Waiver of penalty and interest on unpaid taxes: Matters Arising
Kingsley Amaefule
The Federal Inland Revenue Service (“FIRS”) has announced its intention to grant waivers on interest and penalty on all federal taxes which accrued between 2013 and 2015 but are yet to be paid by taxpayers. This waiver is available only to taxpayers who pay at least 25% of the tax and present a payment plan for the balance on or before 24 November 2016. This gesture by the FIRS has generated considerable excitement among taxpayers in this recessionary period when taxpayers have cash inflow constraints.
Clarification
Following confusion over the implementation of the waiver, it was necessary for the FIRS to provide clarification to encourage compliance. At a Tax Breakfast Meeting held on 18 November 2016 (the “Meeting”), the FIRS Chairman explained that the waiver applies to pre-2013 and is not restricted to 2013 – 2015. Consequently, taxpayers with outstanding interest and penalty which arose anytime before 2013 can also enjoy this waiver.
Matters Arising
Some issues arise from the waiver regime and the law on which it is based. The resolution of these issues should determine what position taxpayers take regarding the waiver. The preferred approach in our view is that taxpayers should liaise with the FIRS to ensure that the waiver regime is administered in a way that is consistent with the law as to do otherwise may expose taxpayers to potential uncertainty.
We have presented our thoughts on the issues arising from the waiver regime in the form of a conversation between a taxpayer and its tax adviser as set out below:
Q: I understand the FIRS’ has offered to waive penalty/interest on unpaid tax liability
A: Yes
Q: The FIRS Chairman has clarified that the waiver applies to pre-2013 penalty/interest. Is he referring to accounting or tax year
A: It is not clear if the FIRS intends tax year or accounting year. However, judging from the Chairman’s response at the Meeting which suggests that FIRS’ disposition is that the waiver would apply to all outstanding penalty and interest, the view can be taken that the FIRS intends accounting year. In that case, waiver would apply to all penalty and interest from when a taxpayer was registered to the 2015 accounting year.
Q: Very good news. I have instructed my Finance/Accounts department to come up with a package that satisfies FIRS’ requirements so we can qualify for the waiver
A: Not so fast
Q: Why, the earlier we act the better. Time is running out
A: I am uncomfortable with the waiver as proposed, as there may not be a legal basis for it
Q: There is a legal basis for it. The FIRS’ notice made reference to some legal provisions
A: Yes, sections 85 (3) of the Companies Income Tax Act (“CITA”) and 32 (3) of the Federal Inland Revenue Service Act (the “FIRS Act”).
Q: Exactly, and they state that the FIRS can grant waiver
A: Well, you are basically correct, although the provisions go a little further than that
Q: What do the provisions say
A: They empower the FIRS to remit either in whole or in part any addition to an unpaid tax
Q: What is an addition
A: An addition is an amount of money added to an unpaid tax when the time for its payment had elapsed. That amount is equal to 10% of the unpaid tax (often referred to as “penalty”) plus interest at the prevailing lending rate of commercial banks.
Q: Exactly, an “addition” is the same as interest and penalty
A: Not always.
Q: Are any interest and penalty excluded from an “addition”
A: Yes. Part VI of the FIRS Act and Part XIII of CITA contain offences. Any penalty and/or interest (whether 10% or otherwise) that arises from the commission of any of the offences would not qualify as “an addition” that can be waived in whole or in part.
Q: So all is well for taxpayers whose penalty/interest arose from non-criminal proceedings
A: Not quite.
Q: How
A: The FIRS can remit an addition only when a taxpayer shows good cause. The law does not grant the FIRS any power to remit any addition where no good cause is presented to it. The current move to grant waiver does not suggest that any taxpayer has convinced the FIRS that there is good cause in its request for waiver.
Q: So the law expects that a taxpayer should first demonstrate good cause before FIRS grants waiver
A: Yes
Q: And such a taxpayer must pay the principal tax by 24 November 2016
A: No, not necessarily.
Q: Ok, at least the taxpayer must pay up within a 45 day period
A: Not at all.
Q: FIRS won’t listen to us unless we do as it has said and present a payment plan
A: That’s not within the law
Q: But FIRS has made this a condition for the grant of waiver
A: The law does not contain any provision that suggests that FIRS has the right to impose conditions in granting waivers. FIRS is to either grant or refuse to grant waiver after considering a taxpayer’s case. Where, after waiver, a taxpayer subsequently fails to pay the principal tax, the waiver would not be reversed, rather, FIRS is to enforce collection of the unpaid tax.
Q: You mean we don’t have to make part-payment and submit a payment plan for the balance to be entitled to waiver
A: Yes, all you have to do is provide good cause to the FIRS that the penalty/interest should be waived in whole or in part
Q: What is a “good cause” upon which FIRS is to apply a waiver
A: The law does not define a “good cause”. However, the term means, from a legal point of view, sufficient grounds.
Q: So what can constitute sufficient grounds for waiver
A: Each case should be decided on its merits. A ground may succeed in one case but fail in another.
Q: The country is officially in recession. Definitely, that should qualify as good cause
A: It is not certain whether recession in the 2016 accounting year would qualify as good cause in all cases as some taxpayers may record a profit in this accounting year. For cases where recession would suffice, it is a moot point whether recession in the 2016 accounting year can serve as good cause for waiving prior years’ liability.
Q: Can the payment plan not qualify as good cause
A: It has been mooted that submission of payment plan may qualify as good cause as it suggests that taxpayers are out-of-pocket for which reason the FIRS has offered waiver to them. However, this argument may not succeed because the requirement for payment plan appears to be a procedural precondition and not proof of why a taxpayer should receive a waiver.
Q: Since the waiver window is now open, we better make haste and submit a good cause for waiver
A: Not necessarily
Q: But if we slack, we may be outside time and FIRS may not offer this opportunity soon or in fact may place a moratorium on waiver as has been done elsewhere
A: Waivers are different. In administering the waiver regime, the FIRS does not have the power to halt the grant of waivers or impose any moratorium. The FIRS cannot determine when to grant and when not to grant waivers.
Q: The moratorium may be indirect, by refusing all applications for waiver irrespective of whether good cause is shown
A: It is unlikely that the law empowers the FIRS to act arbitrarily in administering the waiver regime. There are instances when the word “may”, as used in sections 85 (3) of CITA and 32 (3) of the FIRS Act, can be interpreted as creating a mandatory obligation and this may be one of them.
Q: Does a taxpayer have a remedy if FIRS refuses waiver even after a good cause submission is presented
A: Yes, by an application to a high court for judicial review of the FIRS’ decision.
Q: An unresolved issue is how to incorporate the unresolved tax disputes into this process
A: That is no issue at all.
Q: Why
A: The law does not expect any addition to be imposed on unresolved tax disputes. An addition is imposed only on taxes which are not paid as required by law.
Unresolved tax disputes will await the resolution of the disputes, whereupon, if any tax is payable, the FIRS will serve the taxpayer with a notice of the tax payable, and the tax shall be payable within a month thereafter. An addition can arise if this tax is not paid within time.
Pending the resolution of tax disputes, a taxpayer is to pay a lump sum provisional tax within 3 months of a new tax year. An addition can arise if this tax is not paid within time.
Q: Is there any risk if taxpayers accept the waiver in the present form
A: Yes
Q: What is the risk
A: FIRS can turn round in future and seek to recover the penalty and interest.
Q: This is unsettling. FIRS cannot renege on its promise to grant total waiver
A: Yes it can and we have seen this happen in the past
Q: When
A: In 2009, the FIRS, in response to an enquiry, confirmed that investment tax credit was applicable to certain petroleum exploration and production companies upon which the companies proceeded with the development of a project only for the FIRS to renege in 2012 by asserting that investment tax allowance was the applicable fiscal regime. The companies were aggrieved with FIRS’ change of opinion and referred the matter to court. A decision has been given by the high court against which an appeal has been lodged.
In 2004, the FIRS wrote to a company in the petroleum industry confirming that input in the construction works of the company and all direct input in the course of gas production is VAT exempt irrespective of the source of the input. Based on this confirmation, neither the company nor its subcontractors paid VAT on their local purchases. In 2007, the FIRS wrote to one of the subcontractors, requiring it to charge VAT on supplies to the company and to pay outstanding VAT on its local purchases.
In 1998, the FIRS by correspondence, accepted that a company could deduct recharges in a certain tax year only to argue otherwise later. The company referred the dispute to court and a decision has been pronounced by the Court of Appeal.
Q: Why did the FIRS renege in the above cases
A: The FIRS took the view that its promises were contrary to the law and that the taxpayers should have known better than accept them. The position of the FIRS is that it cannot act outside the law, and so, if it assures a taxpayer of an entitlement, it would not be bound by that assurance if same is contrary to the law.
Q: What is the current attitude of the courts to FIRS’ volte face
A: The most superior court to decide one of these cases has held that the FIRS cannot be bound by its promises or assurances being merely an opinion of the FIRS. The court held that any promise by the FIRS that is contrary to the law is unenforceable.
Q: So FIRS can still return to demand the interest and penalty even after a taxpayer has complied with the conditions
A: Yes, it can
Q: But is there no instance when FIRS kept its promise
A: FIRS may keep its promise for a while, but whether and when it will renege are uncertain. At the moment, FIRS appears to be respecting assurances to certain critical sectors of the economy to treat them differently than expressly stated in the law. The risk is that if FIRS decides to demand compliance with the law, often retrospectively, the unpaid liability might have increased significantly leaving the taxpayer with an unmanageably large exposure.
Q: So what should taxpayers do
A: Taxpayers should insist on compliance with the law. They should require the FIRS to issue them with correspondence showing that they have individually satisfied the “good cause” requirement for which reason the waiver is granted.