New Tax Tribunal Rule as Clog in Wheel of Businesses

The introduction of a new requirement for taxpayers to make 50 per cent deposit of disputed amounts to the Tax Appeal Tribunal may be a disincentive for businesses, writes Oluchi Chibuzor

Micro, small, and medium scale enterprises (MSMEs) in Nigeria were badly affected by the outbreak of the COVID-19, with some of them becoming extinct.

According to a survey by the Centre for Financial Inclusion (CFI), since the first confirmed case of COVID-19 in Nigeria, the number of employees in MSMEs declined by 51 percent compared to its high point the preceding year; and 80 percent of businesses have seen their profits decline.

The data also showed MSME owners’ households were also in a precarious position as more than half of business owners said their households found it extremely difficult to cover their expenses from earned income.

In addition, the report showed that food insecurity was also high among the MSMEs as one-third of respondents reported they or someone in their household had gone to bed hungry because there was not been enough money to buy food.

In carrying out the survey, CFI interviewed 737 respondents, 55 per cent of whom were women. Two-thirds of the businesses in the sample were micro-enterprises (1 to 10 employees) while another quarter were sole proprietorships. Most business were well-established, with an average operating age of 13 years. There was a healthy mix of businesses, including grocers, school operators, and manufacturing businesses.

“The data show that 64 of the 737 businesses in the sample shuttered their operations since COVID-19 arrived in Nigeria. Of these, 40 of the businesses closed because of government restrictions on their businesses.

Since then, the surviving MSMEs have been employing a variety of coping strategies to keep their businesses afloat. For instance, in addition to the dramatic reduction in the workforce, owners are cutting employees’ hours and working longer hours instead.

In view of the aforementioned challenges confronting MSMEs, analysts have described a section of the amended Tax Appeal Tribunal (TAT) (Procedure) Rules, 2021, as additional challenge for MSMEs in the country.

Specifically, the noted that the introduction a in the new law for taxpayers to make a 50 per cent deposit of disputed amounts to the TAT may discourage MSMEs from pursuing recourse from the TAT, thereby affecting justice.

The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, had in June 2021, approved the TAT pursuant to her powers under Section 61 of the Federal Inland Revenue Service (Establishment) Act, 2007 (as amended).

Indeed, the implementation of the new rules emphasises the federal government’s commitment to improving Nigeria’s tax landscape, which commenced with the enactment of Finance Acts, 2019 and 2020.

The amendments to the TAT (Procedure) rules, which was the initial forum for formal tax adjudication in Nigeria, align with changes in global tax administration systems and would ensure that the TAT’s procedures are up to date and give taxpayers increased confidence in the system.

The rules, which replaced the defunct TAT (Procedure) Rules, 2010, enables the Tribunal to deal justly, fairly and expeditiously with appeals and encourages and promote the settlement of disputes among parties.

Some other changes beside the requirement for taxpayers to pay 50 per cent of any disputed amount into a designated account of the TAT as security for prosecuting an appeal, prior to commencement of appeals include: the modification of some old definitions, and interpretation of additional terms such as “appeal”, “notice of appeal”, “decision of the Tribunal,” among others; and recognition of service of documents or processes carried out by email or such other electronic means as the Tribunal may permit.

Others include the recognition of virtual/ remote hearing of applications and delivery of rulings by the Tribunal; introduction of a six-month timeframe from the date of commencement of trial for the TAT to conclude and provide a decision; provisions for hearing of ex-parte and non-contentious applications in Chambers as well as summary appeal procedure for liquidated money demands.

Although the TAT (Procedure) Rules, 2010 was effectively replaced, the Rules allows for “anything done” under the defunct 2010 Rules to remain valid, as long as such is not inconsistent with the provisions of the new Rules, thereby grandfathering existing matters and ensuring a smooth transition.

Analysts’ Position

Leading tax advisory firms, PricewaterCoopers (PwC) and KPMG, have described the TAT Rules 2021 as inconsistent with the Federal Inland Revenue Establishment Act (FIRSEA).

They, however, noted that a fundamental change in the rules, as contained in Order 3 Rule 6, was at variance with similar provisions of the FIRS Act.

The Order 3 Rule 6 prescribes that a taxpayer must make a security deposit of 50 per cent of any disputed amount prior to filing an appeal.

Analysing the order in its Tax Alert published on its website, PwC noted that the provision was open to contention, adding that it was also inconsistent with a statute.

“One area of contention is the requirement for the payment of 50 per cent of the disputed tax as a condition precedent to filing an appeal.

“This provision may be challenged on grounds of inconsistency with the Federal Inland Revenue Service (Establishment) Act 2007 since it is established that rules cannot override the provisions of an Act.

“In addition, the provision may also be challenged on constitutional grounds where a taxpayer does not have the cash to deposit, as this would be a bar on access to justice,” stated PwC.

The professional services firm also noted that the provision of Order 3 Rule 6 may be open to abuse by tax authorities, which may come up with unreasonable assessments in the expectation that a taxpayer will pay a 50 per cent deposit.

On its part, KPMG also stated that the blanket requirement for taxpayers to make a 50 per cent deposit of disputed amounts to the tribunal may be an impediment to justice, as it erodes the right to fear hearing, and discourage taxpayers from pursuing recourse before the TAT.

“This requirement also deviates from the provisions of the Section 15(7) of Federal Inland Revenue (Establishment) Act that permits such deposits only in certain circumstances.

“Further, there is a risk that the blanket requirement may make the TAT more litigious in its outlook and take it away from the less formal dispute resolution framework it was designed to be.

“It may also increase the risk of tax disputes being resolved based on rules of court or technicality, rather than substantive justice, a weakness of the formal court system which the TAT is set up to provide,” stated KPMG.

The firm equally noted that the role of Tax Commissioners was not the same as those of judges in the constitutional sense. It cautioned that the changes the new rules are envisaged to bring may revive the challenges to the legality of the tribunal and its encroachment on the constitutional preserve of the Federal High Court on revenue and taxation issues.

KPMG therefore advised the finance minister to consider making the TAT Rules court-like, so as to ensure the tribunal continues to provide accelerated tax dispute resolution in a non-litigious way.

“The Minister should, therefore, consider making the TAT Rules less litigious or court-like to ensure the TAT maintains its edge as a speedy and non-litigious tax dispute resolution forum,” KPMG’s Wole Abayomi stated.

The implication of the new TAT rule is that businesses could get killed if the tax authorities decide to come up with any assessment they desire. And with the Tribunal as the only recourse open, the disputant is expected to pay half of the amount, even if it wasn’t owing that amount in tax liability. This, clearly erodes the opportunity for fair hearing and is in conflict with Paragraph 15 (7) of the FIRS Act.

Therefore, the federal government needs to urgently review this aspect of the rule so that existing businesses in the country would not be suffocated and for it not to discourage potential investors in the country.