Nigeria’s taxman may have found solace in aggressively going after small businesses in a renewed move to improve tax receipts following an August 8 query issued to its executive secretary Babatunde Fowler, by Abba Kyari, Chief of Staff to President Muhammadu Buhari, bordering on unmet revenue targets.
The newest moves by the Fowler-led Federal Inland Revenue Service (FIRS) are unsettling many small businesses and creating an unhealthy relationship between firms and their bankers.
Hit by lower revenues, the Federal Government is hoping tax revenues can help soften the blow. That has seen the government go after companies it claims have defaulted in their tax payment.
Fowler responded to Kyari on Monday, August 19, over the said N3.9 trillion unmet tax revenue target for a four-year period.
Meanwhile, in an August 7 “letter of substitution” to banks directing them to release statements and other financial records of companies, FIRS justified an inkling of government pressure that led to the query.
The letter to banks, available to BusinessDay, appointed the banks as “Collecting Agent for the full recovery of the amount displayed on the attached schedule payable to the Federal Inland Revenue Service”.
The letters “kindly required” the banks “to set aside the aforesaid sum and pay same to the credit of these attached companies in full or partial amortisation of its aforesaid tax debt” and to do this “prior to execution of all or any related transactions involving these companies or any of its subsidiaries”.
“I further request that the Federal Inland Revenue Service be informed of any transactions prior to execution on the accounts, especially transfer of funds to or from offshore or local accounts of these companies or any of its subsidiaries. Only on my authority should such transactions be exited,” the letter read.
Banks were also to provide records of all principal officers related to any of the said companies.
“The statement should cover the period from the date the accounts were opened to the date of receipt of this notice,” the letter said.
The negative aspect of this renewed pursuit of taxes is the government’s approach, according to a tax consultant who did not want to be named for fear of being targeted by the government.
“It’s illegal to ask banks to deduct money from corporate accounts without the permission of the companies and when a proper and independent audit has not been conducted. It seems like the government is trying so hard to ruin businesses along with recouping taxes,” the source said.
“One of the firms we consult for told the FIRS that they paid all they think they owe but they can come for negotiations if FIRS thinks they owe more. They received no response, only a threat to put lien on accounts in one week. That is scary and I hear it has sent panic across several corporate boardrooms,” he said.
Analysts fear that the government’s stern approach will hurt the economy and scare investments away in a country that could do with private investments to boost economic growth and create jobs for its teeming youth population.
Interestingly, one of the firms identified in the letter did not have any actual inflows into the alleged account in the past three years, thereby raising questions over FIRS audit competence and legal stance.
Sources tell BusinessDay that this attitude is creating additional costs to companies targeted in the FIRS tax lien as they have to hire tax consultants and lawyers even as they record disruptions to their operations while valuable man hour is lost trying to resolve the issues.
Ademola Idowu-led team of tax experts at KPMG in Nigeria believe that FIRS would have done well to painstakingly review and establish that a tax liability is final and conclusive as provided in law, “and that the taxpayer has failed to pay the amount due within the statutory timeline before invoking its power of substitution”.
“Anything outside of this would deviate from the intention of the law. The manner in which the FIRS exercised its power of substitution certainly generated many concerns. For instance, the FIRS’ directive to ‘freeze’ taxpayers’ accounts without recourse to the taxpayers, and without establishing that the alleged liabilities are indeed final and conclusive, constitutes a breach of the taxpayers’ right to fair-hearing as guaranteed by the tax legislation and the Constitution of the Federal Republic of Nigeria,” according to the KPMG experts.
“Similarly, the FIRS allowed the banks only seven days to comply with its directives failing which the banks would be penalised. This is contrary to the provisions of the tax legislation that typically allow taxpayers 30 days to review and respond to tax assessments. Also, the FIRS’ directive could expose the banks to risks where it is later established that the taxpayer has no liability, or less liability than demanded,” the experts said.
“Such mandate could also cause the banks to be in breach of their fiduciary obligations to their customers. It is, therefore, no surprise that the FIRS had to suspend its wide-spread ‘freeze order’ following several commentaries by stakeholders, even though some taxpayers have continued to experience restrictions on their accounts,” they further said.
Eben Joels, partner at international accounting and tax firm, Stransact, said though the FIRS claims that its directives to the banks are based on its powers to appoint agents for collection and recovery of outstanding taxes, it has, however, illegally and crudely extended this power to place liens on bank accounts even where a taxpayer has no notice of any outstanding taxes.
Joels, who spoke to BusinessDay from Boston USA, expressed disappointment on the harm the revenue agency does to businesses especially those that are at the point of closing deals with foreign investors.
“The actions of the FIRS are dangerous and have the tendency to further depress the already low levels of foreign investments in Nigeria. The actions will also stifle small businesses as they may lose their trust and confidence in the banking system and resort to holding cash,” Joels said.
He noted that the power to appoint collecting agents that the FIRS claims is not the same as the power to put a lien on assets which is what the FIRS is doing currently.
“A lien is a legal restriction on the ownership rights of an asset,” he said. “Note that before a tax can be said to be outstanding, it means that both the FIRS and the taxpayer are in agreement that the particular amount is owed as tax. In this case, the FIRS instructs banks to put a hold on a taxpayers bank accounts even when the taxpayer is still disputing the validity of a tax assessment and in some cases even when the taxpayer has no notice that any tax is owed. It is very sad that an agency of government will apply extortionate methods to levy legitimate businesses.”
These developments are raising further questions on the legal legs FIRS stands on. For instance, FIRS said it is targeting over 200 companies as tax debtors in just one bank.
“Does it have the capacity to audit these many firms at such short notice?” an informed source asked.
To worsen the woes, there are indications that some of the companies being targeted are those even being owed by the Federal Government. Some are contractors to government who have not been paid for contracts or partially paid.
“The FIRS is imposing an illegal lien on the assets of legitimate businesses without following legal due process. Even for a genuine debtor, the creditor will need a court order to impose a lien on the debtor’s assets. Banks should seek proper legal counsel before agreeing to impose what is in effect an illegal lien. They may be opening themselves up for very serious legal action by discerning taxpayers,” Joels said.
Iheanyi Nwachukwu & Lolade Akinmurele
