Legal questions on banks’ appointment as FIRS collecting agents
The Federal Inland Revenue Service has intensified its drive to recover outstanding tax liabilities from taxpayers in default of tax obligations. To this end, FIRS has been writing to taxpayers’ bankers, appointing the banks as collecting agents, to collect outstanding tax liabilities from the taxpayers’ bank account balances. This is referred to as tax substitution. FIRS based its appointment of the banks as collecting agents on the provisions of Section 49 of the Companies Income Tax Act 2004, and Section 31 of the Federal Inland Revenue Service (Establishment) Act 2007. Section 31 of the Federal Inland Revenue Service (Establishment) Act 2007 provides that: “The Service may, by notice in writing, appoint any person to be the agent of a taxable person if the circumstances provided in sub-section (2) of this section makes it expedient to do so. “The agent appointed under sub-section (1) of this section may be required to pay any tax payable by the taxable person from any money which may be held by the agent of the taxable person. “Where the agent referred to in subsection (2) of this section defaults, the tax shall be recoverable from him. “For the purposes of this section, the Service may require any person to give information as to any money, fund or other assets which may be held by him for, or of any money due from him to, any person. “The provisions of this Act with respect to objections and appeals shall apply to any notice given under this section as if such notice were an assessment.” Section 49 of the Companies and Income Tax Act, 2007 also empowers the FIRS to collect tax due from companies and appoint agents to collect tax due from companies. It stated that: “The Board may, by notice in writing, appoint any person to be the agent of any company and the person so declared the agent shall be the agent of such company for the purposes of this Act, and may be required to pay any tax which is or will be payable by the company from any monies which may be held by him for or due by or to become due by him to the company whose agent he has been declared to be, and in default of such payment, the tax shall be recovered from him.” Typically, FIRS instructs the bank to set aside an amount equivalent to the taxpayer’s outstanding tax liability, and remit same to FIRS. FIRS also directs that the bank place a restriction on the taxpayer’s accounts and inform FIRS of any transaction on the taxpayer’s account prior to execution on the accounts. The bank is also expected to release the taxpayer’s bank statements and other financial records to FIRS. The banks, probably concerned about compliance and cooperation with government agencies, are quite swift to comply with the directives. Some valued customers are lucky to receive some notification, prior to the bank’s execution of FIRS’ directives, others, not so much. Understandably, given how difficult it often is to recover outstanding debts from recalcitrant debtors, it may not be so surprising that FIRS devised this strategy. But the appointment of banks as collecting agents has stoked several fundamental issues in relation to the propriety or otherwise of the action. Chief of them is the constitutionality of FIRS’ appointment of banks as collecting agents to collect and remit outstanding tax liabilities of taxpayers, without court orders. This is besides the conversation around the hardship that may be occasioned the taxpayer who has had his bank account restricted, particularly where it turns out that the restriction is unjustifiable. However, a salient issue that seems to have eluded discussion is the query: “Is a bank legally enabled to act as collecting agent to collect outstanding tax liabilities from its customers’ bank account(s) on behalf of the FIRS?” The provisions of Section 31(3) of the Federal Inland Revenue Service (Establishment) Act 2007 and Section 49 of the Companies and Income Tax Act, 2007 impose a mandatory responsibility on the bank appointed as collecting agent, rather than a commission earning activity. By these provisions, where the FIRS-appointed bank fails to remit the outstanding tax liability from the taxpayers’ funds in its custody, such bank would be personally liable to FIRS for the taxpayer’s outstanding liability. This certainly places the banks between the devil and the deep blue sea. A pressing issue for concern, as to the propriety of the banks’ appointment as collecting agents for FIRS is the unavoidable breach of a bank’s fiduciary duty to its customer. This issue has raised a lot of hue and cry, over FIRS’ appointment of banks as collecting agents over their customers’ outstanding tax liabilities. A bank and its staff are obliged to keep secret, information regarding the business and account(s) of its customers. In Tournier v National Provincial and Union Bank of England, (1924) 1KB 461, Bankes LJ of the Court of Appeal of England held that confidentiality was an implied term in the customer’s contract and that any breach could give rise to liability in damages if loss results. As with every general rule, there are exceptions to the duty of the bank to keep secret; every information regarding the customer’s account(s). These exceptions are: Where the bank has duty to the public to do so. Where the bank’s own interest requires disclosure: – This occurs for example, where legal proceedings are required to enforce the repayment of an overdraft or where a surety has to be told the extent to which his guarantee is being relied upon. Where the bank has the express or implied consent of its customer to do so: – where he supplies a reference to its customer or where it replies to a status inquiry from another bank. Source: Punch
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