The presidential fiscal policy and tax reforms committee says tax authorities will only approach third parties to recover unpaid taxes after exhausting all legal and administrative processes, including court proceedings.
In a post on X on Monday by Taiwo Oyedele, its chairman, the
committee said the “power of substitution,” which is the use of third parties
to recover unpaid paxes, is a last-resort tax recovery mechanism and not an
arbitrary or discretionary action by government agencies.
“Its use is strictly governed by due process and can only be
invoked after all established processes involving enquiries, assessments,
objections, final notice, and appeals to the courts have been concluded, and
the tax liability has become final and conclusive,” the post reads.
“It serves as a rigorously controlled, last-resort, not a
routine administrative action.”
The committee added that the measure does not apply to
low-income earners or small businesses operating below taxable thresholds,
noting that it is only relevant where substantial tax liabilities exist.
‘POWER OF SUBSTITUTION NOT A NEW LAW’
The tax reforms committee also clarified that the power of
substitution is not new, and has been an existing provision of Nigeria’s tax
laws, including under section 50 of the repealed Personal Income Tax Act (PITA)
and other tax statutes.
According to the statement, similar third-party tax recovery
mechanisms are used globally, aligning Nigeria’s framework with international
best practices such as garnishment and third-party payment notices.
“This power is essential for maintaining fairness within the
tax system. Without effective enforcement tools, compliant taxpayers are
unfairly burdened, tax evasion is inadvertently encouraged, and government
finances face undue pressure, which can lead to higher tax rates for all,” the
committee added.
The fiscal reforms team said the power of substitution may
only be applied when the entire process for establishing the tax liability has
been exhausted; the liability is final, confirmed and legally due; and the
taxpayer has failed or refused to pay within the stipulated period.
The committee said a tax authority may issue a notice of
substitution to any person or entity holding funds belonging to, or owing money
to, a defaulting taxpayer.
“Upon receiving a notice of substitution, the appointed
party is statutorily obligated to either comply or formally object in writing
within 30 days. The objection must specify the grounds for refusal. The legal
provisions for appealing tax assessments are also applicable to the
substitution notice,” the group said.
The committee added that safeguards against abuse include
mandatory due process, the right to object, access to appeal mechanisms under
the tax dispute resolution framework, and taxpayer protections provided by the
office of the tax ombud.
On January 25, the Lagos State Internal Revenue Service
(LIRS) said it will exercise its legal authority to recover outstanding taxes
from non-compliant taxpayers through third parties such as banks, employers,
debtors, tenants, and business partners.
LIRS said this action is in line with provisions of section
60 of the Nigeria Tax Administration Act, 2025 (NTAA 2025), which grants the
service the power of substitution.
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