In line with the current administration’s resolve to increase Nigeria’s tax revenue, the Nigerian Federal Inland Revenue Service (FIRS) has, in the last one year, provided various incentives to encourage payment of tax and continues to impose penalties for non-fulfillment of tax obligations.

In an audacious move to enforce payment of taxes, the FIRS, in the last quarter of 2018, issued a letter of substitution to banks appointing them as collection agents of taxpayers considered to be in default of tax payments and directing the relevant banks to freeze the accounts of the taxpayers to prevent them from drawing funds from the accounts.

Organizations that fall in this category include business entities that are yet to pay tax since 2015 and have an annual banking turnover of N100million and above and have been collecting Value Added Tax (VAT) as well as deducting Withholding Tax without remitting same to the Federal Government of Nigeria.

The banks in compliance with the FIRS directive placed a lien on the concerned accounts. Needless to say, that this action raised a lot of legal questions as to the legality of the FIRS appointing banks as agents. More importantly, the lien on accounts greatly occasioned inconvenience to the affected businesses as their mandates to draw on their account were dishonored by the banks. Accordingly, there were calls to the Federal Government and FIRS to remove or suspend the lien.

In an interesting turn of events, the FIRS in February 2019 directed banks to suspend the lien on bank accounts of alleged tax defaulters for a period of 30days to allow the affected taxpayers regularize their tax positions and alleviate the inconveniences experienced.

The 30days grace period, which several organizations effectively utilized, has since expired. The FIRS therefore directed banks to resume restriction on bank accounts of a number of taxpayers for alleged nonpayment of taxes effective from 15th March 2019.

While the actions of the FIRS have attracted much criticism, it is clear that various tax laws in Nigeria contain provisions that empower a tax authority to appoint another person as agent of a taxpayer, otherwise referred to as the power of substitution.

The Federal Inland Revenue Services (Establishment) Act, 2007 gives the FIRS powers to appoint any person as an agent of a taxable person for the recovery of tax payable by the taxable person from any money held by the agent on behalf of such person. Such agent may also be required to give information as to the money, funds or assets held by him for, or of any money due from him to any person. Other Acts that similarly empower the FIRS to appoint an agent for the recovery of taxes from a taxable person include the Companies Income Tax Act, the Value Added Tax Act and the Personal Income Tax Act.

It must nonetheless be noted that, by law, the appointed agent is only under obligation to pay any tax which is payable by the taxable person. The question as to whether the tax demanded by the FIRS has become payable, therefore, has to be resolved before such agents can be under obligation to pay the tax.

While it does seem that the FIRS has wide statutory powers in respect of proceeds of tax fraud or evasion, these powers are certainly to be exercised in consonance with statutory procedures which protect the rights of taxable persons to a fair hearing.

The economic and legal ramifications of the latest directive of the FIRS on this issue, are serious for all the parties involved and the potential for litigation is high. Caution is therefore advised on all sides.
Tax payers are further advised to attend to all tax assessments, keep a good record of their tax affairs and discharge their obligations as and when due. In the event of unwarranted freezing of a tax payer’s bank account, legal remedies are available.