We understand government’s desperation to raise revenue through taxation. However, the manner it has gone about it: exercising its power of substitution by ordering banks to freeze alleged tax defaulters’ accounts without recourse to the taxpayers, and without establishing that the alleged liabilities are final and conclusive is illegal, a breach of tax-payers’ rights to fair hearing and ultimately, a breach of the constitution of the federal republic of Nigeria.
Much more, such actions do contribute to making the business environment more difficult and unpredictable and is sending a message to investors that Nigeria is not business-friendly and cannot be relied upon to uphold its own laws.
The Federal Inland Revenue Service (FIRS) on August 7, wrote a “letter of substitution” to banks directing them to release statements and other financial records of companies, freeze the accounts of defaulting taxpayers to prevent them from drawing funds. The letter also appointed the banks as “collecting agents” requesting them to set aside any sums mentioned by FIRS “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”
It is not news that Nigeria is having a serious fiscal crisis, with revenues falling far short of target and majority of those revenues (about 70 percent) used to service debts alone. Consequently, the government has to borrow to maintain operations and finance the budget. It is therefore understandable that the government is doing everything within its powers to grow its revenues, especially through taxation. It is also noteworthy that it is trying to enforce tax payment by high net worth individuals and corporate organisations who have capitalised on Nigeria’s lax tax regime to evade taxes for years.
However, those reforms must conform to the rule of law and must never be arbitrary. Sadly, some companies and CEOs who were slammed billions in illegal taxes have demonstrated full compliant to tax regulations. Where they are able to convince the FIRS of full compliance with all the tax laws of the country, they were still requested to “pay something.”
The arbitrariness of the tax bills being sent out have unsettled many companies and even shareholders especially of multinationals operating in the country. The potential impact on company’s cash flow of such debits is creating panic within the business community.
Besides, it is sending negative signals to multinationals operating in the country, current and future foreign direct investors about the uncertainty and unpredictability of the Nigerian environment.
We are at pains to stress that although FIRS have the authority to freeze accounts of tax defaulters, it must only do so on the orders of the court after the tax liability of the tax payer must have been established.
Besides, a tax payer has the right to file tax returns which will be audited by FIRS if it is not satisfied with the returns. The turnover comes in only if companies choose not to file their returns.
The action of FIRS also raises question on “bank customer confidentiality” a key principle in commercial banking relationship. With the FIRS asking banks to debit their customer’s accounts and also submit their customer’s bank details, that confidential relationship between banks and their customers is being broken.
FIRS must exercise its powers with caution to avoid negative impact on the business environment and ease of paying taxes. The current desperation to squeeze money legally or illegally from companies is short-sighted and may deepen rather than alleviate the revenue crisis of the government.
