In what shows that Nigeria’s tax landscape is changing, if not rapidly, the Federal Inland Revenue Service (FIRS) has directed banks to freeze the accounts of defaulting taxpayers to prevent them from drawing funds, and lately the FIRS appointed agent banks for collection of taxes due from alleged tax defaulters.

In the letters issued to the appointed agent banks by the FIRS and some State Internal Revenue Service (SIRS) they were instructed to set aside the tax amount due from the bank accounts of alleged defaulting taxpayers and remit same to the accounts of the relevant tax authorities (RTAs) to the credit of the taxpayers, in full or partial settlement of the tax debts.

Also, the FIRS asked banks to inform the relevant tax authorities of any transaction –that is transfer of funds offshore or locally –on the tax defaulter’s account and obtain the relevant tax authorities approval prior to execution of such transaction.
This development has triggered interesting comments from tax experts lately, including those among the “Big Four” accounting firms.

Most of the tax experts believe that while Section 49 of the Companies Income Tax (CIT) Act, 2007 (as amended), Section 31 of the FIRS (Establishment) Act, and Section 50 of the Personal Income Tax Act (PITA) empower the FIRS to appoint agents for the recovery of tax liabilities; this power should be cautiously exercised and in harmony with the law to avoid negative impact on Nigeria’s business environment and ease of paying taxes.

For instance, for taxpayers, their taxes are required to be paid either based on self-assessment, administrative or audit assessments. For the agent banks, they owe their customers (the taxpayers) the contractual obligations which require protection of their confidentiality or privacy.

Tax experts at Lagos-based Andersen Tax said in their August 17, 2018 ‘Tax Alert’ that, “While Section 31 of FIRS (Establishment) Act empowers the FIRS to appoint agents of tax collection, it is imperative to evaluate the actual extent of such powers.”

“Section 31 (2) of the FIRS (Establishment) Act provides that the appointed agent may be required to pay any tax payable by the taxable person from any money which may be held by the agent of the taxable person (emphasis ours). However, there is a valid question as to when tax can be deemed payable,” Andersen Tax noted.

“Notwithstanding, the powers granted to the FIRS to collect taxes from individuals and companies, the FIRS new approach to recover unpaid taxes may not be consistent with the relevant provisions of the legislative framework in Nigeria. The exercise of control over of taxpayers’ account without regard to due process could lead to distrust on the sanctity of contracts in Nigeria and scare potential investors,” Andersen Tax further stated.

Likewise, tax experts at Deloitte in their August 24, 2018 note believe that the above directive by FIRS and the underlying legal bases appear to permit relevant tax authorities to appoint an agent and request for payment. They, however, noted that the development raises a myriad of concerns, “especially from banks and taxpayers”.

Deloitte tax experts are concerned about this development leading to “potential violation of banks’ privacy and confidentiality obligations”.

The implications of the directives on business operations of the banks and taxpayers, according to them is that it may result in disruption of businesses, consequential damages for businesses, other regulatory backlashes and perhaps lawsuits. Deloitte also warned that the alleged defaulting taxpayer may be unaware of any pending liability prior to the appointment of the bank as agent of collection.

“Where the directives of the RTAs are effected by banks, it may lead to a breach of confidentiality obligation to the customers. Understandably, this obligation is to the exception of valid legal requirements, thus it becomes important to ascertain the extent of the RTAs’ powers in this regard,” Deloitte tax experts noted.
As a way forward, Taiwo Oyedele, Tax Leader for PwC West Africa said in an August 24, 2018 note that the power of substitution is a very important tool for the tax authority in recovering unpaid taxes especially from tax evaders.

“It is similar to a ‘garnishee order’ in many countries where the court may direct a third party (the agent) that owes money to the judgment debtor (the defaulting taxpayer) to instead pay the judgment creditor (the tax authority)”, he added.

According to him, “This power must, however, be exercised with caution and in accordance with the law to avoid negative impact on the business environment and ease of paying taxes. Even where the tax authority has powers to deem tax payable under certain conditions as specified in the law, this power is not to be exercised arbitrarily.”

“On the part of taxpayers, it is extremely important to attend promptly to all tax matters including assessments and keep appropriate records of their tax affairs. The days of tax matters being neglected without consequences are over for good,” Oyedele warns.

•Excerpted from a BusinessDay report