The effectiveness of tax laws lies primarily in the coercive powers of tax authorities to enforce compliance and penalties for default, and not an altruistic or patriotic disposition of taxpayers to contribute to the public revenue. To induce compliance with tax obligations, the law imposes pecuniary sanctions in the form of penalties and interest on taxpayers for default. While there is little debate about the justification for these sanctions, the point at which they apply to unpaid tax has been subject to divergent interpretations. This article explores the question of when penalty and interest apply to unpaid tax.
Statutory Provisions on Penalty and Interest
Various provisions of the different tax laws provide for penalties and interest for non-payment of tax. In this article, we will focus attention on the relevant provisions of the Federal Inland Revenue Service (Establishment) Act, 2007 (“FIRS Act”), the Companies Income Tax Act (“CITA”) and the Personal Income Tax Act (“PITA”).
The FIRS Act
Section 27(2) of the FIRS Act provides that:
Where a tax is not paid, when it falls due under any enactment, by any person from whom it is due, whether or not the payment of that tax has been secured by a bond or otherwise, it shall be paid on demand made by the Service either on that person personally or by delivering the demand in writing to his place of abode or business, and if it is not paid on demand, the person in default shall, in addition to the 100 per cent of tax due and payable, also be liable to a penalty equal to the amount of tax due and payable.
Section 40 of the FIRS Act further provides that:
Any person who is obliged to deduct any tax under this Act or the laws listed in the First Schedule to this Act, but fails to deduct, or having deducted, fails to pay to the Service within 30 days from the date the amount was deducted or the time the duty to deduct arose, commits an offence and shall, upon conviction, be liable to pay the tax withheld or not remitted in addition to a penalty of 10 per cent of the tax withheld or not remitted per annum and interest at the prevailing Central Bank of Nigeria minimum re-discount rate and imprisonment for period of not more than three years.
Section 27(2) of the FIRS Act suggests that liability to pay a penalty is triggered by default to comply with a demand by the FIRS for payment of an outstanding tax and not by default to pay the tax in the first instance. The implication is that a penalty will not apply where the taxpayer complies with a demand for payment.
Section 40, on the other hand, suggests that in the case of withholding tax, interest and penalty accrue from the date of default. The taxpayer will, therefore, be liable to pay the tax that ought to have been deducted and remitted plus the interest and penalty upon conviction. A taxpayer may however escape this outcome by promptly paying the tax upon demand.
The common thread in the provisions is the lack of clarity on the point at which penalty and interest apply to unpaid tax.
Several provisions of the CITA also deal with penalties and interest for non-payment of tax. For instance, section 53 of CITA, which imposes an obligation on taxpayers to self-assess and remit the due tax to the FIRS, provides that where a taxpayer deliberately fails to declare the true and correct amount of the profit or tax payable, the outstanding tax shall become immediately recoverable with penalty and interest. The penalty and interest are payable in accordance with the provisions of the CITA or any other relevant law and accrue from the date the incorrect returns were filed. In other words, penalty and interest accrue from the date of default and not on the date a demand is made for the outstanding tax.
Similarly, section 82 of CITA provides for a penalty of 10% when a person who is obligated to deduct and remit tax fails in his obligation. The accrual of the penalty under this provision does not also seem to be contingent on demand or assessment but arguably applies from the date of default.
However, section 85(1) of CITA provides that:
. . . if any tax is not paid within the periods prescribed in section 77 of this Act—
(a) a sum equal to ten per cent per annum of the amount of the tax payable shall be added thereto, and the provisions of this Act relating to the collection and recovery of tax shall apply to the collection and recovery of such sum;
(b) the tax due shall carry interest at the bank lending rate from the date when the tax becomes payable until it is paid, and the provisions of this Act relating to the collection and recovery of tax shall apply to the collection and recovery of the interest.
The time for payment of tax under section 77(1) of CITA is thirty days from the date of service of a notice of assessment where there is no objection or appeal against the assessment. This means that penalty and interest under section 85 of CITA will only accrue upon failure to pay an assessed tax within thirty days of the assessment where the taxpayer raises no objection or file an appeal against the assessment. In other words, penalty and interest accrue when an assessment has become final and conclusive. This is akin to section 27(2) of the FIRS Act and suggests that where an assessed tax is paid within the prescribed period, penalty and interest will not be applicable, notwithstanding any prior default.
The above provisions of CITA create a bit of confusion on when penalty and interest accrue on unpaid tax. While sections 53 and 82 pin the obligation to pay penalty and interest to the date of default, section 85 makes the application of penalty and interest contingent on a final and conclusive assessment. This ambiguity renders the time of application of penalty and interest for unpaid tax under CITA to varying interpretations.
PITA also provides for penalty and interest in similar terms as CITA. Section 74(1) of PITA imposes a 10% penalty plus interest at the prevailing monetary policy rate of the Central Bank of Nigeria where a person who is obligated to deduct tax (under sections 69, 70, 71, 72 or 73 of PITA) fails in its obligations to deduct or remit the deducted tax within thirty days from the date the amount was deducted or the duty to deduct arose. There is no requirement for service of notice of assessment or demand for the penalty to accrue.
Further, sections 76(1) and 77 of PITA respectively provide for penalty and interest for failure to pay personal income tax. While section 76(1) of PITA imposes a ten percent penalty where tax charged by an assessment is not paid within the prescribed period under section 68 of PITA, section 77 of PITA provides that “the tax due from a taxable person shall carry interest on an annual basis at bank base lending rate from the date when the tax becomes payable until it is paid.” Thus, payment of penalty depends on the failure to pay tax within the time prescribed by section 68 of PITA, while interest applies from the date the tax becomes due. It is however unclear whether the relevant due date for the application of interest under section 77 of PITA is the date the initial obligation arose or the period of payment specified in section 68 of PITA.
In addition, section 82 of PITA imposes a ten percent penalty and interest at the prevailing commercial rate for failure to deduct or remit an employee’s tax under the Pay As You Earn (“PAYE”) scheme. The tax plus penalty and interest are recoverable by the tax authority as a debt and there is no requirement for demand or assessment for the penalty and interest to accrue under section 82 of PITA.
By section 68(1) of PITA, any tax charged by an assessment is required to be paid within two months from the date of service of the notice of assessment in the absence of objection or appeal against the assessment. The combined reading of sections 68 and 76(1) of PITA again leads to the conclusion that penalty is not applicable for the initial default to pay tax, but only to the failure to pay within two months after the service of an assessment notice where there is no objection or appeal.
The common thread in the above provisions under the FIRS Act, CITA and PITA is the lack of clarity on the point at which penalty and interest apply to unpaid tax. A combined reading of the above provisions leads to the following mutually exclusive but plausible conclusions:
a. Penalty and interest only apply upon failure to pay after service of a final and conclusive assessment.
b. Penalty and interest apply from the date the payment obligation becomes due.
While taxpayers often insist on the first interpretation, tax authorities, on the other hand, seem to understandably favour the second interpretation. These divergent positions have been ventilated in a number of cases, but the decisions on the point reflect the lack of clarity in the statutory provisions.
Agbada S. Agbada is a Senior Associate at the firm