The Federal Inland Revenue Service (FIRS) directive to the deposit money banks (DMBs) to freeze bank accounts belonging to tax defaulters has continued to generate heated debates with most of the affected businesses calling for a total reversal of the new policy regime, reports Ibrahim Apekhade Yusuf
From all indications the Federal Inland Revenue Service (FIRS) is no longer at ease with tax evaders. Without prejudice to other subsisting measures, it has since come up with what industry analysts believe is a game changer of some sorts. This time around the Service is forging a synergy of cooperation with the deposit money banks through which it hopes to rein in recalcitrant taxpayers, albeit those who elect not to settle their tax obligations as and when due.
FIRS new policy regime ruffling feathers
The Federal Inland Revenue Service (FIRS) and some State Internal Revenue Service (SIRS), in recent times, have been issuing letters to Nigerian banks, appointing them as agents of collection of taxes due from alleged tax defaulters. Based on the letters, the banks were instructed to among other things set aside the tax amount due from the bank accounts of the alleged defaulting taxpayers and remit same to the accounts of the relevant tax authorities to the credit of the taxpayers, in full or partial settlement of the tax debts.
Besides, the banks were further requested to inform the RTA of any transaction including transfer of funds offshore or locally on the tax defaulter’s account and obtain the RTA’s approval prior to execution of such transaction.
Legal framework for FIRS new policy regime
Based on the provisions of Section 31 of the FIRS (Establishment) Act (FIRSEA), Section 49 of the Companies Income Tax Act (CITA) and Section 50 of the Personal Income Tax Act (PITA), RTAs have the powers to appoint any person to be the agent of a taxable person for the purpose of recovering tax debts or tax payable from such taxable person. The agent appointed may be required to pay any tax payable by the taxable person from any money held by the agent on behalf of or due to the taxable person. The RTA may also require an agent to give information on assets/funds held by the defaulting taxpayer.
Thus taxpayers are encouraged to review their records and settle all outstanding tax liabilities timely. Taxpayers should also ensure that all notices of assessment issued to them by RTAs are either settled timely or adequately objected to, to avoid any disruption to their business operations. Banks are also expected to confirm the allegations against their customers and seek appropriate advice on the appropriate course of action in order to avoid any violation of their obligations to customers and unnecessary lawsuits.
Contending issues in the FIRS Act
While attempting a post mortem of the new policy directive, tax experts including: Moshood Olajide, Elizabeth Anaekwe, Stanley Dike and Jeff Maduka, all of PwC in an article jointly written by them and made available to The Nation, observed that the provision and the manner in which the FIRS is currently seeking to apply it raise a number of issues.
In the statement which reads in part they said, “The provision does not define when ‘tax is payable’ for the purposes of exercising the power to appoint an agent. It would seem that this power can only be validly exercised if an assessment has become final and conclusive under the relevant provisions of the tax laws.”
The provision, they further stressed, “Neither articulates what must be presented by the FIRS to demonstrate to the agent that the tax is payable nor does it specify the information that the agent can request from the FIRS to confirm that the tax is payable.
“This creates a situation where the FIRS can arbitrarily allege that tax is payable and the agent may feel compelled to withhold a taxpayer’s money even when the tax is under dispute.”
The impact of the provision on business may be very harsh, they noted, adding that “An appointment of a bank as an agent effectively freezes the account of a taxpayer up to the amount of the tax payable as alleged by the FIRS. The process of releasing the account may significantly disrupt business activities.”
It is not clear how this provision will be interpreted by the court in the light of the provisions of section 44 of the Constitution of the Federal Republic of Nigeria that guarantees a citizen’s right to own property. Under this section, a party must be given an opportunity to defend his property before the property can be taken.
The agent is required to pay the money in his possession to the FIRS. However, it would seem that the agent can challenge the appointment if the tax is not payable or if the agent does not have any money belonging to the taxpayer in his possession.
The appointment, like all decisions of the FIRS, can be challenged by the agent at the Tax Appeal Tribunal.
The tax landscape is changing rapidly. Taxpayers must attend to all tax assessments promptly and keep appropriate records of their tax affairs.
While the power of appointment is a very important tool for the FIRS in recovering unpaid taxes, this power must be exercised with caution and in accordance with the law to avoid negative impact on businesses and ease of paying taxes.
However, for tax evaders, tax authorities can, where appropriate, explore this tool to recover tax more quickly.
Most common reason for a frozen bank account
Speaking in an interview with Eberechukwu dennis, a lawyer, he said the condition under which account can be frozen is following the demise of the account holder.
“This has nothing to do with criminal activities. As soon the bank is aware that the account holder has passed away, the bank will freeze the bank account. The bank account frozen due to the death of the account holder remains frozen until the bank has identified all legal heirs.
“The bank wants to be on the save side and be 100% sure to distribute the assets to the legitimate heirs and legal successors. In such a situation it depends on the complexity of the family situation and the countries of domicile of the account holder and the domicile of the heirs involved. If the account holder has passed away and the place is known where the legitimate heirs are living, the bank account can be unfrozen within two or three months.”
Her was however quick to add that most frequently, frozen assets are connected to pending investigations in connection with corruption, fraudulent activities, bribe, money Laundering, acquisition of influence, tax evasion, tax fraud, carousel fraud, VAT fraud, to mention just a few.
Rising antagonism against the new tax policy
Expectedly there has been a lot of acrimony over FIRS directive. Firing the first salvo, the Lagos Chamber of Commerce and Industry (LCCI) said the decision of the FIRS to appoint banks as collecting agents and freezing the accounts of tax defaulters was in bad rather arbitrary.
Its Director-General, Muda Yusuf while acknowledging that the move was premised on the powers conferred on it by Section 31 of the FIRS Act, which gives it power to appoint collection agents for the recovery of tax payable by the taxpayer, he however urged discretion and caution before its implementation, insisting that the provision is draconian and could be used as a tool to intimidate, coerce and harass taxpayers.
He said LCCI is a strong proponent of regulatory compliance by private sector players but noted, however, that it was important to understand that tax administration should agree with the rule of law and the fundamental principles of a good tax system.
He said: “Tax administration should be consistent with the basic principles of equity, fairness, legality and accountability. LCCI is concerned about the recent turn of events, especially the freezing of accounts of bank customers based on tax assessments that are in dispute. This development raises a number of key concerns which need to be urgently addressed.”
He faulted the propriety of appointing banks as ‘Collecting Agents’ by the FIRS, given the strategic and catalytic role of the banks in business operations, financial intermediation and transactions among economic players.
He called for an exhaustive engagement between the tax authorities and the taxpayer, noting that the legality of freezing the accounts of bank customers by banks on the directive of FIRS for alleged tax liability, given the contractual relationship between the banks and their customers should be studied
Like the LCCI, the Bureau De Change (BDC) operators have also decried the account suspension directive of FIRS to banks over the demand that the operators pay taxes on their transactions turnover.
The Association of Bureau De Change Operators of Nigeria (ABCON) has condemned the action, insisting that banks’ suspension of BDCs accounts remain unlawful.
ABCON President Aminu Gwadabe said banks were acting on the directive of the FIRS by demanding that BDCs pay taxes on bidding funds used for dollar collections. The funds are sent through the commercial banks to the Central Bank of Nigeria (CBN) weekly.
“The BDCs are a high turnover sector and their funding cash for dollar collections cannot be subjected to taxes. An average BDC does over N30 million weekly turnover and paying taxes on such funds will affect their cash flow and ability to meet their statutory role of foreign exchange supply to the retail-end of the market,” Gwadabe said.
He said many of the affected BDC operators are facing funding challenges that need to be addressed immediately by concerned stakeholders. “In fact, we will be writing to the Central Bank of Nigeria (CBN) to complain about the illegal policy of the ‘Post No Debit’. Presently, most of our members funds with the deposit money banks for their bidding obligations are being trapped in the banks. This scenario, if not checked, will affect our members funding capacity, derail the sustainability of their businesses with the resultant liquidity spikes,” he said.
According to Gwadabe, the new trend in collecting taxes from BDCs is unacceptable and must be stopped. He said that ABCON will be writing CBN to call the banks and other parties implementing the directive to order.
“The banks did not ask the BDCs to bring evidence of tax payment before they act. Value Added Tax- VAT- Exempt for BDCs is applicable in other climes and should also be practiced in Nigeria. The non-implementation of tax exempt in Nigeria is affecting the capacity of BDCs to effectively meet the foreign exchange demands at the retail-end of the market,” he said.
He said ABCON will continue to implement zero tolerance for non-compliance with regulatory requirements and unethical conduct amongst its members but will not sit idly and watch the businesses built by its members destroyed by illegal policy like the ‘Post No Debit’ order.
The ABCON, he added, has also created the office of Compliance Officer at its National Secretariat and in all its Zonal Offices to discipline operators that fail to comply with set regulations.
Gwadabe said the BDC sector is critical for continued stability in the foreign exchange market adding that the working of many developed economies is highly dependent on the activities of BDCs and Nigeria should not be an exception.
Best practice
The issue of tax evasion is a global phenomenon; as such every region of the world has means and ways of addressing such.
The tax evasion battle between the Swiss financial sector and the DOJ began a decade ago when whistleblower Bradley Birkenfeld provided evidence that his former employer, UBS, was helping wealthy Americans evade taxes.
Switzerland’s largest bank was fined $780 million in 2009, but it was later discovered that other Swiss banks had been poaching UBS clients after the criminal probe had been announced. One of these institutions, Switzerland’s then oldest private bank Wegelin, was forced to close down in 2013 after being taken to court and fined $74 million.
Later that year, a Swiss-US agreement laid the foundations for a Swiss Bank Program that enabled wrongdoers to settle financially to avoid criminal prosecution through the US courts. This classified banks under four categories: category 1 was those banks already under investigation, category 2 comprised of banks that wanted to come clean about their activities, whilst categories 3 and 4 contained those that had no case to answer.
In January 2016, 80 category 2 Swiss banks had shelled out $1.36 billion in fines to avoid prosecution. ZKB was classified a category 1 bank but its settlement is lower than that of the dozen or so other banks in this group, Credit Suisse, for example, was fined more than $2.5 billion in 2014.
The tax evasion spat as a whole forced Switzerland to end its tradition of providing strict banking secrecy, a practice that had shielded foreign tax evaders from the scrutiny of their home tax authorities.
In a statement obtained by The Nation at the weekend, the Zürcher Kantonalbank reportedly agreed to pay $98.5 million as part of a settlement with US tax authorities after a seven-year investigation into the bank’s activities with US customers.
The ZKB said in statement that it had agreed to pay $98.5 million as part of a Deferred Prosecution Agreement after concluding “the DOJ’s investigation into the bank’s legacy business with US clients.”
“We are relieved that after seven years, we were able to conclude the investigation following an objective dialogue with the US authorities. The solution that has now been reached marks the end of this matter and removes any related uncertainties,” said Jörg Müller-Ganz, Chairman of the Board of Directors.
In a 2012 indictment, prosecutors said that from 2003 to 2009, more than 190 US taxpayer clients of ZKB conspired to hide accounts at the bank from the US Internal Revenue Service to evade taxes.
Making a case for FIRS
In the view of Taiwo Oyedele, the Tax Leader for PwC West Africa, he would rather concern businesses look at the issues dispassionately and not get unnecessarily sentimental about it.
Raising some posers, Oyedele asked, “How legitimate is the FIRS order to banks to freeze accounts of tax defaulters? What roles should banks play; and what recourse do taxpayers have? Did the FIRS jump the gun in directing banks to freeze accounts of taxpayers alleged to have defaulted in paying their taxes? Did the banks jump the gun in obeying the order to freeze such accounts and should the taxpayer jump the gun to settle the alleged tax liabilities?”
In his assessment what he described as FIRS’ unconventional tax collection measure, he said, the Federal Inland Revenue Services (Establishment) Act gives the FIRS powers to appoint any person as an agent of a taxpayer for the recovery of tax payable by the taxpayer from any money held by the agent on behalf of the taxpayer.
The power, he stressed, grant the tax authority under the various laws is to be exercised strictly under specific conditions. It does not confer the right on the FIRS or any tax authority to forcefully collect taxes that are under dispute or arbitrary tax assessments.
“It is clear from the relevant provisions of the law that the power to appoint a tax agent only applies to a situation where there is tax payable by the taxpayer and the taxpayer has defaulted in paying.”
A tax is ‘payable’ either when an assessment is undisputed or an assessment has become final and conclusive under the relevant provisions of the tax laws and the statutory time for payment has elapsed.
“An assessment is undisputed where it results from a self-assessment by the taxpayer or where the taxpayer has specifically agreed to the assessment. On the other hand, a tax assessment can be described as ‘final and conclusive’ where the taxpayer fails to object within the time allowed by the law; or the assessment has been determined by a competent court/tribunal and the taxpayer has not appealed within the time specified in the law.”
The appointment, like any decision of the tax authority, can be challenged by the agent. Section 31(5) of the FIRS Establishment Act says “the provisions of this Act with respect to objections and appeals shall apply to any notice given under this section as if such notice were an assessment.” Section 31(3) of FIRS Establishment Act provides that “Where the agent defaults, the tax shall be recovered from him.”
The combined effect of the above provisions is that while the agent is obliged to comply with the directive, the agent is not to simply obey the order without questions. Although not specifically stated in the law, some logical questions to ask the tax authority in writing before acting include:
Evidence that the tax is payable, that is, the taxpayer has agreed to the assessment and it is not under dispute
Where the taxpayer has not agreed, then evidence to show that the tax has become final and conclusive
Confirmation that the time limit allowed by the law within which the tax must be paid has elapsed
Although section 50 of CITA provides an indemnity for the agent where it acts under the appointment of the FIRS, it will be irresponsible for an agent to oblige the appointment without first taking reasonable steps to establish that the tax is payable. It is also important to note that other than CITA, there are no similar indemnification provisions in the other laws hence the need to be diligent to avoid undesirable consequences.
Options available for taxpayers
According to Oyedele, it is not all gloom and doom. “It is important for taxpayers to pay attention to their tax affairs and discharge their tax obligations as and when due on a consistent basis. This includes timely objection to tax assessments and proper documentation of correspondences with the tax authorities.”
In the event of an unwarranted order to freeze a taxpayer’s bank accounts, necessary actions may include making request for a copy of the directive and supporting evidence of tax payable provided to the agent by the tax authority.
This, he said, “Will enable the taxpayer provide a balanced perspective or fill in the gaps where the tax authority has only provided selected information.”
The other measure required, is to support the agent in raising an objection to the letter of substitution. “While the law does not expressly provide for this, there is good chance that a court would accept this approach on the basis that the taxpayer will ultimately suffer the tax liability and hence should have a right to be involved in the objection.”
The taxpayer, he maintained, can also obtain a restraining order from the court to prevent the freezing of bank accounts and take legal action where necessary to prevent any unlawful possession of their assets.
Way forward
On the way forward, Oyedele said, “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 judgement debtor the defaulting taxpayer to instead pay the judgement creditor.
“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.
