Questions on the legality of tax audits and tax collection by RMAFC     

Introduction

The Nigerian government has recently adopted aggressive tax collection schemes to boost non-oil revenue collection. Currently, there are multiple government agencies that monitor tax compliance in Nigeria and one of such agencies is the Revenue Mobilization Allocation and Fiscal Commission (RMAFC). Over the last (5) five years, the RMFAC has conducted tax audits on the records of certain taxpayers and taxpayers have questioned its statutory powers to conduct such tax audits.

This article discusses the powers of the RMAFC vis-à-vis those of the FIRS and the implications of the tax administration functions that the RMAFC has performed in recent times.

Background

The significant loss of government revenue under the multi-accounting system led to the introduction of the Treasury Single Account (TSA) system in 2012.The TSA is a public accounting system under which all government revenues, receipts are collected into and payments made through one single account or a set of linked accounts maintained by the Central Bank of Nigeria. The introduction of the TSA virtually signified the end of autonomy of Ministries, Departments and Agencies as regards verification/monitoring of revenue collecAtion.

Nigerian commercial banks act as agents of the Government for the collection of monies due to MDAs. Following the introduction of the TSA system, RMAFC wasmandated by the Federation Account Allocation Committee to conductthe verification/monitoring exercise on the records of thecommercialbanksto ensure thatall the monies collectedfrom tax payers on behalf of the Federal Inland Revenue Service (FIRS)and Nigerian Customs Service were duly remitted into the Federation Account.

Theinitial scope of RMAFC’s monitoring/verification exercise, as communicated in letters to the banks, was limited to revenue collection and remittance. However, in 2014, the scope was expanded to cover federal taxes charged/deducted and remitted by the banks as taxpayers, a task ordinarily carried on by the FIRS. This action was endorsed by the FIRS in letters issued to several commercial banks in Nigeria. However, the following concerns were raised by taxpayers:

 

• Legality of the RMAFC to conduct tax audits on taxpayers.
• The limited focus of the tax audits on the banking industry
• Reopening of closed audit periods and concurrent audit of open periods by both the FIRS and the RMAFC

 

Review of relevant legislation and analysis of the powers of the RMAFC and the FIRS

Firstly, in determining the appropriate agency empowered by legislation to conduct tax audits on tax payers, we have reviewed the provision of the Acts that set up the RMAFC and the FIRS.

Section 6(1) of the RMAFC Act, 2004provides that the Commission shall have powers to carry on the following functions-

 

1. monitor the accruals to and disbursement of revenue from the Federation Account;
2. review, from time to time, the revenue allocation formulae and principles in operation to ensure conformity with changing realities;
3. advise the Federal, State and Local Governments on fiscal efficiency and methods by which their revenue is to be increased;
4. determine the remuneration appropriate to the holders of the offices as specified in Parts A and B of the First Schedule to the Act;
5. make recommendations and submit its finding by a report thereto to the government of the Federation or of the State, as the case may be, regarding the formula for the distribution of the Federation Accounts and the Local Government Accounts; and
6. discharge such other functions as may be conferred on the Commission by the Constitution of the Federal Republic of Nigeria, this Act, or any other Act of the National Assembly.

 

There is nothing in the above provisions that empower the RMAFC to audit the books of taxpayers as taxpayers do not remit taxes directly to the Federation Account. It is our view that the provisions of the RMAFC Act only empowers the Commission to monitor the activities of the FIRS, NCS, Central Bank of Nigeria, Office of the Accountant General of the Federation and any other agency, to ensure that monies collected by these agencies are paid into the Federation Account.

By Section 8(a)(b)(c)(e)&(s) of the FIRS (Establishment) Act, 2007, the FIRS is empowered to:

1. assess persons including companies, enterprises chargeable with tax;
2. assess, collect, account and enforce payment of taxes as may be due to the Government or any of its agencies; ..

• collect, recover and pay to the designated account any tax under any provisions of this Act or any other enactment or law;

1. in collaboration with the relevant law enforcement agencies, carry out the examination and investigation with the view to enforcing compliance with the provisions of this Act;
2. carry out oversight functions over all taxes and levies accruable to the Government of the federation and as it may be required, query, subpoena, sanction and reward any activities pertaining to the assessment, collection of and accounting for revenues accruable to the Federation.

 

The above provision clearly gives the FIRS sole responsibility for assessing, collecting and enforcing payment of taxes. In the event that the FIRS wishes to appoint another agency to collect taxes on its behalf, Section 25 of the FIRS (Establishment) Act requires the FIRS to obtain approval from the Honourable Minister of Finance (HMF) for such appointment.

Although one may argue that the provisions of Section (6)(f) of the RMAFC Act are broad enough to imply that the Commission mayalso assess and collect tax from tax payers, such argument is flawed by the express provisions of the FIRS (Establishment) Act which give the FIRS powers to execute this function. Furthermore, according to the ejusdem generis where particular words are followed by general words, the general words are to be interpreted restrictively to have a meaning that is of the samekind/genus as the preceding ones already particularized. Consequently, the general proviso of Section 6(1)(f) of the RMFAC Act can only be interpreted in the context of the preceding provisions which have nothing to do with tax administration or tax compliance monitoring/enforcement.

Secondly, a review of the Taxes and Levies (Approved List for Collection) Act provides some clarity on the appropriate agencies to collect tax in Nigeria.Section 2 of the Act provides that no person, other than the appropriate tax authority(emphasis ours), shall assess or collect on behalf of the government, any tax listed in the schedule to the Act. The Act further defines the tax authority to mean:

• the Federal Board of Inland Revenue, the State Board for Internal Revenue or the Local Government Revenue committee
• a Ministry, Government Department or any other body charged with responsibility for assessing and collecting the particular tax

Given that the RMAFC is not a tax authority, as defined in the provisions of the Taxes and Levies (Approved List for Collection) Act, then the Commission by conducting tax audits on taxpayers and collecting taxes due, hasgone beyond its remit and acted ultra vires.

Thirdly, a review of the case ofLagos State Waterways Authority & Others vs The Incorporated Trustees of Association of Tourist Boat Operators & Water Transportation in Nigeria & Others (Appeal No. CA/L/886/2014), further confirms that it cannot be the intention of the Government to establish two (2) separate agencies to carry out the same functions.

Prior to the ruling inthe above referenced case, there was lack of clarity on the rightful regulator of waterways within Lagos State. Whilst this ambiguity lingered, boats and dredgers on the waterways were subjected to multiple taxes/levies and licensing requirements by the Lagos State Waterways Authority (LASWA), National Inland Waterways Authority and Nigeria Maritime and Safety Agency. The Court of Appeal resolved the case in favour of LASWA and ruled that it was the only appropriate body responsible for regulating waterways in Lagos.

This judgment further reinforces the fact that both the FIRS and the RMAFC cannot simultaneously collect taxes from taxpayers through tax audits. Given that the RMAFC Act does not empower the Commission to assess and collect taxes, then the RMFAC is has no legal basis for collecting taxes from taxpayers.

Lastly, one of the guiding principles of the Nigerian tax system as documented in the National Tax Policy is that tax administration should be efficient and cost-effective in line with international best practices. Surely, the cost incurred by the RMAFC and FIRS in auditing the same set of companies twice defeats this principle. A lesson can be learned from other jurisdictions with similar structures like Nigeria, such as India, South Africa and the United Kingdom that have ensured that a single identifiable tax authority is duly empowered to assess and collect tax from taxpayers, while other fiscal commissions are set up as supervisory regulators to monitor the activities of the tax administrators.

Impact of RMAFC’s audit on tax payers                    

Not only has the RMAFC usurped what is rightfully the FIRS’s distinct responsibility, the actions of the RMAFC has placed undue tax burden on Nigerian banks.

One of such challenges is the manner in which RMAFC audits are conducted and resolved. The tax audit approach adopted by the RMAFC conflicts with the tax dispute resolution process provided for in the tax laws. In some cases, the RMAFC had reportedly arrogated to itself the superior authority for the assessment/collection of taxes and threatened to derecognize the payment of tax audit liabilities assessed by the FIRS. Furthermore, in instances where the assessed tax liabilities had been in dispute, the RMAFC had relied on threats and intimidation, including threats of arrest by the Economic and Financial Crimes Commission, to compel taxpayers to settle disputed tax liabilities.

Another issue is that the RMAFC engaged the services of third parties to conduct these tax audits and the remuneration of the third parties is based on a percentage of the tax liabilities established. Unfortunately, this leads to the third party consultants exaggerating the tax liabilities which taxpayers, sometimes, are bullied into paying.

In addition to the above, the audits conducted by the RMAFC ran simultaneously with audits conducted by the FIRS, with both agencies issuing different audit reports and demanding payment of tax liabilities into separate bank accounts, thus leaving taxpayers overburdened and at the mercy of both agencies.

The aforementioned unconventional methods adopted by the RMAFC in carrying the tax administration may, in the short run, generate additional revenues to the government. However, these methods are contrary to the canons of taxation, in particular the canon of equity and fairness in tax administration and the canon of low tax compliance costs. In fact, one of the policy guidelines as stated in the National Tax Policy approved by the Federal Executive Council is that taxes similar to those being collected by a level of Government should not be introduced by the same or another level of Government.

It is clear that the recent approach to tax administration in Nigeria is aggressive and enforcement of tax by multiple agencies creates a hostile environment for doing business in the country. It also counters the effort of the Government to promote social, political and economic development through the country’s tax system.

Conclusion

For many years, Nigeria has fared poorly in the global rankings on both ease of doing business and economic competitiveness. This is due to the Nigerian Government’s inability to create an enabling environment in which businesses can thrive, and the unnecessary complexity of the Nigerian tax system.

Based on the recent approach to revenue collection, it is clear that the intention of the Government is to clamp down on banks and other non-compliant tax payers. However, multiple taxation is harmful to businesses as it promotes uncertainty and unlocks the channel for revenue leakages. Hence, it will be pragmatic to ensure that revenue collection strategies employed by the Government are in line with the provisions of the National Tax policy and existing Laws of the Federation.

There should be certainty and clarity on how much tax is payable by the tax payer, the particular tax authority that such taxes are payable to, and the particular agency required to confirm appropriateness of taxes remitted. A win-win between tax authorities and tax payers can be achieved by following the principles enunciated in the National Tax Policy with respect to equity and transparency.

Research has shown that tax payers who expect and receive fair and efficient treatment by the tax authorities are more willing to comply with tax regulations. Thus, the continued conduct of concurrent tax audits on the records of tax payers by two federal government agencies – RMAFC and FIRS- defeats the aim of the National Tax Policy and the practice may undermine the Federal Government’s Ease of Doing Business reform programme. The government agencies must respect boundaries and stick to their respective statutory functions.

 

Opeyemi Osunsan and Chizoba Madu

Osunsan and Madu are of KPMG Advisory Services