Nigeria: Tax Dispute Resolution: Critical Issues On Final And Conclusive Assessment

In 2018, the Federal Inland Revenue Service (FIRS) reported that it collected N5.32trillion in tax revenue. This was as a result of the increased drive for tax collection and must have given the FIRS, the confidence to set a very ambitious tax revenue target of ₦8 trillion for 2019. This drive for improved tax collection is also seen at the sub national level where most State Internal Revenue Services (SIRS) are aggressively engaging taxpayers in a bid to raise revenue. Given the plan to approve the national minimum wage of ₦30,000 and the resultant increase in Government expenditure, it is expected that the tax authorities will become even more aggressive in their effort to shore up tax revenues.

In the past year, the FIRS embarked on several initiatives aimed at expanding the tax net and raising revenue. As part of the FIRS' efforts, it gathered huge data on potential taxpayers and their business activities. The data was then processed to profile potential taxpayers who hitherto had not paid their taxes. This resulted in the issuance of back duty tax assessments to ensure recovery of unpaid taxes. For many taxpayers who received such back duty tax assessments for the first time, it was evident that they were not aware of the stipulated timelines for responding to such back duty assessments and the implications of missing the deadlines for objection.

Where the taxpayer disputes the assessments, the tax laws allow taxpayers to object the additional assessment within a specified timeline¹, stating the specific grounds of objection. Failure to object within the specified period may make the additional liabilities final and conclusive.

This article seeks to review the issues around final and conclusive tax assessments and addresses common pitfalls that lead to unfavorable tax assessments issued to taxpayers.

When and how do assessments become final and conclusive?

Generally, a tax assessment is final and conclusive when a taxpayer agrees with the tax liability raised in the assessment notice following an objection or an appeal. Another reason may be due to failure to respond to an assessment within the specified deadline as provided within the tax laws. With respect to Companies Income Tax (CIT), Section 76 of CIT Act (CITA) provides that:

Based on the foregoing, a final and conclusive assessment may be the high note of a tax dispute where the taxpayer agrees to the assessment and settles the tax liability. A problem only arises where the assessment is inconsistent with the taxpayer's position and the tax authority has considered the assessment as final. In this scenario, the FIRS may issue a Notice of Refusal to Amend (NORA) and the next avenue to seek redress will be through litigation. Most taxpayers are usually not willing to explore this option due to cost implication and protracted nature of most cases. Some of the issues to consider in avoiding unfavorable final and conclusive assessments are as follows:

a. Timeline specified by law

The timeline to submit a valid objection to a tax assessment is critical in challenging an unfavorable final and conclusive assessment from the tax authorities. Failure to respond to an assessment within the time provided by the relevant tax laws automatically makes the assessment final and conclusive.

Whereas the provisions of CITA and Personal Income Tax Act (PITA) require that a valid objection to tax assessments should be filed within thirty (30) days of receipt of such assessment, Section 38 of the Petroleum Profits Tax Act (PPTA) stipulates that an objection must be filed within twenty-one (21) days of receipt of the assessment. Notwithstanding the provisions of the tax laws, there are instances where the tax authorities issue assessment notices to companies and demand a response within seven (7) days of receipt after which the assessment would become final and conclusive.

Given the above, it is important to examine Section 13(2) of the Fifth Schedule to the FIRS Establishment Act (FIRSEA), which provides for a 30-day timeline to respond to an assessment notice. Specifically, Section13(2) of the Fifth Schedule to the FIRSEA provides that "an appeal under this Schedule shall be filed within a period of 30 days from the date on which a copy of the order or decision which is being appealed against is made or deemed to have been made by the Service...".

Section 68(2) of the FIRSEA also addresses the seeming inconsistency between the provisions of Section 38 of the PPTA, which requires a 21 day deadline for companies operating in the Upstream Sector of the Oil and Gas Industry to respond to an assessment notice, and Section 13(2) of the FIRSEA. Based on Section 68(2) of the FIRSEA, where the provisions of any other law (including the PPTA), are inconsistent with the provisions of the FIRSEA, the provisions of the FIRSEA will prevail and the provisions of that other law will to the extent of the inconsistency, be void.

Consequently, any other timeline required to respond to an assessment that is different from a 30-day period from the date of receipt of the assessment notice is invalid. Hence, a company operating in the Upstream Sector of the Oil and Gas industry may choose to object to an assessment on the 30th day after receiving an assessment notice without running a risk of the assessment being final and conclusive.

b. Incomplete/Inadequate records

An objection is considered valid where the taxpayer states the ground of objection and the amount of tax due (if any) to the tax authority. This would typically involve the submission of documents such as receipts, evidence of tax filings and other documents that will support the taxpayer's position. There are instances where the taxpayer is aware of the timeline for submission of a valid objection to the tax authority but unable to do so, due to insufficient or absence of the appropriate records to support the tax position. Where the taxpayer proceeds with a notice of objection with inadequate document, the tax authority will most likely reject the objection and issue a NORA, thus foreclosing the taxpayer's right to further object the assessment except he seeks redress in court.

Although the Companies and Allied Matters Act (CAMA) requires companies to retain their accounting records for six years, based on the tax laws, taxpayer's records can be subjected to tax investigation for periods exceeding six (6) years where any form of fraud, willful default or neglect is suspected. In this instance, it may be difficult for the taxpayer to provide a 10-year-old document that is required to defend a favourable tax position, within a 30-day deadline. The taxpayer may request an extension of the timeline in this circumstance or better still, the provisions of the tax laws should be revisited for a more realistic period an audit should cover.

The above notwithstanding, taxpayers should ensure proper tax and accounting records are kept in order to be able to respond to assessment notices speedily. Electronic record keeping options should be explored to prevent possible loss to fire and damage.

c. Lack of proper correspondence management framework

It is important for taxpayers to have an effective system of managing correspondence with the tax authorities. The framework should include ability to track date of receipt of all pieces of correspondence and the relevant personnel to receive such correspondence when delivered to the company. There have been instances where assessment notices were received by security personnel and kept amongst other documents until the deadline lapsed, thus exposing the taxpayer to undue tax liabilities.

An effective system to track tax correspondence will help to guide taxpayers on the time available to review the assessment, collate all necessary documents and respond to the tax authority. The failure of taxpayers to keep track of the date of receiving an assessment can result in unnecessary additional tax liabilities.

Review of Judicial precedence and practical implications

The judicial pronouncement on when an assessment becomes final and conclusive has been interesting and seem to provide some laxity to the taxpayers with respect to the timeline required to object to an assessment notice. For example, in the case between Theodak Nigeria Limited (Plaintiff) vs. FIRS, the Federal High Court (FHC) was to determine whether an assessment based on the value of the taxpayer's property can be said to be final and conclusive. The FIRS referred to Section 69(1) and (2) of CITA and opined that the Plaintiff did not object to the assessment notices within 30 days of receipt and as such, the assessments had become final and conclusive.

However, the FHC held that the use of the word "may" in Section 69(1) of CITA does not place the Plaintiff under any obligation to file an objection to FIRS. The Court further emphasized that the use of the word "may" in the section implies that the objection to the FIRS is discretionary and not mandatory. This notwithstanding, the word "may" has also been held to be the equivalent of shall in a number of tax cases. Thus, the word "may" can also be read to impose a legal obligation to file an objection with the FIRS in the event of a dispute. While this judgment gives taxpayers some grounds to argue that the timeline is subject to his discretion, it is best practice to respond to an assessment notice within the 30-day deadline.

In another Tax Appeal Tribunal (TAT) case; Lagos State Internal Revenue Service (LIRS) vs. Star Deep Water Petroleum Limited (SDWPL)², one of the issues for determination was whether failure to submit notice of objection to the LIRS within the 30 days specified under PITA can result in an assessment being final and conclusive. The TAT held that given that the assessment was not valid ab initio, failure of SDWPL to object to the assessment within the 30 days deadline does not make the assessment final and conclusive. This judgment suggests that an assessment can only be final and conclusive where the basis of the assessment is valid in the first place. Thus, it behoves the tax authority to take cognizance of this case while issuing assessment notices. Taxpayers may not also want to wait for a litigation process to determine the validity of an assessment, before addressing the issues raised therein.

Conclusion

Given the ambitious tax revenue target of the Federal and State governments, it is important that taxpayers coordinate their business affairs in a manner that does not expose them to unnecessary tax assessments, which may culminate into unfavorable final and conclusive tax assessments.

Where final and conclusive tax assessments have already been issued, taxpayers are advised to work closely with their tax consultants to ascertain the legality and validity of such assessments, in order to take the next appropriate steps as specified in the tax laws.

Footnotes

1. Section 69 of the Companies Income Tax Act and Section 58 of the Personal Income Tax Act specify the timeline as 30 days. However, under Section 38 of the Petroleum Profits Tax Act, the timeline is 21 days.

2. Lagos State Internal Revenue Service vs. Star Deep Water Petroleum Limited (15 April 2015)

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.