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Tax substitution as double taxation

By Omuli Iwere

The power to levy tax in Nigeria, being a federation, is shared between the Federal, State and Local governments. To avoid double taxation, the tax system spells out which government unit (federal, state or local) has the power to levy tax on specific persons and matters.

Omuli Iwere
Omuli Iwere

The Federal Inland Revenue Service Establishment Act 2007 provides in Section 25 that the Federal Inland Revenue Service (FIRS – primary tax agency of the Federal Government) shall have power to administer the following taxes: Companies Income Tax Act, CITA;  Petroleum Profits Tax Act, Personal Income Tax Act, PITA; Capital Gains Tax Act; Value Added Tax Act; Stamp Duty Act; and Taxes and Levies (Approved List for Collection).

In Nigeria, CITA is applicable to companies registered under Part A of the Companies and Allied Matters Act 1990 while PITA is applicable to individuals and Business Names. For this discourse, our focus will be on PITA. PITA is the tax payable by all individuals, registered businesses and partnerships which are not companies. Part II of the Taxes and Levies (Approved list for collection) Decree No. 21 of 1998, LFN which is incorporated into the 2007 Act, provides that it shall be the sole responsibility of the states to collect all personal income tax in respect of ‘Pay As You Earn, PAYE and Direct Assessment. The PAYE model is applicable to those in paid employment, while those in businesses carry out Direct Assessment and remit their taxes to the state.

In effect, reading both legislations together ({Approved List of Collection} Decree No. 21 of 1998 and Federal Inland Revenue (FIRS) Establishment Act 2007), the FIRS have no authority to collect taxes from individuals, registered businesses and partnerships which are not registered companies, these fall under the remit of the state tax authorities.

Legal Personality Vs Business Name:

The position under the tax legislation on business name taxation finds ready support in case law treatment of business names. In Nigerian Law following the common law tradition, a company has a legal entity which is distinct from that of its proprietors and can act, sue or be sued in its registered name without recourse or liabilities to its proprietors. However, a business name is not considered as a distinct entity with legal personality and can only act through its proprietors. Hence, in law, the proprietor(s) of a business name are personally liable for any acts of the business name and can only sue and be sued through its proprietors.

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The Court of Appeal, Abuja Division, in 2014, in the case of Federal Capital Development Authority & Ors v. Unique Future Leaders International Limited, following the decision in Bankole & Ors v. Emi Industries Limited (2012) (C.A.), held that a registered business name is not a Juristic Person and so cannot enter into any contract or transaction in its business name. The Court of Appeal also held that a registered business name can enter into contracts through its trustees or in the individual names of the proprietor or proprietors of the business name.

In company law, the law sees no distinction between the business name and its proprietor(s). It therefore follows that categorising them along with individuals in matters of taxation is the correct position of the law. It also means that the state tax authorities, not the FIRS, are the proper regulator to oversee business name taxation.

Recent Action of The FIRS: Recently, the Federal Inland Revenue Service intensified its efforts to collect taxes from default payers by appointing banks and other financial institutions as collection agents. Many account holders woke up to restricted access to their accounts as a large number of accounts were restricted by banks between the months of August 2018 and February 2019, causing hardship, consternation and disrupting business transactions.

The legality of this action has already been questioned in different fora. Some legal colleagues have given their opinions on appointment of third parties as collection agents as part of tax substitution and have concluded that although section 31 of the Federal Inland Revenue Service (Establishment) Act, 2007 (FIRS Act) which also embodies Section 49 of the Companies Income Tax Act (CITA), 1990 and Section 50 of the Personal Income Tax Act (PITA)does empower the FIRS to appoint third parties as collection agents, the said power can only be exercised where the tax has become payable.

While the debate subsists on limitations imposed on this power such as the definition of when a “tax is payable” and if an agent is obligated to accept such appointment by the FIRS, there is a salient point which the process has thrown up which is being overlooked. This point is: does a Tax Identification Number, TIN, subvert legal personality as recognised by Law with regards to Business Names? This point is of importance as the freeze was not only imposed on companies but also on business names, simply because the banks have mandated business names to obtain a TIN. Does this mean that business name holders should now pay their taxes to the Federal Government instead of the State Government? And for those who might feel that this move was to capture Value Added Tax, VAT regarding business names, then why was this not also imposed on business individuals who run their businesses under their birth names?

To be continued…


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