in Nigeria is the Personal Income Tax Act (“PITA”). A Nigerian employer acting as an agent for the Nigerian tax authority is required to deduct and account for the personal income tax of its employee through the Pay-As-You-Earn (PAYE) system.
Best of Judgment Assessment is a tax assessment procedure conducted by tax authorities on the accounts of a company or individuals. It is usually done where the tax payer does not provide any Audited Accounts or Statement of Net-worth if it is an individual. It can also be conducted if the tax authorities have reasons to believe the accounts presented by the tax payer is not sufficient enough to assess their tax liability.
Despite the role of the employer in the assessment of the emoluments of the employee under the PAYE system, section 54 (2)(b) of the PITA provides that the relevant tax authority can reject the returns filed by a taxable person and determine the amount of the assessable, total or chargeable income of the person (employee) based on the tax authority’s “best of judgment” and make an assessment.
Section 17(1) and 58 (3) of PITA also empowers the tax payer to raise objection to the revised assessment by the tax authority. This further reiterates the power of the tax authorities to use their discretion to determine on a best of judgment basis, the tax liability where none or insufficient tax has been paid by the employer who act as its agent.
The recent case of Group 4 Securicor Nigeria Limited (the “Company”) and Lagos State Internal Revenue Service (“LIRS”) at the Tax Appeal Tribunal, saw the employer raise an objection to the assessment of its expatriate employees based on deemed income and penalties imposed by the “LIRS”.
The LIRS contended that the Company had no ‘locus standi or cause of action’ because it is not a taxable person under the PITA being only an agent of the tax authority therefore it is only the employee who has the right to protest or bring a claim.
The Company claimed that the deemed income was computed based on tax remitted by employees of a subsidiary company, Outsourcing Services Ltd (“OSL’”) which was operating an entirely different line of business though they were both owned by the same parent company. The subsidiary company protested the deemed income imposed on it by the tax authority but could not provide appropriate documents to substantiate its position. Unlike OSL, the Company provided relevant documents to the LIRS to confirm the actual income earned by the expatriate employees.
The TAT asserted that it was legitimate for the tax authority to rely on the positions of section 54(2)(b), 17 and 58 (3) of PITA to make an assessment based on the deemed income but the following had to be considered:
1. The best of judgment assessment cannot be established on a prior best of judgment assessment i.e. it must originate from actual industry results or the parameter must be realistic within industry context.
2. Best of judgment must bear semblance to the normal tax assessment of identical or closely related companies in similar or identical circumstances.
The TAT concluded that the Company had the right to appeal against the demand notice where there are claims by the tax authority that the emoluments were understated and not only the case of under deduction and non remittance.
The question this case actually raises is that, in the cases where the Federal Inland Revenue Service (FIRS) issues a best of judgment assessment as provided in the companies income tax act where a company has not filed its returns, will the principle in the case of Group 4 Securicor Nigeria Limited v Lagos State Internal Revenue Service (“LIRS”) be applicable?
By Sogo Akinola
By Sogo Akinola