There is hardly any government that can thrive without tax revenue, as tax provides the “cheapest” source of funding for public projects. Thus, governments, through their legislature, often enact tax laws to provide frameworks for effectively assessing taxpayers to tax. These include establishment of tax authorities for the administration and enforcement of tax laws, designation of certain taxpayers as collection agents of the government, establishment of tax dispute resolution mechanisms, etc. Tax authorities, however, have varying degrees of powers in different jurisdictions.
In Nigeria, tax legislation empowers tax authorities to assess taxpayers on best of judgment basis given certain circumstances; appoint taxpayers as agents for collection of taxes; distrain properties of taxpayers, and so on. The overriding objective of these provisions is to discourage tax evasion, while respecting taxpayers’ rights to object against arbitrary imposition of tax liabilities. As we are in an era of increasing clamor for tax reforms and ambitious tax revenue targets, it is little wonder that tax authorities often seek to pull every weight of the law, albeit inappropriately in some cases, to enforce tax compliance and bolster government revenue.
This article examines the manner of enforcement of statutory powers by Nigerian tax authorities in certain instances, impacts of such practices on businesses, and best practices that tax authorities can adopt in promoting sound tax systems and an enabling business environment.
2. Some contentious areas of exercise of powers by the tax authorities
2.1 Power to assess taxpayers on a fair and reasonable percentage of revenue
Companies are generally required to pay tax on the profits “accrued in, derived from, brought into or received in Nigeria” in respect of any trade or business carried on in Nigeria, after making necessary adjustments, as provided in the Companies Income Tax Act (CITA). The CITA also requires companies to self-determine their tax liabilities and file their income tax returns, annually, with the Federal Inland Revenue Service (FIRS). To mitigate tax avoidance, the CITA further empowers the FIRS to assess and charge companies to tax on fair and reasonable percentages of their turnover under the following circumstances :
– where the assessable profits cannot be ascertained; or
– where the trade or business produces no assessable profits; or
– where the assessable profits are less than the profits expected from such business.
The above anti-tax avoidance provision should ordinarily be applied in situation where a taxpayer fails to file its tax returns or where a taxpayer is determined to have deliberately filed misleading tax returns. In these cases, the tax authority should issue an assessment on its best-of-judgment basis, bearing in mind that the assessment should be on a “fair and reasonable” percentage of turnover while considering the specific economic circumstances of the taxpayer. Tax authorities are, therefore, expected to exercise this power judiciously.
However, tax authorities often issue arbitrary assessments to taxpayers even when the taxpayers have provided accurate documentation to support their claims. This is not unconnected with the tax authority’s aggressive drive to ramp up government’s revenue. State tax authorities, for instance, have continued to issue Pay-as-youEarn tax assessments to employers based on deemed income, particularly employers who have foreigners in their employment, even when the employers have provided relevant documents to justify the employees’ actual emoluments . Also, in 2016, the FIRS issued several letters to corporate taxpayers purportedly to assess them to income tax on its best of judgment, based on the deemed value of properties owned by the companies. As expected, this resulted in tax disputes that required judicial intervention. A noteworthy example is the Federal High Court (FHC) judgment in the case of Theodak Nigeria Limited and FIRS where the FHC held that the FIRS’ act of unilaterally assessing the company to tax based on the value of its property was oppressive and ultra vires.
Non-resident Companies (NRCS) operating in different sectors of the economy have equally not been spared the fury of arbitrary tax assessments. For instance, the FIRS has persistently adopted a deemed profit margin of 20%, which translates effectively to a 6% tax rate, for assessing NRCS to income tax. This is regardless that the rate is alien to the tax legislation as it was only brought into effect through the 1996 Budget Pronouncement, which was merely a policy statement of the Federal Government of Nigeria. Hence, assessing NRCS to tax at 6% of turnover without due consideration for their economic situations and ability to pay is neither fair nor reasonable.
2.2 Power of substitution
The tax laws empower the federal and states tax authorities to appoint any person to be the agent of any taxpayer for the purpose of remitting taxes due, on behalf of the taxpayer, if the person so appointed is in custody of monies belonging to the taxpayer. This is referred to as the “power of substitution”.
The law empowers tax authorities to recover the tax due from the agent so appointed, where the agent fails to remit the tax due from monies in his custody. Directives issued by the tax authorities in this instance are, however, subject to objection and appeal process under the law.
The FIRS recently exercised its power of substitution by appointing banks as tax collecting agents for some customers maintaining bank accounts with such banks. The FIRS alleged that the affected customers failed to remit taxes due and therefore mandated the banks to place a lien on relevant accounts and remit alleged tax liabilities on behalf of the account holders. The FIRS further directed the banks not to honour any mandate issued by the customers on their accounts until the alleged liabilities were defrayed.
The manner in which the FIRS exercised its power of substitution certainly generated many concerns. For instance, the FIRS’ directive to ‘freeze’ taxpayers’ accounts without recourse to the taxpayers, and without establishing that the alleged liabilities are indeed final and conclusive, constitutes a breach of the taxpayers’ right to fair-hearing as guaranteed by the tax legislation and the Constitution of the Federal Republic of Nigeria. Similarly, the FIRS allowed the banks only 7 days to comply with its directives failing which the banks would be penalized. This is contrary to the provisions of the tax legislation that typically allow taxpayers 30 days to review and respond to tax assessments. Also, the FIRS’ directive could expose the banks to risks where it is later established that the taxpayer has no liability, or less liability than demanded. Such mandate could also cause the banks to be in breach of their fiduciary obligations to their customers. It is, therefore, no surprise that the FIRS had to suspend its wide-spread “freeze order” following several commentaries by stakeholders, even though some taxpayers have continued to experience restrictions on their accounts.
The FIRS would have done well to painstakingly review and establish that a tax liability is final and conclusive as provided in law, and that the taxpayer has failed to pay the amount due within the statutory timeline before invoking its power of substitution. Anything outside of this would deviate from the intention of the law.
2.3 Power to distrain properties of taxpayers
The law empowers tax authorities to distrain the properties of delinquent taxpayers as a last resort in recovering established tax liabilities. For this power to be validly exercised, the tax authority must establish that an outstanding liability is final and conclusive, it must have issued an assessment, and the taxpayer has defaulted in paying the assessed amount within the statutory timeline. The law also imposes obligation on State tax authorities to obtain an order of a High Court for the distrain to take effect.
In many unrelated cases, however, tax authorities have disregarded the above conditions and exercised the power to distrain taxpayers in unwieldy manners. Simply put, allegations of tax default have been the basis upon which the distrains have been effected, and in some instances, without any court order and without affording taxpayers their right to object and appeal.
There have also been instances where taxpayers have received letters of distrain while a tax liability is still in dispute. In the Court of Appeal case between the Ekiti State Board of Internal Revenue (ESBIR) and Guaranty Trust Bank (GTB), where the ESBIR sought to distrain the properties of GTB, for instance, the Court entered judgment in favour of GTB that the ESBIR failed to fulfill the conditions in the Personal Income Tax Act (as described above) which are precedent to its invocation of the power of distrain under the law. Also, the FIRS recently affixed notice of distrain on the premises of many insurance companies in Nigeria based on allegations of outstanding stamp duties liability. This is a clear violation of the distrain process as provided in the law.
3. Impacts on businesses
The social contract between citizens and the government is such that the former should pay its fair share of taxes, while the latter should create an enabling environment by applying its resources towards developmental outcomes. Anything outside of these will hamper the economic potentials of businesses and will be counterproductive to the government’s revenue generation drive in the long-run. Actions of tax authorities involving disruption to taxpayers’ business activities, unnecessary freezing of bank accounts, issuance of arbitrary tax assessments, and so on, will defeat the government’s agenda of increasing the tax base, bolstering tax revenue and improving the overall ease of doing business in Nigeria.
The overwhelming pungent narrative of tax authorities’ power-play would discourage existing and intending investors, who typically make tax environment an important parameter in evaluating their investment decisions. Considering that Nigeria’s Foreign Direct Investment in recent years has been anything but progressive, tackling the regressive practices of tax authorities must be a priority for governments at all levels.
4. Recommendations/way Forward
It is imperative for tax authorities to operate an all-inclusive administrative system by proactively engaging with stakeholders on tax matters that affect their businesses with a view to eliciting voluntary compliance. Further, tax authorities should infuse more rigour and thoughtful planning into their systems and processes. They should also set good example for taxpayers by adhering to the provisions of the law on tax administration and enforcement. In this regard, they could borrow a leaf from the Swedish Tax authorities.
Taxpayers, on their part, must fulfill their obligation under the social contract by paying the right amount of taxes and filing relevant tax returns as and when due. This will give them the moral grounds to challenge any austere directive issued by tax authorities. The legislature would also do well to amend inimical tax law provisions, which may be relied on by tax authorities to perpetuate unfair practices, or taxpayers to evade taxes. Overall, the judiciary must continue to play its role as the last resort and an unbiased umpire in tax disputes between taxpayers and tax authorities.
Ademola is a Manager; Samuel and Chinyere are Senior Associates, all at KPMG in Nigeria
