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When does penalty and interest apply to unpaid tax – A look at judicial decisions

When does penalty and interest apply to unpaid tax – A look at judicial decisions

By: Agbada .S. Agbada  

In Weatherford v. FIRS, the Tax Appeal Tribunal (“TAT”) held that interest and penalty only apply where a taxpayer fails to object or appeal an assessment. In this case, the TAT found that the taxpayer objected and appealed the additional assessments within time and that interest and penalty were inapplicable to the unpaid tax.

The above reasoning was reiterated by the TAT in UBA v. AIRS. The TAT held in this case that by the provisions of section 68 of PITA, inference can be drawn that:

. . . the Respondent has the legal backing to impose penalty and interest on the Appellant, but only when the assessment is final and conclusive. By the facts of the appeal before this Tribunal, it’s clear that the assessment made by the Respondent is disputed by the Appellant, hence the duty to impose penalty and interest had not arisen but is in abeyance until the dispute is determined.

If an appeal operates to extinguish liability to penalty and interest no taxpayer would pay taxes when due

The above decisions however only represent one side of the debate, as the other side has equally received judicial affirmation. In CMA CGM Delmasa v. FIRS, the TAT rejected the taxpayer’s argument that interest and penalty only apply to unpaid tax where an assessment has become final and conclusive. The TAT held that:

An objection or appeal only suspends collection until the grounds of the objection or the appeal are resolved one way or the other. The interest and penalty will continue to accrue at the background from the time the tax ought to have been paid but will only crystallize if the objection or appeal were determined in favour of a tax authority.

The TAT’s rationale for this interpretation is that:

If an objection or an appeal operates to extinguish liability to penalty and interest for late payment or non-payment of tax, no taxpayer would be compelled to remit taxes as and when due. They would simply wait for the tax authority to issue notices of assessment, timeously object or file an appeal and put the tax fund to other commercial uses knowing that penalty and interest cannot accrue. And where the appeal is eventually determined in favour of the Revenue, the tax fund would have generated enough money from which the tax liability could be paid. That, we say unequivocally is not the intention of the lawmakers.

For this reasoning, the TAT drew insight from the Court of Appeal decision in FBIR v. Integrated Data Services Limited, where the Court held that:

. . . the purpose of S. 15(1) and S. 31 of VAT Act No. 102 of 1993 as amended is to deter companies or taxable persons from engaging in fraudulent practice, e.g. collecting VAT and keeping or trading with it for some time before remitting same to the Federal Government.

Read also: When does penalty and interest apply to unpaid tax?

However, the question before the Court of Appeal in the Integrated Data Services Limited case was whether the tax authority had powers to impose penalties and interest and not the time of accrual. The question of when penalty and interest accrue on unpaid tax was therefore not decided by the Court of Appeal.

Besides, the Value Added Tax Act, No. 2 of 1993 (“VAT Act”) which was the applicable law to the Integrated Data Services Limited case does not suffer any ambiguity as the FIRS Act, CITA and PITA. Section 15 of the VAT Act (now section 18) provides for penalty and interest for failure to remit VAT and empowers the tax authority to assess the taxpayer for the unremitted tax plus penalty and interest at the same time.

There are also no other provisions of the VAT Act which tie liability to pay penalty and interest to a final and conclusive assessment or failure to comply with a demand for payment. This clearly means that penalty and interest accrue from the date of default to remit VAT. The VAT Act therefore does not lend itself to divergent interpretations of the time penalty and interest accrue on unremitted VAT. To that extent, the Integrated Data Services Limited case may not be an authoritative guidepost for the interpretation of the relevant provisions of the FIRS Act, CITA and PITA.

Nonetheless, the logic of the Court of Appeal’s reasoning in the Integrated Data Services Limited case can arguably be applied to the interpretation of the FIRS Act, CITA and PITA. The purpose of imposing penalties and interest on defaulting taxpayers under the FIRS Act, CITA and PITA is to induce compliance with their tax obligations. This purpose will be defeated if penalty and interest will only apply where an assessment has become final and conclusive. As rightly noted by the TAT in the Delmasa case, “if an objection or an appeal operates to extinguish liability to penalty and interest for late payment or non-payment of tax, no taxpayer would be compelled to remit taxes as and when due”. Such an outcome will drain the penalty and interest provisions of their deterrent element, and this may not align with the intent of the legislature.

It is important to note that section 53 which provides for penalty and interest to accrue from the date of default to file correct tax returns was introduced by the Finance Act, 2020. While this appears to be an attempt to remedy the ambiguity on when penalty and interest accrue, the amendment has not achieved this purpose as section 85 of CITA still makes the liability to pay penalty and interest contingent on a final and conclusive assessment. Section 53 may however provide an additional impetus for the argument that penalty and interest accrue from the date of default.

Read also: Experts task FG on tax reforms to rejig Nigeria’s economy

Another point to note is that the relevant provisions in the FIRS Act, CITA and PITA suggest that penalty and interest for failure to remit withholding tax or the personal income tax of an employee under the PAYE scheme accrue from the date of default as the obligation to withhold and remit tax is not subject to an assessment. While under section 40 of the FIRS Act, the liability to pay penalty and interest depends on the conviction of the taxpayer, there is no requirement for conviction under section 82 of CITA and sections 74 and 82 of PITA for penalty and interest to accrue.

Section 68 of the FIRS Act provides that in the event of any inconsistency between the provisions of the FIRS Act and the provisions of any other enactments including CITA and PITA, the provisions of the FIRS Act shall prevail.

In view of section 68 of the FIRS Act, it is arguable that the liability to pay penalty and interest under CITA and PITA are equally dependent on the conviction of a taxpayer for default to deduct or remit tax. The requirement for conviction implies that where the default is remedied without trial and conviction, penalty and interest may not apply.

Conclusion

Tax laws are required to be strictly interpreted. A strict and holistic interpretation of the relevant provisions of the FIRS Act, CITA and PITA, in the author’s view, will justify the conclusion that penalty and interest are contingent on a final and conclusive assessment, especially for income tax. While the relevant provisions on withholding tax and the PAYE scheme suggest that penalty and interest for default to deduct and remit within the prescribed period apply from the date of default, the question still remains whether penalty and interest will apply where the default is remedied without conviction.

The ambiguity in the relevant provisions of the FIRS Act, CITA and PITA and the conflicting decisions of the TAT regarding the point at which penalty and interest accrue leave taxpayers in a state of uncertainty. Until the issue is finally resolved by legislative intervention, arguments on the issue may continue to result in conflicting outcomes.