The Power of the FIRS to Appoint Agents for Defaulting Tax Payers; Ensuing Issues and Challenges – Agidi Emmanuel

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The Federal Inland Revenue Service has since 2018 started issuing letters of appointment to banks in Nigeria to act as agents of alleged defaulting taxpayers (what is called the power of substitution). This idea is premised on the provisions of section 31 of the Federal Inland Revenue Service (Establishment) Act which empowers the Service to make such appointment for the purposes of paying any tax payable by the taxable person from any money which may be held by the bank which will now serve as agent of that alleged defaulting taxpayer. This reception of the ideals in this provision has been with mixed feelings as accounts of alleged defaulting taxpayers have overtime been frozen under the instructions of the FIRS.

LEGAL BACKGROUND FOR THE APPOINTMENT 

Section 31 of the Federal Inland Revenue Service (Establishment) Act provides

  1. The service may by notice in writing appoint any person to be the agent of a taxable person if the circumstances provided in subsection (2) of this section makes it expedient to do so.
  2. The agent appointed under subsection (1) of this section may b required to pay any tax payable by the taxable person from any money which may be held by the agent of the taxable person.
  3. Where the agent referred to in subsection (2) of this section defaults, the tax shall be recoverable from him.
  4. For the purposes of this section, the Service may require any person to give information as to any money, fund or other assets which may be held by him for, or of any money due from him to, any person.
  5. 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.

Also, section 49 of the Companies Income Tax Act provides

  1. The Board may by notice in writing appoint any person to be the agent of any company and the person so declared the agent shall be agent of such company for the purposes of this Act, and may be required to pay any tax which is or will be payable by the company from any moneys which may be held by him for, or due by or to become due by him to, the company whose agent he has been declared to be and in default of such payment the tax shall be recoverable from him.
  2. For the purpose of this section, the board may require any person to give information as to any moneys, funds or other assets which may be held by him for, or of any moneys due by him to, any company.
  3. 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.

The above provisions form the legal basis for the power of substitution. The law creates an atmosphere where the Service can by a letter appoint a bank as an agent of an alleged defaulting taxpayer and the bank is made to remit any money held by it to the amount payable as tax. The banks acting within the purview of this authority will not be held liable and on the other hand, failure of a bank to act will amount to the tax being directly recoverable from the bank. It further extends to giving information about a customers banking details without a proper order of court. The law only allows for an appeal against the decision of the Service at the Tax Appeal Tribunal.

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The legal justification however, has not been able to settle all surrounding questions and doubts around the legislation, the practice and procedure of the service, the need to protect the right to property, the confidence in customer-bank relationship, the issue of when tax is due and payable, the right to fair hearing amongst others.

ISSUES AND CHALLENGES

  1. Confidence in customer-banker relationship and the ideals to the right of privacy

The issue of confidence has been a contentious one whenever the power of substitution is discussed. The provisions of Section 28 and 31 of the FIRS Act provides for banks to report on demand to the Service without first informing or notifying the account holder about the inquiries into his account. The question not answered by the court specifically is whether this power also extends to freezing the account of a customer on the demand of the Service as stated in Section 8 (1) (g) of the FIRS Act even where there is no valid or existing court order as to such end.

The law is very positive to the end that the banker-Customer relationship is a unique and well defined one. There legally exists a fiduciary relationship and thus the later owes the customer a duty of care, diligence and skill. In the case of Fidelity Bank Plc v Bayuja Ventures Limited & anor (2012) ALL FWLR (Pt. 646) 456, the Court of Appeal held that Banks have no right to freeze a customer’s account without a proper Order of Court. See also, Guaranty Trust Bank v. Akinsiku ADEMOLA & 2 Ors in Appeal No CA/L/1285/2015 (Unreported) judgment delivered 1 March 2019 and most recently, the decision of the Federal High Court sitting at Warri in the case of Ama Etuwewe V Federal Inland Revenue Service & Anor (unreported, suit no: FHC/WR/CS/17/2019, Federal High Court, Warri Division, 30 September 2019, Hon. Justice Emeka Nwite).

  1. The need to protect the right to property and the principles of the right to privacy;
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The procedure as laid down is Section 31 of the FIRS Act and 49 of the CITA necessitates this issue. The Constitution of the Federal Republic of Nigeria 1999 (as amended) has clearly posited for individual right to property and the need for the individuals freewill when it involves dealing with such property. It is pertinent to note that although this right has certain exceptions, and very importantly, tax related issues are clearly identified as one of the exceptions in section 44 (2) (a), however, this exception can only come into play where there is a court order justifying same. The issue of assessment has to be settled before this can come into play. The tax must have been settled to have become payable by virtue of the combined reading of Section 33 of the FIRS Act. Ordinarily serving a letter of substitution on a bank to act on an individual or a firms account (and where they so act) will amount to a breach of the right to own moveable properties.

  1. When tax is due and payable, practice and procedure of the service and other administrative issues revolving around Section 31 of the FIRS Act.

A combined reading of section 33 of the FIRS Act and Section 77 CITA shows that tax becomes payable when a tax assessment is final and conclusive, put in other words, a tax assessment is final and conclusive when the tax payer fails to exercise his right to appeal or object against and assessment or after objecting or appealing against the tax assessment, the taxpayers’ objection or appeal fails.

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The practice of the Service is usually issuing letters under the hand of the board to the banks. Very important here is that the instruction shall not be given by any other person including the chairman of the service other than the board. The court in the case of Ama Etuwewe V Federal Inland Revenue Service & Anor (unreported, suit no: FHC/WR/CS/17/2019, Federal High Court, Warri Division, 30 September 2019, Hon. Justice Emeka Nwite, laid rest to this issue and posited that the  failure of a service to serve the letter under the hand of the board is a procedural defect will nullifies the whole appointment procedure.

The question that has been left unanswered here is the position of the law where a letter of substitution has been issued and there is no evidence of the finality or conclusion of the tax assessment. Whether the agent can still be held liable personally if he fails to act or the action of the agent and the Service will amount to breach of a taxpayers right to fair hearing.

CONCLUSION AND RECOMMENDATIONS

The power of substitution has now laid down a procedure for collecting taxes from individuals and companies. When counterbalanced with the existing legal framework in Nigeria, a great deal of questions and inconsistencies usually follow. The need for due process, diligence and care on the part of the Service cannot be overemphasized, put simply, an exercise of the power of substitution without regard to other laws could lead to distrust on the sanctity of contracts in Nigeria and scare potential foreign and local investors.

Agidi Emmanuel George Esq is an ASSOCIATE in the litigation team at Aluko & Oyebode. He is a chartered arbitrator and has core interest in commercial litigation and arbitration.

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