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FIRS directs Banks to freeze taxpayers’ accounts

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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.
Nigeria’s tax-to-GDP ratio at 6 percent is one of the lowest in Africa and Babatunde Fowler-led Federal Inland Revenue Services said it is on course to achieve its target of N5trillion from taxes in the 2018 fiscal year. At a Greenwich Trust limited (GTL) event on August 3, 2018, Flower said “Nigeria’s tax-to-GDP ratio is rising and should hit 16 percent to 20 percent by 2020.”
“The target may be achievable in the long run if we continue to improve our tax collection net, improve our tax effectiveness and sanction those that fail to pay their taxes, then our tax-to-GDP ratio will be increasing. Whether we achieve the 16-20 percent target is debatable,” said Johnson Chukwu, CEO at Lagos-based Cowry Asset Management Limited.
Nigeria’s tax amnesty –Voluntary Asset and Income Declaration Scheme (VAIDS) – which took-off on July 1, 2017 ended on June 30, 2018. The scheme covered the whole gamut of taxes and gave Nigerians the opportunity to regularise their tax affairs. It was meant to enable taxable Nigerians to declare their assets and incomes and get certain waivers, including penalties and interest payments.
The data mining efforts of the Federal Ministry of Finance domiciled in ‘Project Lighthouse’ had helped the FIRS identify over 130,000 high net worth Nigerians and companies that have potential tax underpayments.
Meanwhile Nigeria has raised its Tax to real GDP to 8 percent from six percent, although still way below its peers and federal government’s target, a recent review of the tax performance in the past six years has indicated.
The new figure is an outcome of a re-computation of the country‘s tax numbers done by the National Bureau of Statistics and Federal Inland Revenue Service (FIRS).
But tax to nominal GDP is still at 6 percent, an FIRS confirmed to BusinessDAY at the weekend. The tax review was between 2012 and 2017 fiscal years.
Africa’s largest economy has one of the lowest tax to GDP both in Africa and globally – a major concern not just for government but global bodies.
Minister of Finance, Kemi Adeosun, had consistently said Nigeria was among the lowest tax-paying country in the world and that recent efforts were to double tax to Gross Domestic Product (GDP) ratio from its current six per cent to 12 per cent by year 2020.
“Ghana has 15 per cent, South Africa has 24 per cent. Most developed countries have 30 per cent. Nigeria’s six per cent is very low, so we need to correct that and we’ve driven a number of initiatives to do this,” she said earlier in the year.
Giving updates on the review exercise, the FIRS source said even the 6 percent that had been quoted for years was not correct and the figure should have been around 4 to 5 percent at the time.
“The tax to GDP ratio we have been using is not correct,” he told BusinessDay.
“We found that many other revenue items which are not tax were being added in the tax computations. You can’t add MDA’s IGR, that is not tax. “So NBS is helping us recompute it historically and currently,” he had told BusinessDay at the start of the review.
The source also confirmed that the report would be submitted to the finance minister on Monday, although the Joint Tax Board already has been given a copy.
The IMF is particularly worried that low income countries, including Nigeria, have embarked on excessive borrowing to fund development, especially as incomes dwindled for commodity prices- as it now strongly advises on an aggressive tax
“The recommendation of the IMF is to broaden the tax base by removing exemptions, to rationalize tax incentives in particular to strengthen tax compliance and our recommendation to raise the VAT rate,” Cathy Pattillio, Assistant Director, Fiscal Affairs Department at the IMF told BusinessDay in April.
For Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department, “It is imperative that low income developing countries strengthen their tax capacity. This will allow them to meet their debt service obligations. It will also allow them to finance spending priorities- such as health, education, and public infrastructure – to attain the 2023 Sustainable Development Goals.”
“When we insist that low income countries should be improving their tax revenue mobilisation, we see that as an instrument of sustainability and development. In that context, higher tax capacity could also help sustain debt service. But that is not an end.
“The end in itself is the ability to stand on priority areas – health, education, public infrastructure, and others,” Gaspar stated.

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