Reviewing the FIRS Freezing Order on Tax Compliance: A Licentious Octopus or Ultra Vires Act by Fredrick Okagua


INTRODUCTION
As the system of tax compliance and revenue generation become increasingly demanding, the Nigerian government has through its specialized tax authority introduced policies to help enhance tax regulatory compliance, raise more revenue to boost the economy and block loopholes against tax evaders who manipulate the process .
The Federal Inland Revenue Service (FIRS) has taken extensive measures aimed at promoting the culture of compliance from taxable persons. Recently, the FIRS sent out letters to banks, appointing them as tax collection agents for tax considered payable by their named customers. To achieve this task the FIRS has ordered commercial banks to freeze the account of tax payers until their liability has been fully settled. It was observed that the purpose of exercising the above discretionary power by issuing such directive was to foster compliance of the various tax regulations among tax payers. While this move may have been applauded by industry experts as a remedy to tax evasion, the question one should be asking is whether in light of the above circumstances the orders/directives given by the FIRS violated the clearly defined standards and procedures? Or whether the FIRS has by virtue of such orders acted ultra-vires its powers?
In this article the author seeks to analyze and review whether the directive issued by the FIRS was clearly a breach of process, or an improper, irrelevant and unreasonable exercise of discretionary powers in the circumstance, and to determine whether an undisputed tax assessment was conducted before issuing out such orders. Again, the seeks to find out whether the appointment of commercial banks as agents of tax payers for the purpose of enforcing compliance is justifiable in light of the prevailing tax statutes? Perhaps, the tax appeal tribunal was ignored in the process. The tax appeal tribunal is the established arbiter for settlement of tax disputes and also entrusted with the powers of making quasi-judicial orders. This article therefore discusses and reviews the powers of the FIRS vis-à-vis the order given to banks to freeze the account of tax defaulters.
TAXATION AND POWERS OF THE FIRS TO TAX
Taxation is the compulsory imposition and payment of fines in pecuniary value to the government. The benefits of paying tax includes: provision of social amenities, infrastructural development, and welfare packages for the purpose of stimulating economic growth and activities in the state. Taxation has therefore been viewed as a key factor for potential revenue generation for government and drives for progressive economic growth and sustenance. The importance and relevance of taxation in any nation’s economy cannot be overemphasized. Taxation is concerned with three major aspects:
1. Tax Legislation: Deals with the relevant tax statute and laws
2. Tax Administration: Deals with the management and enforcement of tax compliance
3. Tax Policies: Deals with the system, strategies employed by the tax authorities.
The Federal Inland Revenue Service (FIRS) is the specialized agency of government with the legal guaranteed right to generate revenue on behalf of the government through a recognized system of taxation. The FIRS was brought into being by virtue of section 1 of the FIRS (Establishment Act), 2007. In the preceding subsection of the Act provides that the service shall be a body corporate with perpetual succession and can sue or be sued in its corporate name and may acquire, hold or dispose of any property, movable or immovable, for the purpose of carrying out any of its functions. This makes the FIRS a full fledge agency of government with all the rights and powers of a legal personality in law.
The mandate of the FIRS is to control and administer the different tax laws enacted by the National Assembly and to account for all taxes received and collected from persons or Companies chargeable with tax. As part of its ancillary powers under the FIRS (Establishment) Act, it can adopt critical measures with a bid to identity, trace, freeze and confiscate the proceeds derived from tax fraud or tax evasion . It can also adopt some regulatory measures with a view to enforcing compliance by introducing some investigative and control techniques for the sole purpose of detecting and preventing non-compliance by tax payers.
According to the Federal Inland Revenue Service (FIRS) index reveals that about N 4, 027 trillion were collected in 2017 fiscal year. It was recorded that 62.27% were accounted for by non-oil revenue despite the obvious challenging economic climate prevalent in that year. This is a clear indication that non-oil sector sources can be a booster for revenue generation to the economy and government is gradually reducing its dependence on oil revenue .
The law provides to the effect that before any distraining order or order to substitute or enforce the payment of tax from a tax assessment that has become payable the Service shall serve a demand notice upon the company or person in whose name a tax is chargeable and if payment is not made within a period of one month from the date of the service of such demand notice, the Service may proceed to enforce payment
THE RATIONALE FOR APPOINTING BANKS AS TAX COLLECTION AGENTS
Under the law the FIRS has power 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. This power is exercisable pursuant to section 31 of the Federal Inland Revenue Service (Establishment) Act, which provides that:
“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 makes
it expedient to do so’’.
Subsection (2), provides to the effect that the agent appointed may be required to pay any tax payable by the taxable person from any money which may be held by the agent of the taxable person. This provision is also impair-materia with section 49 of the Company Income Tax Act which provides that:
‘‘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’’.

The rationale of this provision is to the effect that any person (i.e. a bank, stock broker, an individual person and an insurance company etc.) can be appointed to be an agent of a taxable person for the purpose of collecting and remitting taxes payable by a tax payer. A taxable person in the eyes of the law connotes individual humans or body corporate (who is viewed as a person because it is capable of transacting legal contracts and can sue or and be sued in its corporate name and identity).

However, since under the law of agency: the agent is legally authorized to act on behalf of the principal in the principal’s business transaction. Therefore, the agent owes the principal a fiduciary duty. This means the agent is obligated to act in the best interests of the principal. Hence, there should not be any conflict of interest between the principal and the agent in carrying out the act. In view of this case one can only ask if such appointment is consented by the tax payer who is perceived to be the principal in the absence of any ostensible or apparent authority conferred by him on the agent (i.e. bank).
By subsection 3 of the FIRS Act went further to provide that where the agent defaults then the tax shall be recoverable from him. In what way or manner will such tax be recovered from the agent was not explicitly provided in the Act.

IS THE FREEZING ORDER AN ULTRA-VIRES ACT OR A STEP IN THE RIGHT DIRECTION?
The ultra-vires doctrine stipulates that where an authority is expressly conferred on someone to act within legal boundaries, any step taken outside the purview of such authority is unlawful and of no legal effect. This appears to suggest that any act declared ultra-vires cannot ipso facto trigger any legal enforcement or compliance. This invariably means that a person cannot make something legal from an unlawful act. In Afolabi v. Polymera Industries (Nig) Ltd , the court was of the opinion that a person contracting with company or its representatives makes a contract, which to his knowledge, actual or constructive, is ultra vires the company, he cannot enforce it because one cannot approbate and reprobate.

It is important to emphasis that section 31 of the FIRS (Establishment) Act gives the FIRS discretionary powers only to ‘‘appoint and collect’’ taxes from the agent. Hence, there was no ostensible authority directing the bank agent to freeze their customers account.
From the foregoing provision, it is understood these monies can be recovered from the agent if it is respectively held by the agents of the tax payer. Hence, the directive given to banks to freeze the accounts of tax payers may not be legally justifiable for the purpose of collecting taxes.

It is pertinent to note that where a power or discretion is expressly given for one purpose, an exercise of that power for another purpose is unlawful and therefore invalid. This principle was given judicial flesh by the English court in Sydney Municipal Council V. Campbell , in that case the council was given power to acquire land compulsorily only for the purpose of making streets. The council used the power to acquire land ripe for development so that any increase in value would accrue to the municipality. Justice Duff stated with emphasis:
The Legal principle governing the execution of powers… are not at all in controversy.
A body authorize to take land compulsorily for a specific purpose will not be permitted
To exercise its powers for different purposes, and if it attempts to do so the court will interfere.

In Administrative law this principle is known as ‘‘Improper purpose’’. Also, the notion of ‘‘Relevant Consideration’’ is another principle worthy of mention which posits that where a discretionary power is granted or donated, the donee of such discretion is required to take into account all relevant considerations and exclude all irrelevant considerations before arriving at a decision. In the case of Prescott v. Birmingham Corporation , A corporation owned and operated a transport undertaken and had statutory powers to charge fares. Although there was no express obligations to charge all passengers, the corporation decided to provide free travel for certain passengers. It was held that the corporation did take into relevant consideration that the essence of the fare was to charge all passengers but at different rates. Therefore, it acted ultra-vires its powers. In view of the above authorities, it suffice to state unequivocally that the litmus test for assessing the order given by the FIRS to banks in its substantive sense is an ultra vires act.

THE EXERCISE OF THIS POWER: WHEN AND HOW?
The power granted to 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 (1) tax payable by the taxpayer and (2) the taxpayer has defaulted in paying.
A tax is ‘payable’ either when (1a) an assessment is undisputed or (1b) an assessment has become final and conclusive under the relevant provisions of the tax laws; and (2) the statutory time for payment has elapsed .
According to Mr. Taiwo Oyedele, an assessment is undisputed where it results from a self-assessment by the taxpayer himself or where the taxpayer agrees or acquiesced to the assessment. On the other hand, a tax assessment can be described as ‘final and conclusive’ where (1) the taxpayer fails to object within the limitation period prescribed in the law; or (2) the assessment has been determined by a competent court/tribunal and the taxpayer has not appealed within the time specified in the law.

WHAT MUST THE AGENT DO BEFORE OBEYING THE ORDER?
It is the author’s view, that an objective and rationalistic view be adopted in the circumstance. The agent must first carry out some due diligence before giving effect to such orders by raising ‘‘Requisitions’’ especially in grey areas that require proper clarifications. This is because such appointment, like any decision of the tax authority, can be equally 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. The agent is not to simply obey the order without questions. Certain questions to ask and demands to make will include:
a. Documentary evidence that the tax payer has defaulted in paying his tax
b. Evidence that the tax is payable and was subject proper assessment which has not been disputed or dissented by the tax payer.
c. Where it is clearly discovered that the assessment was disputed, then a proof that the tax has become final and conclusive and
d. Confirmation that the period permitted for the payment of tax has elapsed.

RESORT TO TAX APPEAL TRIBUNAL FOR SETTLEMENT OF DISPUTES
The Tax Appeal Tribunal is a recognized institution empowered to settle disputes arising from the operations of the FIRS (Establishment) Act and others spelt out in the fifth schedule to the Act. With reference to section 59 (2) of the FIRS Act, they have jurisdiction over disputes arising from the Companies Income Tax Act; Petroleum Profit Tax Act, Personal Income Tax Act, Capital Gains Tax Act, Value Added Tax Act; Stamp Duties Act; Taxes and Levies (Approved list for collection) Act; as well as other laws, regulations, proclamations, government notices or rules related to these Acts.

Since the administration of taxes is bound to throw-up disagreements and disputes. The law authorizes the FIRS to sue and recover taxes charged against taxable persons, but which remain unpaid at the expiration of the notice issued to demand for such payments. Thus, where a taxpayer receives a notice of assessment, he may agree with the assessment and make necessary payment or he objects to it . And if the FIRS is aggrieved by the non-compliance of a person, or body corporate in respect of the tax laws, the grounds for appeal will be to resort to the tax tribunal for deliberation and determination of such assessment. The tax appeal tribunal is therefore an indispensable component of any tax administration system and this underscores the crucial role of the Tax Appeal Tribunal.

Section 59 of FIRS (Establishment) Act 2007, provides for the establishment of the Tax Appeal Tribunal, replacing the body of Appeal Commissioners and the Value Added Tax Tribunals, with powers to settle disputes arising from the operations of the Act and others spelt out in the Fifth Schedule to the Act. Section 18 (2) Companies Income Tax (Amendment) Act, 2007 states that appeals shall be as provided for in the FIRS Act, and section 68 of the Act states that the provisions of the Federal tax laws shall be read with such modifications as to bring them into conformity with FIRS Act.

CONCLUSION
The exercise of discretionary powers by the FIRS for the enforcement of tax compliance is a welcome development. However, it goes without question that the exercise of such power must be threaded with caution, so as not to over-step the legal boundaries set by the law. The ultra-vires rule acts as a check to the excesses of the FIRS, when exerting its disciplinary and enforcement mechanism on tax defaulters. Like a licentious octopus the FIRS has the capacity to penetrate all sectors of the economy through the spread of its administrative tentacles.
In exercising its powers the FIRS is bound to follow the procedures stricto-sensu by ensuring that it is not found wanting before issuing any directive appointing banks as agents to freeze the account of their named customers who are perceived to have defaulted in paying their tax.

Despite the express provisions of section 8 that empowers the FIRS to adopt critical measures with a bid to identity, trace, freeze and confiscate the proceeds derived from tax fraud or tax evasion. It is however, only permissible in extreme circumstances, (i.e. where there is a final and conclusive evidence from a proper undisputed assessment of tax fraud or tax evasion). But, where such is not the case and the assessment is questioned and disputed, the proper channel for both the FIRS and the tax payer is to appeal to the tax appeal tribunal to formally resolve such dispute.
Since the power to substitute by the FIRS is similar to a garnishee order whereby the court orders a third party agent that owes money to a judgement debtor to instead pay the judgment creditor. In this case the judgement creditor is the FIRS and such order can only be made by a court or tribunal, not the judgement creditor.

In view of the above taxpayers are therefore advised to promptly pay attention to their tax affairs, obtain and verify their tax clearance certificate 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.

 

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