August 17, 2018
The Federal Inland Revenue Service (FIRS) recently started issuing letters to commercial banks, directing them to set aside alleged amounts owed by taxpayers for full or partial amortization by the banks. It appears that the FIRS is relying on the powers to appoint agents (including banks) to pay any tax due to the FIRS from any money held by the agent on behalf of taxpayers in line with the provisions of the FIRS (Establishment) Act.
Based on our understanding of the matter, the FIRS’ new approach to recovering outstanding taxes is predicated on the provisions of Section 49 of the Companies Income Tax (CIT) Act, 2007 (as amended) and Section 31 of the FIRS (Establishment) Act. We also understand that the FIRS wants the alleged tax debts withheld from the taxpayers’ bank accounts and remitted to the FIRS in priority to any other authorized transaction by the taxpayer. In addition, the FIRS requested that it should be notified of other proposed transactions on taxpayers’ bank accounts prior to execution.
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 is tax can be deemed payable.
It is common knowledge that tax is either payable based on self-assessment, administrative or audit assessments. It is also clear that a tax assessment can only be deemed final and conclusive after all options to reconcile any dispute over such assessments have been explored and exhausted. Moreover, Section 49 (3) of the CIT Act as well as Section 31(5) of the FIRS (Establishment) Act provide that the provisions of the CIT Act on objections and appeals will apply to any notice given under the two sections. Given that the FIRS referred to both sections of the law in its letters, it is necessary to pay attention to the entire provisions of the sections in giving effect to any other subsection.
In addition, given the fiduciary and contractual obligations owed by banks to their customers (i.e. the taxpayers), it could be a breach of the bank’s duty to its customers to remit any alleged unpaid taxes stated by FIRS without the consent of the taxpayers or a court order requesting the banks to comply.
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.
Taxpayers reserve the right to object to assessment notices and resolve tax disputes without any untoward consequences on their business operations. It is equally important for taxpayers to review their records and ensure that substantial tax positions are ready accessible, in the event of this nature of disputes.
Andersen Tax has a hands-on Tax Dispute Resolution Desk that is available to provide information to taxpayers regarding the proposed tax reconciliation and assist with tax dispute resolution.