FHC Faults FIRS Using Banks as Collection Agents Unduly

Federal High Court (FHC) has ruled that it is unlawful for the Federal Inland Revenue Service (FIRS) to appoint Guaranty Trust Bank as its collecting agent to recover alleged Companies Income Tax (CIT) liability from Ama Etuwawe Esq (plaintiff).

In its judgement in the case between the plaintiff, FIRS and GTBank, who are jointly referred to as Defendants, FHC held that the Plaintiff is not liable to pay CIT, being an individual, who carries on legal practice in its name, and issued an order of perpetual injunction restraining the FIRS, its agents, privies, employees, etc., from demanding the payment of CIT from the Plaintiff.

The court also awarded monetary sum as damages against the Defendants for illegal and unlawful freezing of the Plaintiff’s bank account.

What it means: It means that the tax regulator does not have the right to appoint banks as its agents for the collection of taxes when the taxes are not proven to be due. The court insisted that such a move is premature and exposes the banks to risk if such taxes are not actually due, or are lesser than the sum actually paid to the FIRS.

It also means that going forward, FIRS must demonstrate that the alleged liability is final and conclusive, and that the taxpayer has failed to pay the liability within the statutory time limit before it can validly appoint an agent of collection for that purpose. In any case, the court ruled that such enforcement must be limited to the amount of the valid liability and not the total funds in the affected taxpayer’s bank account.

The FHC judgement added that a risk of exposure in the form of an award of damages may crystalize on the banks where the freeze order is determined to have been wrongly issued and executed, especially where the bank failed to obtain adequate comfort from the FIRS that the liability is indeed final and conclusive before executing the lien.

What really happened: In 2018, the FIRS commenced the issuance of Letters of Substitution to banks in Nigeria, pursuant to Section 49 of the Companies Income Tax Act, Cap. C21, Laws of the Federation of Nigeria, 2004 (as amended) and Section 31 of the Federal Inland Revenue Service Establishment Act, 2007.

By the letter, the FIRS alleged that certain listed customers (“affected companies”) maintaining bank accounts with such banks failed to fulfil their tax obligations, and therefore appointed the banks as tax collecting agents for the deduction and remittance of the alleged tax liabilities. The FIRS also requested the banks to “freeze” the accounts of affected companies and demanded that the banks should not execute any mandate on those accounts without its prior approval.

Following the above, KPMG issued a Newsletter highlighting key issues that the FIRS should consider before implementing its directive to the banks, some of which the FHC addressed in this judgement.

The FHC judgement declaring the FIRS’ action as “unlawful, null and void” is, therefore, not surprising given the plethora of issues associated with the FIRS’ directive, some of which we had highlighted above.