Tax Appeal Tribunal (TAT or the Tribunal), on 20 January 2020 in the case between Delta Afrik Engineering Nigeria (Delta Afrik or the Company) and Akwa Ibom State Board of Internal Revenue (AKBIR), affirmed the principle of law that a tax authority may not impose back duty assessments for periods beyond the preceding six (6) years unless it is able to establish fraud, willful default, or neglect (Justiciable Cause – in this alert, refers to fraud, wilful default, or neglect). This implies that the courts’ powers to rule on back duty audits beyond the six-year rule is dependent on whether Justiciable Cause can be established.
AKBIR issued a demand notice to Delta Afrik for alleged PAYE tax liabilities covering 2007-2015, totalling
N14,487,498,665, without substantiating the liabilities or identifying the individual employees and the income earned. AKBIR calculated the alleged tax liabilities based on the employee charge-out rates in the contract for the provision of engineering, procurement, construction, installation and commissioning activities, between Delta Afrik and Mobil Producing Nigeria Limited (Mobil).
TAT considered and resolved the following issues:
- Whether AKBIR can issue a demand notice to Delta Afrik beyond the statutory six-year limit
TAT held that Section 54(5) of Personal Income Tax Act (PITA) clearly provides that tax authorities are proscribed from issuing back-duty PAYE assessments beyond the six year limit without Justiciable Cause. In this case, since the PAYE tax assessment was for a period of nine years (longer than the statutory period), AKBIR was required to establish Justiciable Cause in order to assess the earlier three years (i.e. 2007 – 2009) as a mere allegation is not a sufficient basis. In the absence of proof, the six-year limitation stands.
- Whether AKBIR can deem employees income, for the purpose of calculating PAYE, on the basis of contract/project values
AKBIR, in calculating the alleged PAYE tax liabilities of Delta Afrik’s employees, relied on the employees’ charge-out rates, which formed the basis of the contract between Delta Afrik and Mobil. Delta Afrik objected to this assessment on the basis that these charge-out rates form the turnover of the Company and not the income earned by its employees. Delta Afrik argued further that subjecting its contract income to PAYE tax in the hands of its employees would amount to sharing all the Company’s revenue to the employees. TAT agreed with Delta Afrik, and therefore struck out the alleged tax liabilities calculated by AKBIR.
Notwithstanding the six-year limitation period rule, the Federal Inland Revenue Service Establishment Act (FIRSEA) and Personal income Tax Act (PITA) empower Revenue authorities to request for any document or information from taxpayers without specifying the time limit of the information sought. Thus, it may be argued that there is nothing in the law preventing Revenue authorities from auditing a taxpayer’s books beyond six years. However, the law only proscribes the issuance of an assessment beyond the preceding six years, except where Justiciable Cause can be proven.
Overall, based on the TAT ruling Revenue Authorities can legitimately issue an assessment to any taxpayer outside the six-year limitation period only where Justiciable Cause is established. The TAT decision is not explicit on how to establish a case of fraud, willful default or neglect. While fraud and willful default may require a higher level of proof, negligence is easier to establish where the taxpayer has not been filing his returns. Fraud connotes crime and where this is the case, a criminal prosecution may be required before the Revenue authority can exercise the right to assess a taxpayer to tax beyond the six-year period. In the present case, the fact that Delta Afrik had filed its returns up to date was instrumental in proving that the company was not negligent. We hope that this decision will empower taxpayers to object to back duty assessment, and make the tax authorities reflect and establish the basis of a justiciable cause before commencing tax audits/investigation extending beyond the six-year limitation rule.