Nigeria: A Final And Conclusive Tax Assessment Without Legal Basis Is Futile

The issuance of a final and conclusive tax assessment sometimes signify a sense of closure for both a taxpayer and a tax authority with respect to a particular tax dispute. With this, the taxpayer is expected to make payment of any alleged tax liability, particularly when such assessment is not disputed. A final and conclusive assessment also gives the tax authority the right to distrain against the property of the taxpayer. However, where such final and conclusive assessment lack legal basis, any action carried out by the tax authority in furtherance of the said assessment is void ab-initio.

A case in point is Longe Medical Centre & Anor v. AG Ogun State (2020) LPELR- 49751(Longe's Case). In this case, the Court of Appeal held that the Ogun State Internal Revenue Service (OIRS) acted outside the confines of the law when it invaded and locked up the premises of the taxpayer pursuant to a final and conclusive assessment devoid of legal basis. A key aspect of the case revolves around the relevant tax authority for the assessment of and remittance of Personal Income Tax (PIT).

This article provides an overview of the Longe's Case and aims to shed light on the implications of the Court's decision on taxpayers and the overall integrity of the tax administrative system.

When and how do assessments become final and conclusive?

Simply put, a tax assessment becomes final and conclusive when a taxpayer concurs with the tax liability raised in the assessment notice. An assessment can also become final and conclusive where the taxpayer fails to respond (or object) to an assessment within the specified timeline provided by law. Generally, based on Section13 of the Fifth Schedule to the Federal Inland Revenue Service (Establishment) Act, 2007 (FIRS Act), an assessment becomes final and conclusive where the taxpayer does not object or appeal within a period of 30 days from the date of such assessment.

The Longe's Case: Brief Facts and Decision of the Court of Appeal

This appeal emanated from the decision of the High Court of Ogun State. In September 2011, the Ogun State Internal Revenue Service (OIRS) invaded and locked up the premises of Longe Medical Centre (the 1st Appellant), a health institution located between the boundaries of Lagos and Ogun States but registered with the Lagos State Private Hospital Registration Authority.

Prior to the invasion and locking up, the OIRS had persistently demanded that the 1st Appellant pay the personal income tax (PIT) of its employees to the OIRS. The 1st Appellant maintained its liability was to the Lagos State Internal Revenue Service (LIRS), since all its staff reside in Lagos State.

The OIRS claimed that having served the 1st Appellant with the final and conclusive assessment and demand notice, it was entitled to distrain the 1st Appellant's premises in accordance with Section 104 (1) (a) (b) of Personal Income Tax Act (PITA). In its submission, the 1st Appellant argued that the OIRS stepped out of its territorial jurisdiction of enforcement of tax payment by locking up its premises. There was uncontroverted evidence that the staff of the Hospital are resident in Lagos State, and the Appellants went further to provide evidence of consistent remittance of Personal Income Tax to the LIRS.

The Court of Appeal held that the 1st Appellant had no obligation to remit PIT of its employees to OIRS as its obligation was to Lagos State and the OIRS acted ultra vires its powers when it distrained the property of the 1st Appellant situate in Lagos State, which is outside its jurisdiction.

Tax Residency: A Necessary Condition for the Validity of Personal Income Tax Assessments

It is a long-standing principle in taxation that no tax can be levied except under authority of an extant law. This is known as legal bases for imposition of tax. One of the legal bases for the imposition of PIT is Residency.

Section 2 (2) of PITA provides that the PIT of individuals for any year of assessment may be collected only by the State which the individual is deemed to be resident for that year. The choice of the word "only" by the draftsman connotes that only the State which an individual resides has the exclusive authority to collect the PIT for that year. The general exceptions to this are in relation to Itinerant workers, persons employed under the Nigerian Armed Forces, officers of the Nigerian Foreign Service, a person resident outside Nigeria who derives income or profit from Nigeria etc. The personal income tax of these individuals is due to the Federal Inland Revenue Service.

The Court in Ecodrill (Nig.) Ltd. v. A.B.I.R. (2015) 11 NWLR (Pt. 1470) has interpreted a place of residence to mean "place of residence of an individual in relation to imposition and collection of personal income tax". This question of residency was a key issue in the Longe's case where the Court in relying on the Ecodrill's case had to determine whether the 2nd Respondent had the authority to issue an assessment and collect tax of the Appellant's staff residing in Lagos State

A pertinent question to ask therefore is - what happens when a tax authority issues a final and conclusive assessment without legal bases? Does it become binding on the taxpayer? The answer, as seen from Longe's case, is No.

Any action by a tax authority outside the bounds and provision of the law in issuing a final and conclusive assessment is invalid and hence, useless. The foregoing is notwithstanding the correctness of any procedure/steps in enforcing the purported assessment. In considering whether the OIRS acted within the ambits of the law, the Court held that it is immaterial that the OIRS followed laid down procedure to distrain the Appellant's property, in so far as the Appellants were not under its jurisdiction, it acted ultra vires its powers.

Key Takeaways: A Case for Efficient Tax Administrative System

The Court of Appeal's decision in the Longe's Case, once again, renewed the call for an efficient tax administrative system across board. It is important to note that where taxpayers are faced with final and conclusive assessments without legal basis, they are left with no option but to challenge such assessments through the judicial process usually starting from the Tax Appeal Tribunal and sometimes up to the Court of Appeal or the Supreme Court. This not only place an extra burden on the judicial system but is an avoidable waste of time of both the taxpayer and the tax authority.

In most cases, the tax authority does not get any additional revenue but end up expending resources (man-hours, retention of external counsel etc) pursuing needless tax appeals. Issuing tax assessments without legal basis (and distraining a taxpayer's premises) could also have other far-reaching implications for tax authorities such as being held liable for the breach of the fundamental human right of the taxpayer as well as liability to pay damages to the taxpayer. This brings to the fore the importance of ensuring that tax assessments strictly adhere to provisions of relevant tax laws and procedures.

To ensure an efficient tax administrative system, there is the need for tax officials to have an in-depth understanding of tax laws and its applicability to their operations. In certain cases, tax disputes arise as a result of lack of knowledge of the issue by a tax official, wrong or erroneous interpretation of a statutory provision, unlawful exercise of administrative powers etc. Therefore, periodic training of employees is crucial in driving an efficient tax system, maintaining the integrity of tax administration and avoiding unprofitable and un-necessary voyages for tax revenue, as seen in the Longe's Case.

Conclusion

The Court's decision in the Longe's Case serves as a stark reminder of the consequences of issuing tax assessments without legal foundation. Tax assessments devoid of legal merit undermines the need for a transparent, just and efficient tax system. Thus, it is crucial for tax authorities to ensure that their assessments are grounded in law to avoid legal challenge from taxpayers. A comprehensive understanding of applicable legal framework is therefore paramount, as tax authorities navigate the complex landscape of tax administration and collection.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.