The Role Of The Special Enforcement Unit Of The Federal Inland Revenue Service In Tax Compliance Enforcement Under The FIRS (Establishment) Act By Arekhandia, Zebedee

ABSTRACT

Taxation is a pathway to social and economic development because it is one of the formidable options for Government to generate revenue. To achieve efficient revenue generation through taxation, there must be substantial tax compliance by taxpayers. It is only when taxpayers comply with their tax obligations by paying their taxes as and when due, that the government will be able to generate optimal revenue through taxation. And where non-compliance is pervasive, Government will not be able to generate sufficient revenue for socio-economic development. It is the urgent need to ensure tax compliance by taxpayers that made Government at various levels and through the relevant Tax Administration Agencies, formulated and developed policies for tax compliance enforcement. One of such policies of the Federal Government of Nigeria led to the establishment of the Special Enforcement Unit (SEU) set up by the Federal Inland Revenue Service (FIRS). This paper examines the role of the Special Enforcement Unit in tax enforcement compliance in Nigeria under the FIRS (Establishment) Act. The methodology adopted in this paper is qualitative and analytical. Relevant data was sourced from primary and secondary sources. The relevant data obtained from these sources were qualitatively analyzed to draw appropriate deductions that ground the conclusions and recommendations proposed in this paper.

Keywords: Tax law, Taxation in Nigeria, Tax enforcement, Tax compliance, Federal Inland Revenue service, Tax administration

*DSW, LLB, (BENIN); LL,M (IBADAN); BL. Legal Officer, Legal Section, Nigeria Police Force, Zone 2 Police Command Headquarters, Lagos, Nigeria. Email: ekpiku@yahoo.com

INTRODUCTION

Historical Background of the Special Enforcement Unit of the Federal Inland Revenue Service

The Special Enforcement Unit of Federal Inland Revenue Service was created pursuant to Sections 35 and 36 of the Federal Inland Revenue (Establishment) Act, 2007 (FIRSEA)[1] for the purpose of addressing the lacuna in the functions of the FIRS; to effectively enforce taxpayers’ compliance with tax laws, and to investigate tax laws violation by tax payers. A lacuna existed because the FIRS, as a non-security agency, lacks certain investigative and enforcement powers (such as power of ingress, power to arrest, search, suppress aggression, etc.). Only the Nigeria Police Force, as the core law enforcement agency in charge of internal security of Nigeria, possesses such powers. The SEU of the FIRS is made up of Police Officers and Special Purpose Tax Officers (SPTO). The Police Officers are assigned to the FIRS under Police Special Duties engagement. The power of the Police Officers to enforce tax compliance and investigate tax offences is concomitant with the legal powers of the Police as entrenched in the Constitution of the Federal Republic of Nigeria, 1999[2], including the Police Act and Regulations[3], the Criminal Procedure Act[4] and the Criminal Procedure Code.

Instructively, prior to the enactment of the FIRSEA and the subsequent establishment of the SEU, the FIRS had already resorted to the Police for compliance enforcement assistance. Deliberate effort by policy makers to formalize this synergy between the FIRS and the Police towards ensuring a more robust and successful tax compliance enforcement gave birth to the SEU. Now, before I proceed to the main discussion, let me by way of an appetizer state thus:

• Breach of tax compliance by a tax payer is tantamount to non-compliance with tax payment and other tax violations
• Non-compliance with tax payment and other tax violations is the condition precedent for tax compliance enforcement
• Where and when there is tax compliance by a tax payer, there will be no need for tax enforcement
• Tax enforcement becomes necessary only when a tax payer fails to comply with tax obligations under the law

Since non-compliance with tax law is a pre-condition to tax compliance enforcement, it would be better to fully understand the concept of tax compliance before we proceed to discuss tax enforcement in details.

WHAT IS TAX COMPLIANCE

Chambers 21^st Century Dictionary[5]defines compliance as “yielding, agreement, assent, submission”. Tax compliance is therefore a concept used to describe the voluntary payment of the right amount of tax by a tax payer at the right time and place. Tax compliance encompasses the tax payer obeying the tax laws and rules. For example, a tax payer must do the following:

• Register with relevant tax authorities
• Declare the actual and true income and profit
• File tax returns as and when due
• Pay the tax timeously
• Give true report of tax base
• Correct computation of tax liabilities
• Provide information and documents to tax officers to enable them carry out their duties, such as tax audit
• Allow tax officers access to premises, where necessary
• Remit taxes deducted from a third party on behalf of the FIRS,

Where a tax payer acts contrary to the above stated tax obligations, it will amount to non-compliance and a violation of the tax law. Penal sanctions such as imprisonment, fine, penalty, interest or destrain may be the consequence of such tax violation.

TYPES OF TAX COMPLIANCE

There are two types of tax compliance, namely: Voluntary Tax Compliance and Compulsory Tax Compliance.

Voluntary Tax Compliance: This is where a tax payer willingly complies with tax laws in all respects and without compulsion from tax authorities. A tax payer may voluntarily comply with tax laws either out of patriotism, or due to tax education and enlightenment from tax authority, or based on fear of sanctions for non-compliance. Voluntary tax compliance is a legal requirement under the relevant laws which require a tax payer to register for tax, keep accurate records, disclose business affairs in full, file tax returns and pay taxes as and when due, without being forced to do so. Therefore, the defining feature of voluntary tax compliance is where a tax payer willingly reports his or her tax affairs by registering with tax authority, making self-assessment, filing tax returns, and paying full taxes on or before the due date specified under the laws.[6]

Compulsory tax compliance: This is the type of tax compliance which is induced by the tax authority through tax compliance enforcement mechanism. For example:

• Breach of tax compliance by tax payer is tantamount to non-compliance with tax obligations
• Payment of tax in order to avoid prosecution due to indictment by tax investigations for tax evasion[7]
• Payment of tax based on the order of a competent court after successful civil or criminal indictment for tax evasion
• Payment of tax after denial of application for Tax Clearance Certificate due to non-compliance with tax law (i.e payment in order to qualify for TCC)
• All compulsory tax compliance is a consequent of successful tax enforcement

FACTORS THAT PROMOTE TAX COMPLIANCE

The following factors may enhance tax compliance:

• Dynamic and result-oriented tax laws. This encompasses existence of pragmatic tax laws that have adequate sanctions for tax violations, with simple assessment procedures and devoid of multiple of taxes

• Sound tax compliance enforcement regime. Tax payers will pay their tax voluntarily if they know that non-payment will be successfully enforced by tax administration authority
• Purposeful tax education and enlightenment
• Government’s provision of basic infrastructure and services for tax payers
• Incentives for voluntary tax compliance. This may be in form of discounted refunds from the amount of tax to be paid when the tax payment is timely, correct and voluntarily paid.

PREDISPOSING FACTORS OF NON-COMPLIANCE WITH TAX OBLIGATIONS

The following factors may influence non-compliance with tax payment

• Defective legal regime for taxation
• Lack of adequate sanctions for non-payment of taxes
• Complex tax assessment procedures
• Avalanche of multiple of taxes
• Lack of robust tax enforcement regime
• Lack of purposeful and result-oriented tax education and enlightenment
• Corruption and embezzlement of tax revenue by public officials resulting to government’s inability to provide basic infrastructure and services for tax payers

WHAT IS TAX ENFORCEMENT

The word “enforcement’’ is derived from the word `enforce’, and the Chambers 21^st Century Dictionary[8]defines it as “to cause a law or decision to be carried out”. Enforcement therefore means the process of causing a law or decision to be carried out. Black’s Law Dictionary[9]defines enforcement as “the act or process of compelling compliance with law, mandate, command, decree or agreement”. Tax enforcement could be described as the process or series of processes used in the administration of tax to compel a recalcitrant and defaulting tax payer to perform his or her tax obligations under the law.

CONDITIONS PRECEDENT TO TAX ENFORCEMENT

As already stated in our introduction, the condition precedent to tax enforcement is non-compliance with tax obligation or a violation of the tax law. Non-compliance or tax violations that may compel tax enforcement are:

• Non-registration of tax payer with the tax office for the purpose of obtaining Tax Identification Number (TIN)
• Non-filing of tax returns and payment of taxes
• Non-payment of assessed tax liability
• Refusal of tax payer to furnish on demand documents and information to FIRS
• Refusal of a tax payer to give tax officers access to premises in the course of their duty

The Special Enforcement Unit is empowered by relevant tax laws to enforce the above tax violations using the enforcement procedures and mechanisms discussed below

TAX ENFORCEMENT PROCEDURES AND MECHANISMS

Tax enforcement is the most effective method of ensuring compulsory tax compliance by tax payers. Tax can be enforced either through executive action or judicial order. The various tax laws in Nigeria make provisions on how payment of tax and other compliance with relevant tax laws can be enforced against a defaulting tax payer. Some Examples of Tax Law Provisions for Enforcement of Taxes include:

• The Federal Inland Revenue Service (Establishment) Act[10] which provides for enforcement powers of the FIRS, outline what the FIRS and the law enforcement agencies should do in the enforcement of tax. Section 36 of the Act provides thus:
• The Service may co-opt the assistance and co-operation of any of the law enforcement agencies in the discharged of any duties under this Act

• The law enforcement officers shall aid and assist the authorised officer in the execution of any warrant of distraint and the levying of distraint.

• Any tax officer armed with the warrant issued by the Judicial officer and accompany by a number of law enforcements as may be determined by the Executive Chairman shall-

• enter any premises covered by such warrant and search for, seize and take possession of any book, document or other article used or suspected to have been used in the commission of an offence;
• inspect, make copies of, or take extracts including digital copies from any book, document or computer regardless of the medium used for their storage or maintenance;

• search any person who is in or on such premise;

• open, examine and search any article, container or receptacle;

• open any outer or inner door or window of any premise and enter or otherwise forcibly enter the premise and every part thereof; or

• remove by reasonable force any obstruction to such entry, search, seizure or removal as he is empowered to effect.

• No person shall be bodily search under this section except by a person who is the same gender as the person to be bodily search
• The Companies Income Tax Act[11] makes it mandatory for a Ministry, Department or an Agency (MDA) of government or a commercial bank, with which a company has any dealing, with respect to any of the transaction set out in Section 101 (4) and (5) of the Act, to demand from the person a tax clearance certificate for the three years immediately preceding the current year of assessment.
• The Personal Income Tax Act[12] also makes it mandatory for MDA or a commercial bank, with which a person has any dealing, with respect to any of the transaction set out in Section 85 (4) and (5) of the Act, to demand from the person a tax clearance certificate for the three years immediately preceding the current year of assessment.

Unfortunately, these provisions of the tax laws for the enforcement of taxes by demanding for tax clearance certificate is not duly observed and obeyed by those the laws mandate to so do. We state here without hesitation that no commercial bank in Nigeria at the moment requests for tax clearance certificate from individuals (and even corporate bodies) that apply for loan facility before granting such loan. This is also applies to the registration of motor vehicle, application for firearms licence, etc.

Methods of Tax Compliance Enforcement

The following methods may be used for tax compliance enforcement by the FIRS.

1. Routine Tax Audit: This is an investigation carried out on taxpayer to ascertain the veracity of the returns filed by such tax payer. It is tax enforcement mechanism in that it exposes the true tax liability of a tax payer and makes the tax payer to pay the correct amount of tax. The Special Enforcement Unit may adopt this method of tax enforcement. When the SEU adopts this method in tax compliance enforcement, they will have to involve and rely on the expertise of the Tax Audit Department of the FIRS.
2. Criminal tax investigation: This is the investigation of any tax violation that is expressly declared by tax laws to be an offence punishable with fine, penalty or imprisonment. It is tax compliance enforcement mechanism as it exposes the culpability of the tax payers, tax status and liability. It is this revelation that helps tax authority to successfully prosecute civil and criminal litigation against a recalcitrant tax payer. The power of the Special Enforcement Unit to adopt criminal tax investigation, as a method of tax enforcement, is pursuant to Section 35(1) of the Federal Inland Revenue Service (Establishment) Act which provides thus:

The Service shall employ Special Purpose Tax Officers to assist any relevant law enforcement agency in the investigation of any offence under this Act.

Criminal tax investigation is basically aimed at achieving the following:

• To ascertain the extent and level of tax law violation by a tax payer
• To ascertain those responsible for the tax law violation
• To ascertain the beneficiaries of the tax violation
• To ascertain the extent of revenue lost due to the tax violation. Routine tax audit mechanism in co-opted in this because it involves ascertainment of tax liability
• To ascertain the immediate and remote cause(s) of the tax law violation. This is aimed at blocking the revealed cause(s) in the future
• To gather evidence that is required for prosecution

Criminal tax investigation is used in cases such as non-registration with tax authority, non-filing of tax returns, failure to deduct or remit tax, obstruction of tax officials on duty, false declaration by tax payer, counterfeiting Tax Authority’s document like Tax Clearance Certificate, non-payment of taxes, etc. Criminal tax investigation can be carried out in different ways depending on the circumstances of each case, such as:

• Invitation of the tax payer to the tax office to respond to the allegation of tax law violation
• Arrest of the alleged tax law violator especially in cases of counterfeiting document, obstruction and assault on tax officer on duty, etc.
• Execution of search warrant and recovery of documents and items relating to the offence
• Audit of the financial activities of the alleged taxpayer

The ways to carry out criminal tax investigation is not limited to the above ways and all the mentioned methods can be adopted in a single case if the circumstance so demand. When adopting criminal tax investigation method in tax enforcement, the SEU must be fully abreast of its investigative powers, and armed itself with its investigation tools.

The most pronounced investigative powers are:

• Power to invite the defaulting tax payer or representative of the tax payer when it is a company or other bodies corporate. It should be noted that Section 49 (2) of the Federal Inland Revenue Service (Establishment) Act, 2007 provides for those to be held liable when a company or corporate body commits tax violations.
• Power to arrest. Section 49 (2) of FIRSEA provides for the person(s) who could be arrested and the SEU officers must get a warrant of arrest, unless it is an emergency.
• Power to search. The officers must know exactly what to search for and must obtain a valid search warrant.
• Power to request for tax payer statement of account from their bankers. The SEU officers must have the account number of the tax payer and arm themselves with a valid Bankers Order to achieve this.
• Power to call for company’s details/information of registration from the Corporate Affairs Commission. The SEU officers must know the actual company’s name from its preliminary investigation, so that they can send a valid company name to CAC.

When the SEU adopts the investigative methods in enforcement of tax violations by a tax payer, it must arm itself with the following: the nature of tax violation(s) by the taxpayer (s) that necessitated the enforcement should be well defined. For example, if the tax violation was reported to the SEU for enforcement by Large Tax Office (LTO) Non-Oil, Lagos Island, it must be able to know from the information provided to it, what is the actual tax violation for which enforcement is to be carried out. (i.e. tax evasion, non-filing of returns, or non-registration with tax office, or non-payment of taxes, or refusal to provide documents, or refusal to allow tax officers access to premises, or refusal to accept assessment notices, etc.).

Where the tax violation is non-payment of tax liability, the SEU must know the actual amount of tax liabilities owed by the tax payer; they must have evidence of service of notice of assessment on the tax payer and the 30 days period in which the tax payer is obliged under the law to object to the assessment pursuant to Section 68 of the Companies Income Tax Act[13]’ must have elapsed; they must also have evidence of service of demand notice on the tax payer and the time given in the demand notice for the tax payer to pay the outstanding tax liability must have elapsed.

3. Civil litigation: This is the use of civil judicial process to enforce payment of defined tax liability. It involves the use of the Undefended List Procedure to recover undisputed tax liability or through the use of writ of summons where the tax liability is disputed. The role of the Special Enforcement Unit in this regards is to help the relevant FIRS department and staff to get necessary information and documents from the taxpayer.
4. Criminal prosecution: This is the trial of a tax payer in the court for tax offence committed under the tax laws. It involves arraignment, taking of plea, trial, judgment and sentencing. This is similar to our usual criminal prosecution procedure where the SEU officers are required to prepare the case file, make a duplicate of the case file available to Legal Department of FIRS for vetting and a legal advice, and to give evidence in court.
5. Destraint: This is the seizure and holding of property of a tax payer as security for payment of a debt or satisfaction of claim pursuant to a valid Court Order. Section 33(1) of Federal Inland Revenue Service (Establishment) Act provides for the power of the FIRS to destrain thus:

Without prejudice to any other power conferred on the Board for the enforcement of payment of tax due from a company, where an assessment has become final and conclusive and a demand has, in accordance with this provision of the relevant tax laws in the First Schedule to this Act, been served upon the taxable person or upon the person in whose name the taxable person is chargeable, then if payment of the tax is not made within the time limited by the demand notice, the Board may in the prescribed form, for the purpose of enforcing payment of the tax due-

• distrian the taxpayer by his goods or other chattels, bonds or other securities;

• destrain upon any land, premises, or place in respect of which the taxpayer is the owner and, subject to the following provisions of this section, recover the amount of tax due by sale of anything so distrain.[14]

6. Sealing of business premises: The sealing of business is sequel to the distraint powers of the tax authority.

7. Recovery Tax by Deduction at Source: This is a type of tax enforcement method whereby the tax owed by a tax payer (usually a government ministry, parastatals, institutions or agencies) and the interests thereto, are deducted at source by the Accountant-General of the Federation from the statutory revenue allocation due to the tax defaulting government agency, upon the written request for said deduction by the revenue authority, and remitted to the tax authority. This mode of tax enforcement is provided for in Section 83 of Company Income tax Act and Section 74 (2) of the Personal Income Tax Act. The role of the SEU in this method of tax compliance enforcement is to help get necessary information and documents from the defaulting taxpayer through its investigation mechanism whenever the Unit is required to do so.

RECOMMENDED OPERATIONAL PROCEDURES FOR THE SEU IN TAX COMPLIANCE ENFORCEMENT

It is recommended that in carrying out their duties, the SEU officers should ensure that they:

• Know and master tax laws that apply to all enforcement cases
• Know the full facts of the case of tax violation to be enforced
• Interview the FIRS staff in charge of the tax payer’s file for verification
• Ensure that the tax enforcement is authorized by the appropriate authority
• Arm themselves with the requisite enforcement tools, which vary from one enforcement method to the other. For example, in tax enforcement by investigation, they should procure valid warrant of arrest, search warrant, bankers order, investigation activities signal, etc. In tax enforcement by destraint of taxpayer property, they should get the relevant destraint order.
• Be polite and courteous in their approach but firm in their decision.

It would also be helpful for the SEU officers:

• Not to request for bribe or any other form of gratifications from the tax payer, and refuse to accept when offered

• Not to terminate enforcement half way
• Not to apply force, and when applied, must not be disproportionate
• Not to expose their life and that of the FIRS staff to danger and unnecessary risk during enforcement exercise
• Not to allow the FIRS staff to dictate to them in the middle of enforcement exercise the style and method of enforcement. They should follow the method approved by the Head of SEU, and seek for further direction when circumstances demand
• Not to go for tax enforcement unless approved by appropriate authority, such as the Head of the SEU or any other person so delegated by him

CONCLUSION

It is important to point out that all we have discussed here are mere guidelines for the day-to-day tax enforcement duties by the Special Enforcement Unit in the FIRS. The main determinant of the SEU success in tax enforcement duties is the “human factor”. Tax enforcement by the SEU will be a futile exercise and an unproductive endeavor if there is no competence, sincerity of purpose, determination, ingenuity, and dedication to duty on the part of the SEU officers.

[1] Federal Inland Revenue Service (Establsihment) Act, No. 13, 2007

[2] See Section 214 of the Constitution of the Federal Republic of Nigeria, 1999 (as amended)

[3] Section 4 and 23 of the Police Act, Cap C18, Laws of Federation of Nigeria, 2004

[4]See Section 10 of Criminal Procedure Act, Cap C39, Laws of Federation of Nigeria, 2004

[5] At page 281

[6] FIRS 2015 Tax Year Planner

[7] See Section 48 of Federal Inland Revenue Service (Establishment) Act, 2007, which empowered the service to compound tax offences by accepting a sum of money not exceeding the maximum fine specified for the offence.

[8] At page 435

[9] 8^thed, page 569

[10]Federal Inland Revenue (Establishment) Act, 2007, Section 36 thereof. Its commencement date was 16^th Day of April, 2007

[11] In Section 101

[12] In Section 85

[13] Company Income Tax Act, Cap 2004, (as Amended)

[14] See also Section 33 (2), (3), (4), (5), (6) and (7) of Federal Inland Revenue (Establishment) Act, 2007, Section 86 of Company Income Tax Act and Section 104 of Personal Income Tax Act.