The Tax Appeal Tribunal (TAT or the Tribunal), on 21 August 2019, in the case between Polaris Bank PLC (Polaris or the Appellant) V. Abia State Board of Internal Revenue (ASBIR or the Respondent), affirmed that statutorily stipulated procedures must be followed before a tax liability determined from an audit exercise becomes payable by a taxpayer.
ASBIR had issued a demand notice to Polaris for unpaid tax liabilities covering 2006 to 2011. Polaris objected to the demand notice, admitting to a portion of the tax liability which it subsequently paid. However, ASBIRS subsequently issued another demand notice, requesting payment for the unpaid portion of the alleged tax liability within 7 days. The appellant objected to this demand notice and filed the appeal at the TAT.
The following issues were considered and resolved by the TAT:
- Whether ASBIR can deem an assessment as final and conclusive, where a valid objection has been submitted by the taxpayer
The TAT held that statutorily provided procedures, including the principle of fair hearing stated in sections 58 & 68(2) (on revision in cases of objection and payment of income tax) of the Personal Income Tax Act (PITA), must be adhered to by the tax authorities before a tax liability becomes final and binding on the taxpayer. Consequently, the demand notices issued by ASBIR were set aside on the ground that statutory steps were not followed in determining the alleged final and conclusive assessment.
- Whether ASBIR is entitled to collect Development Levy and Business Premises Levy without an enabling state statute
TAT ruled that Taxes and Levies (Approved List for Collection) Act is not a primary tax legislation which can be relied upon by a state to levy business premises and development levy, as it has no charging provision. Therefore, development and business premises levies can only be levied by a state board where there is a legislation imposing such levies.
- Whether ASBIR is entitled to collect penalty and interest based on any of the demand notices served on the Appellant
According to the TAT, penalty and interest becomes payable where the tax liability has been determined by law. Ordinarily, interest and penalty on the undisputed tax liability admitted and paid by the Appellant would have become due. However, given that the undisputed tax liability relates to a period beyond the six year statute of limitation, penalty and interest cannot be imposed on the undisputed liability.
Also, TAT held that mere labelling an exercise as a “tax investigation” (which typically connotes findings with a view to discovering tax crimes), would not suffice to remove the statutory limitation typically applicable to tax audits.
The decision of the TAT is a welcome development as it upholds certain principles of the law with regards to when a tax liability becomes final and conclusive, and the powers of state tax authorities to collect certain levies. The requirement for state legislatures to enact laws in order to impose taxes/levies collectible by state governments, reaffirms one of the cardinal principles of taxation that all taxes must be backed up by statutes.
In addition, this case affirms that in the real sense of it, a tax investigation on a taxpayer has to be triggered by a case of fraud, wilful default or neglect. Therefore, the practice of tax authorities labelling tax inquiries as ‘tax investigations’ in order to collect tax liabilities relating to periods extending beyond the 6 year statute of limitation may not pass intense scrutiny.
The tax law is also not explicit on how to establish a case of fraud, wilful default or neglect. For instance, wilful default would imply an intentional omission or commission, which begs the question of how the tax authorities will prove that default by a taxpayer was intentional to warrant a tax investigation, and not as a result of error or ignorance. For fraud, a key question would be who determines the incidence of fraud? Can the tax authorities alone establish the incidence of fraud or do they need to rely on reports from other government agencies or bodies to establish this?
It appears that this TAT ruling gives room for taxpayers to challenge the tax authorities where they seek to conduct a tax investigation on their records and request for evidence of the existence of the statutory triggers for an investigation exercise. It will be interesting to see the reaction of the tax authorities to this ruling in the future.