With a tax to Gross Domestic Product (GDP) ratio of about five percent—one of the lowest in the world—the federal government of Nigeria has continued to take steps towards raising non-oil revenue in the country.
One such step is the ratcheting up of tax collection mechanisms, through tax reviews, audits and investigations of taxpayer records, by both tax and non-tax authorities. This multi-agency approach to taxpayer audits has inadvertently put the Nigerian tax administration system in the spotlight and calls into question the rationale and legality of non-tax bodies becoming involved in tax administration.
Current Tax Administration System
The current tax administration system in Nigeria is structured such that tax administration cuts across the three tiers of government. The purpose of this is to enable the different tiers of government to administer the taxes under their scope, to ensure efficiency in tax collection and reduce multiple taxation.
The Federal Inland Revenue Service (FIRS) Establishment Act confers on the FIRS the authority to administer (including to perform audit and reviews) and collect all taxes due to the federal government. The State Boards of Internal Revenue (SBIR) and Local Government Councils have the authority to administer taxes and levies due to the states and local governments.
In spite of this clear assignment of powers to these agencies by the extant laws, companies in Nigeria are subject to multiple audits, reviews and investigations—sometimes for the same periods—by “non-tax” agencies.
This is clearly contrary to the objectives of the National Tax Policy, which seeks to effect the simplification of the tax system and ease of compliance by taxpayers.
From experience, some government agencies (apart from tax authorities) that have conducted audits and reviews of taxpayers’ records at different times include the Revenue Mobilization Allocation and Fiscal Commission (RMAFC), Special Presidential Investigation Panel (SPIP), and shockingly, the Ministry of Justice through the Office of the Attorney-General of the Federation.
The National Tax Policy document released in 2017 gives an implementation mandate to the President and Governors to work towards ensuring that there is only one revenue agency per level of government, to streamline revenue administration and improve efficiency of revenue collection. The same document also states that ministries, extra-ministerial departments and agencies other than tax authorities should not become tax collecting bodies.
Powers of Non-tax Agencies
The question then becomes: what are the primary functions of these non-tax agencies and are they acting within the ambit of their statutory powers?
For example, commercial banks in Nigeria have been the subject of aggressive RMAFC audits in the last two years. In most cases, these banks could have open FIRS audits for the same periods, or would be scrutinized for the periods already audited. Section 6(1a) of the Revenue Mobilisation, Allocation and Fiscal Commission Act, 1989, states that the Commission shall have power “to monitor the accruals to and disbursement of revenue from the Federation Account,” while 6(1b) states that the Commission shall have power to “review from time to time, the revenue allocation formulae and principles in operation to ensure conformity with changing realities.”
By simply looking at these functions, it can be inferred that the above Act gives the RMAFC authority over the management of the Federation Account, and does not confer on it any power to conduct any audit or review taxpayers’ records. This position is further strengthened by the provision of section 6(2b) (iii) of the same Act, which empowers the RMAFC to demand and obtain regular and relevant information, data or returns from the FIRS—the agency charged with the primary responsibility of tax administration and collection.
These provisions are clear and unambiguous, so one wonders why the RMAFC continues to make incursions into tax matters!
The SPIP has also written to some companies about its intention to conduct investigation activities due to suspicion of tax fraud. Will the SPIP be acting lawfully where it conducts such investigations?
According to sections 1 and 2 of the Recovery of Public Property (Special Provisions) Act, 1983—the legislation that establishes the SPIP—the major function of the SPIP is to investigate the assets of any “Public Officer” who is alleged to have been engaged in corrupt practices. Section 4 of this Act defines a Public Officer as any person who holds or has held any of the offices specified in Part II of the Fifth Schedule to the Constitution of the Federal Republic of Nigeria (i.e. the President of the Federation, the Vice-President of the Federation, Governors and Deputy Governors of States, etc.).
Why does this body extend its powers to investigating companies, specifically for tax-related matters? Are companies now considered public officers as contemplated in the Nigerian Constitution?
There are other instances where the Office of the Attorney-General of the Federation has made attempts at carrying out stamp duty audit on some banks. Does this have any basis in law? The First Schedule to the FIRS Establishment Act empowers the FIRS to administer the Stamp Duties Act. This includes the collection of duties accruable to the government of the federation and carrying out of audit exercises on taxpayers with respect to compliance with the provisions of the Stamp Duties Act.
However, reading the provisions of section 111 of the Stamp Duties Act, one sees that the Act grants power to the Attorney-General of the Federation to recover unpaid stamp duties, in a summary manner, on behalf of the federal government. Does this amount to conflict in law?
The authors do not think so. Without attempting to interpret the law, the authors are of the view that such function of the Attorney-General of the Federation is only exercisable through an order of the Federal High Court, in situations where a taxpayer defaults and makes no objection to a stamp duties assessment.
These odd practices raise the question whether the actions of these non-tax agencies will enhance the simplification of Nigeria’s tax system as conceptualized in the National Tax Policy document. Will these actions support business growth or will they scare away prospective investors? What is the potential impact on business?
Impact on Business
Without doubt, the impact of having non-tax bodies become involved in tax audits and collection can be disruptive to business, with far-reaching implication for the economy, as considered below.
Disruption to Businesses Operations
Companies frequently complain that tax audit exercises are disruptive to their business operations, in the sense that officials of the FIRS (and SBIR) typically request information, documents and clarifications from taxpayers during audit. Attending to these requests takes its toll on the employees of the company being audited.
If this is the case with conventional tax audits, one can imagine what it would be like attending to “tax audits” conducted by non-tax agencies, possibly just trying to prove a point by requesting information and documents during the audit exercise, which in some cases may be running concurrently with the conventional tax audit or may relate to similar periods/years already audited by the FIRS.
Without doubt, this has the capacity to impact negatively on the productivity of employees of the company being audited, and by extension, the productivity of the business.
Closely associated with the above point is the time spent during tax audit exercises. On average it takes about two years to conclude a tax audit exercise in Nigeria. Assuming a company spends two years undergoing an audit by the FIRS, and a similar period on another audit by a non-tax authority, that would amount to four years of undergoing tax audits, which may cover the same accounting periods/years.
It can be imagined what the cost associated with this time consumed would be for the business.
Increased Business Overhead Costs
Companies incur costs in engaging consultants to provide support during the tax audit exercise, which are sometimes contingent on the time spent by the consultants. When an audit involves a significant period of time, the company would incur significant cost in the form of tax audit consultancy fees.
Difficulty in Doing Business
Attending to separate audits by a conventional tax authority (e.g. the FIRS) on the one hand, and non-tax authorities on the other hand, is time-consuming, forces the taxpayer to incur unnecessary running costs, and inevitably puts a strain on the business.
If these practices continue, the government’s current effort to improve ease of doing business in Nigeria will be significantly undermined. Potential investors will receive a signal that Nigeria is an unfriendly investment destination, tax-wise.
A hostile tax environment is certainly not good for business, and has the potential to deter prospective investors. It is important that the government recognizes the potential negative impact the current trend of multi-agency tax audit and reviews may have on taxpayers and on the government’s revenue generation efforts.
As a first step towards improving the situation, it is important that non-tax agencies stay within the limits of the laws which establish them. These agencies should not become involved in issues relating to taxation, as they are not established to oversee tax affairs.
Second, the statutory tax authorities (i.e. the FIRS and the SBIR) must play a leading role in tax matters in Nigeria. They must be able to exert their authority in general tax administration as provided for in the enabling legislation.
Third, taxpayers should be prepared to challenge the actions of these non-tax agencies in a competent court of law, should they continue in the future.
The duplication of activities by government agencies cannot guarantee increase in tax revenue. The gains made with regards to voluntary tax compliance by taxpayers will be eroded if the current trend is not checked.
Taxation should be a tool for economic growth and development: concerted efforts should be made to widen the tax base in order to capture more taxpayers, rather than over-taxing a select few.
There should also be a consolidated database among government agencies as this would boost tax intelligence. The National Tax Policy seeks to facilitate inter-agency co-operation and exchange of information—the government should revisit this vital document and work towards its effective implementation.
Kenneth Mgbemena and Ikechukwu Enekwe are Senior Tax Adviser and Semi-Senior Tax Adviser respectively with KPMG Advisory Services, Lagos, Nigeria and may be contacted at: email@example.com; firstname.lastname@example.org.