxpayers and the banks when such powers are evoked; among others.
Furthermore, as part of the ongoing digitization of tax administration by various tax authorities in Nigeria, the government should put in place a technology-based platform that allows seamless transmission and secure exchange of taxpayers’ information amongst local, state and federal tax authorities. This will reduce the incidence of multiple requests for similar information by various tax authorities from banks and ultimately improve the relationship between the tax authorities, taxpayers and commercial banks in Nigeria.