TaxationLegality of Outsourcing Tax Collection

June 1, 2012by Olufola Wusu2

The Tax Act, precisely Section 12(4) of the FIRS Establishment Act 2007 expressly stipulates the appropriate tax authority that can assess and collect taxes and levies. This excludes the use of consultants and agents. The rising cost of running government in addition to dwindling revenue has encouraged various state governments in Nigeria to come up with strategies to improve their revenue base. Not surprisingly the global meltdown with the attendant near collapse of the National Economy has created serious financial stress for all tiers of government. In this writer’s opinion the worst hit are the state governments of non-oil producing states all of whom have experienced unusual reduction in their share of the National Revenue from the Federation Account. Despite the numerous sources of revenue available to the various tiers of government as specified in the Nigeria 1999 Constitution, from the 1970s till the year 2012, over 80% of the annual revenue of the three tiers of government comes from the sale of petroleum and its ancillary products. This dependence on a single commodity has its own drawbacks as the finances of our nation have been affected negatively by the vagaries in crude oil prices.

However, there has been a decline in the revenue derived from the sale of oil in recent years due to fluctuations in oil prices and other factors including but not limited to insecurity and this has led to a decrease in the funds available for distribution to the states. Interestingly non-oil producing states are beginning to clamour for a larger share of the oil revenue.

There is a glaring need for state and local governments to generate adequate revenue from internal sources. This is the reason why the state, local governments and even the federal government are looking for new sources of revenue and are becoming more aggressive and innovative in the mode of collecting revenue from existing sources and tax payers. This is evident in the recent announcement by the Lagos State Government that Religious bodies in the state are also required to start paying taxes in the nearest future.

To meet the need for increased revenue, the use of external tax consultants was introduced by the federal and state governments in Nigeria to increase revenue generation under a programme known as the Accelerated Revenue Generation (ARG) Programme. The Federal government appointed Consultants/ Monitoring agents on Value Added Tax (VAT) and Withholding Tax (WHT) in the Oil Industry. Professional Import Duties Administrators (PIDA) were appointed in 1996 by the federal government for the collection of import duties side by side with certain custom officials. Some State governments also appointed consultants to boost revenue generation in their states.

There have been varied reactions to this development by various interest groups and individuals. For instance, while the revenue officials see the tax consultants as usurping their powers, to the taxpayers the modes of operation of the consultants is a nightmare. Company executives and tax professionals particularly of the big firms oppose the practice and activities of the tax consultants while smaller firms of tax professionals sometimes applaud it.

The basic questions for consideration are the following: (i) Is the appointment of the tax consultants legal? (ii) Is there anything wrong with the mode of operation of the tax consultants and their method to reduce tax evasion and other sharp practices by the taxpayers?

Legal basis for outsourcing tax collection?

Section 12(4) of the FIRS Establishment Act 2007 provides that the FIRS “may appoint and employ such consultants including Tax consultants or accountants and agents to transact any business or to do any act required to be transacted or done in the execution of its functions under the Act: provided that such consultants shall not carry out duties of assessing and collecting tax or routine responsibilities of tax officials.” It is this writer’s opinion that the restriction on outsourcing applies to State Boards of Internal Revenue (SBIRs) but not particularly to Local Government (LG) Councils.

Section 102 Personal Income Tax Act (PITA) defines ‘tax collector’ as “a duly authorised official” of the SBIR or the FIRS. In effect, this means that agents or tax consultants are not “tax collectors” for the purpose of enjoying the “Powers of tax collectors” in Part XII of PITA. But section 24(2) and (3) PITL Rivers State suggests that ‘consultants’ may be regarded as ‘staff’ of the SBIR to “enjoy such terms … of services as the Board may… determine.” Section 88(3) PITA provides that subject to 88(4), the SBIR may delegate the performance of any function, duty or power conferred on the Board, to any person by notice in writing or in the Gazette. As expected, section 88(4) PITA precludes the Board from delegating all key functions such as assessment or exercise of discretion vested in the Board for the determination of tax liability, etc.
In addition, a characteristic PITL provision (as typified by section 4(4) PITL, Lagos) is that the Governor may by notice in the Gazette or in writing authorise any person to perform or exercise on behalf of the Board, any power or duty conferred on the Board by the enabling Law. Surely, where such function is of the nature that has been reserved as non-delegable by PITA, the delegation would be null and void.

In reality more often than not, many SBIRS engage consultants to conduct audits, whilst the assessment for tax is done by the SBIR. Section 90 & 91(1) PITA establishes the LG Revenue Committee, with the mandate to “be responsible for the assessment and collection of all taxes, fines and rates … and shall account for all amounts so collected in a manner to be prescribed by the Chairman of the LG.”

Furthermore, by section 91(2), “the Revenue Committee shall be autonomous of the LG treasury and shall be responsible for the day to day administration of the Department which forms its operational arm.”

The question is whether the provision “in a manner to be prescribed by the Chairman of the LG” permits or contemplated delegation to tax consultants? In this writers opinion, section 91(2) contemplates that “the Department” would carry out, and not delegate the functions of “assessment and collection of all taxes, fines and rates under” the Committee’s “jurisdiction”. However, the absence of express provision against delegation (unlike with
SBIR under section 88), seems to give credence to the argument that delegation by LG is not prohibited.

It is imperative to note that LG ‘tax consultants’ are perceived negatively as ‘irritants’ to businesses, issuing questionable assessments for levies and rates, inconsistently with constitutional provisions (see 2nd Schedule, Item 7, Concurrent Legislative List, 1999 Constitution) and of the Approved List of Taxes Act.

The average consultant usually attaches an introductory letter from the LG together with their assessment and sends it to the prospective tax payer demanding for payment in addition to giving sometimes veiled and not too veiled threats in cases of non-compliance.

Experience has shown that change of administration at the LG often results in change of tax consultants – unfortunately due to poor record keeping or including but not limited to the absence of continuity it sometimes happens that both the current tax consultant will begin to demand the same levies that the former tax consultants had demanded from the same taxpayers.

Most times those consultants and agents operate on contingency basis and are therefore quite aggressive and even violent in their tax drive as the more taxes they raise the higher their fees. Most times they are judge, jury and executioner all at once in their dealings with the average tax payer; their demand notices are served complete with their cell phone numbers and instructions that payments should be made directly to them.

The average revenue consultant and agent are usually reluctant to deal with lawyers as they regard lawyers as an irritation too. When they deal with lawyers on the other side, they deal with them with the intention to negotiate (apparently, they seem to have the implied power to review downward the monetary value of the taxes demanded if you are willing to “cooperate”) than to listen to lengthy speeches about the illegality of their tax heads and tax drive.

On average, clients who require the services of lawyers to deal with such demands are usually corporate entities who understandably want a quick resolution of the situation. More often than not such clients are usually reluctant to go to court as the court system is not only slow, but by the time they compare your fees with the value of tax being demanded, coupled with the possibility of a downward review of the tax, they are eager to take a commercial decision by opting to settle out of court with the revenue agents at the fraction of the cost of a lawsuit.

Some clients are also afraid of getting their lawyers to challenge the legitimacy of some tax heads and tax collectors. They seem to fear a backlash from the government. To get around this fear, it seems that some clients prefer to sue under the aegis of a trade union, association challenging the legitimacy of some of these tax heads and the use of revenue consultants and agents in the collection of taxes and levies.

It stands to reason that until there is a committed attempt to get our courts to make a categorical pronouncement on this matter, the stand in arrangement of delegated tax
collection may flourish and in the absence of checks and balances the excesses of these consultants may begin to and continue to erode the rights of the average taxpayers.

There are allegations of high handedness, especially in the sealing of offices whilst tax liabilities were still being disputed by conscientious tax payers. Some also question the typical compensation model as consultants take a percentage of the internally generated revenue collected.

There is no doubt that a tax administration benefits from the involvement of consultants, what is important is to design a workable and supposedly fair system acceptable to all stakeholders. Opponents opine that the involvement of consultants should be limited to contributing intellectual capital towards enhancing the system and process of tax administration.

It can be argued that outsourcing assessment and collection is inconsistent with the ‘coercive’ nature of taxing rights, as they are meant to be strictly construed.

Further giving consultants , a percentage of taxes paid to government is also considered by some to be offensive, some advocate lump sums with fee caps; conflicts of interests may occur whilst the negotiating ability of government officials , when engaging consultants ,especially where there was no competitive bidding process.

Some argue that L.G ‘tax consultants’ issue questionable assessments for levies and rates, inconsistent with constitutional provisions (see 2nd schedule item 7, concurrent legislative list, and 1999 constitution) and of the Approved list of taxes Act.

The consultant typically attaches an introductory letter from the L.G together with their assessment. In practice, change of administration at the L.G results in change of consultants, and it does happen that both former and current consultants demand the same taxes from taxpayers.

It is not uncommon for some L.G consultants to insist that cheques for payment of assessment be raised in their name. However (where applicable) the prudent approach is to issue cheques in favour of the Local Government Councils and taxpayers can insist that any other arrangement is impermissible under their corporate governance rules i.e. that assessments can only be paid to the (ultimate issuing authority.

However, when appropriately managed and monitored, outsourced revenue collection may establish a foundation for more effective and efficient local government revenue administration.
Possibility of Litigation

Aggrieved citizens would find that challenging the validity of the rates or assessment rather than the capacity of the agent that is acting on behalf of the taxing authority, the more effective strategy. Where the challenge is successfully sustained, it disposes of the issue once and for all.

It should however be noted that a successful challenge of the capacity of the agent, does not relieve the tax payer of the obligation to pay, as the authority , assuming the validity of the rate is not in issue the government can then seek to enforce payment directly.

Rather than instituting individual actions it may be beneficial for aggrieved parties to institute class actions in order to save cost and to avoid a backlash from the government. Professional bodies and trade unions would do well to lead the way in this regard.


We have been made to believe that Col. Buba Marwa, increased the internally generated revenue “IGR” of Lagos State to over N600 million(six hundred million naira only) from the N100 million(one hundred million naira only) he inherited. We have also been made to believe that by the end of the tenure of Bola Tinubu, IGR in Lagos was over N10 billion (ten billion naira). We are now being told that under the governorship of Babatunde Fashola, IGR in Lagos State is over N200 billion (two hundred billion naira). In Lagos revenue collection has been contracted out to a private consultant Alpha-Beta Consultancy under both the Tinubu and Fashola administrations.

During the mid-term anniversary of Gov. Raji Fashola in 2009 the Director of Publicity of an opposition political party, alleged that the Lagos state government was encouraging waste in the system by paying at least N36 billion (thirty six million naira) to the Alpha-Beta Consulting from the internally-generated revenue of Lagos which amount to over N240 billion (two hundred and forty billion naira).

We would do well to commend both the Ex-Governor Bola Tinubu and Gov. Raji Fashola for their innovation and efforts in increasing the state’s IGR, it is also important that the issues being raised by stakeholders are also addressed as they are germane and real. Indeed allegations are rife that Alpha-Beta Consulting Ltd is paid at least 15% of Lagos State’s IGR which is said to amount to over N240 billion (two hundred and forty billion naira). This is a princely sum that is being paid from tax payers’ money to a private consultant. It would make a lot of economic sense to either review Lagos State’s terms of engagement with this consulting firm or in alternative seek another consulting firm with more tax payer pocket friendly fees.

It is important to observe that the engagement of tax consultants in the area of revenue collection did not start with Gov. Raji Fashola or his predecessor. It is alleged that Col. Buba Marwa contracted revenue collection to Olusola Adekanola and Co. during his administration.

There are at least two issues at stake here which borders on probity and accountability, namely the fact that the amount being paid to the tax consultant in Lagos is a little staggering and that their terms of engagement seem to be shrouded in secrecy.

It is this writer’s opinion that the average taxpayer in Lagos State will want to know more about the “process” undertaken to engage a consultant that is being paid at least N3 billion
monthly. The questions we would like the people’s governor to answer are simple namely; is there a procedure for the appointment of consultants to the government? Did the Lagos State Government invite consultancy bids for the contract? How many consultancy companies submitted bids for the said contract? Why was Alpha-Beta selected as the preferred consultant? Did Alpha-Beta have a known track record of revenue collection before it was appointed as a consultant? What were the criteria used in selecting Alpha-Beta?

There is no denying Gov. Fashola’s good work in Lagos and the clear evidence of phenomenal increase in IGR since his assumption of office, it has however been argued in some quarters quite erroneously that Gov. Fashola is not obligated to the people of Lagos State to give an explanation on the issue of Alpha-Beta Consulting and their terms of engagement. It is this writer’s humble opinion that, for as long as Alpha Beta is being paid with tax payers’ money our much beloved Governor of Lagos State will continue to be obligated to provide answers to the questions being asked by concerned tax payers in Lagos State.

Another way to look at the above mentioned issue is to examine critically whether or not the Alpha-Beta Consulting contract provides enough ‘value-for-money’ to the taxpayers in Lagos State? This is simply because; it is taxpayers’ money that is being used to pay for their services. In this writer’s humble opinion it is not entirely correct to assert that because an administrator is performing well he should not be held accountable for his actions. If it is true that Alpha-Beta Consulting charges at least 15% of the Lagos State’s IGR, is there any reason for us to believe that another consulting firm cannot provide us with the same service at a lower cost – say 10%?

It is indeed safe to assert that the N36 billion (thirty six billion naira) being paid to Alpha Beta Consulting by the Lagos State government is a colossal amount of money to pay any individual firm for collecting taxes on its behalf. Furthermore if such an amount of money is used to provide basic amenities in Lagos state, it is inevitable that the impact of the funds will be felt by all and sundry.

Arguments in favour of the use of tax consultants
Some argue that external Tax Consultants should be retained positing that the use of external tax consultants have impacted positively on the internally generated revenue of State Governments in Nigeria.

Here are some of the arguments put forward in favour of the retention of tax consultants

Increase in Internally Generated Revenue in the States; there has been a huge increase in the internal revenue for the participating States. From Lagos to Rivers states, examples abound of states that have succeeded in shoring up their revenue base, due largely to the input of the tax consultant. This is because the tax consultants brought innovation into tax consulting service in Nigeria and has a result-oriented approach to revenue generation in the States such that a lot more funds were generated for the participating states.

Update of Master Register; The tax consultants can be credited more with the creation of sustainable tax data base with the compilation of a Standard Master Register of Taxpayers. This is because you cannot tax a tax base you cannot identify. This is a practice that had been forgotten for quite a while by the revenue authorities, probably due to the oil boom.

Staff Orientation; The consultants are alleged to have brought about a positive change in the orientation of the staff of state and federal boards of inland revenue services as well as an improvement in their training and development.

Voluntary compliance; The introduction of a new voluntary tax payment culture as evidenced by the emphasis on the benefits of voluntary self-assessment has resulted in a significant increase in voluntary compliance.

Professionalism in Taxation; Some even argue that taxation became recognized as a body of knowledge distinct from other professional bodies. As a professional body, experts in other professional bodies can be engaged as tax consultants. It is noteworthy that in Nigeria today experts in these other fields may also be admitted into membership of the Chartered Institute of Taxation of Nigeria (CITN).

Accounting for Tax; Accounting for tax collected has become more prompt and more accurate since the tax collected and remitted forms the basis of the consultant’s fees. However some also argue that the state governments are likely to take the tax consultants figures as the gospel truth and that the tax consultant may under declare the amount of taxes actually recovered from tax payers.
The use of tax consultants cannot be said to be an entirely new development as their prominence on the tax administration scene seems to be growing every day as they have contributed immensely to the revenue base of the state and local governments

However there is a need for the powers and activities of the tax consultants to be streamlined and their excesses curtailed as the revenue drive of both the state and local governments cannot be used as a basis for the violation of the rights the tax payer

Megathos Law Practice © 2012


Olufola Wusu


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