The Lagos State Internal Revenue Service (LIRS) has constantly been on the move to increase taxpayers' database with a view of increasing its tax revenue. The most recent effort in this direction is the Public Notice issued by the LIRS on 4 June 2019, informing the public of its intention to integrate the existing Taxpayers Identification Digit (PID) into the nationwide Tax Identification Number (TIN) system with the Joint Tax Board. The PID is a taxpayer's identity code issued by the LIRS to taxpayers in Lagos State. To achieve this, the LIRS intends to leverage on Bank Verification Number (BVN) of taxpayers. Consequently, every self-employed person is required to provide their BVN to the LIRS for creation of their unique PID, while corporate institutions are to ensure that their employees provide their BVNs for processing of their Tax Clearance Certificates (TCCs).
Valid concerns have been raised in various quarters in relation to the Notice. The question on the minds of many taxpayers is: "Does the LIRS really have the power to make BVN a requisite parameter for registration and tax compliance? What mechanisms will be put in place to protect and guard the privacy of taxpayers?"
Another concern that has been raised is how businesspeople should organize their affairs going forward such that minimal tax footprints is created, in the light of the above. This is a significant issue especially in the informal sector where there is little or no separation between personal and business affairs of taxpayers. No transaction, personal or business, will now escape the all-seeing eyes of the taxman, it seems.
Rationale and Legal Basis for the Newly Introduced Taxpayers Identification System
The effect of the Public Notice mentioned above is that BVN will be required to access all LIRS' electronic platforms including taxpayer registration, creation of Payer ID, payment of taxes and validation of taxpayers' profile. Interestingly, the authority to make such request is embedded in Section 48(4) of the Personal Income Tax Act as Amended (PITAM), which empowers the State tax authority to give notice to any person to deliver the information including a name and an address specified therein within the time limited for the purpose of obtaining information in respect of the income or personal circumstances of any individual. This then leads to the question of the LIRS' particular interest in BVN. Why not National ID? The LIRS is of the view that the BVN is generally the most credible identity management database with the widest coverage available within the country. According to the LIRS, creation of multiple tax IDs in the past was as a result of non-application of biometrics in the creation of Payer IDs. With continuous application of technology, various agencies have adopted biometrics as a unique identifier. BVN which is based on biometrics will serve as a veritable tool for elimination of multiple tax IDs.
BVN and Privacy of Taxpayers
The operation of BVN in Nigeria is regulated by the Central Bank of Nigeria (CBN) through the Regulatory Framework for Bank Verification Number Operations and Watch-list for the Nigerian Financial System ("the Regulatory Framework"). BVN information are very sensitive and private, and as such, may require court order or CBN approval before such information can be released to the LIRS. This power and the stifling need to increase internally generated revenue should be weighed against the need to avoid data security risks to taxpayers. It is thus important for the LIRS to consciously put impregnable measures in place to ensure data privacy and protection of taxpayers. This is highly desirable in the light of the recent global awareness for protection of private information of individuals which is apparent from the recently introduced the European Union General Data Protection Regulation 2018 and the Nigerian Data Protection Regulation 2019.
The need to protect the privacy of tax payer's information is also recognised under Section 48(2) of the PITAM which prohibits officers or employees of the state tax authority from disclosing any information relating to the income, tax or personal circumstances of any person which has come into his/her possession in the course of tax administration and collection. The law permits such disclosures only in expedient circumstances as may be required in a legal proceeding or to another tax authority or in accordance with the provisions of tax related treaty or arrangement between Nigeria and any other country. Furthermore, section 37 of the 1999 Constitution of the Federal Republic of Nigeria guarantees and protects the privacy of citizens, their homes, correspondences, telephone conversations and telegraphic communications.
Some schools of thought are of the view that the LIRS does not require BVN in its drive to sanitize the process of tax collection and administration in Lagos State as reliance can be placed on less risky means of certifying the authenticity of the identity of taxpayers, such as national identity card, international passport, or drivers' license. In addition, some say this move by the LIRS is an infringement on the right to privacy of citizens as provided in the Constitution. It is quite possible that in days ahead, some aggrieved persons may decide to test the above assertion in court.
It has also been argued in some quarters that the LIRS does not require BVN to gain access to details of taxpayers' banking transactions e.g. bank statements etc. as Section 49 of the PITAM has expressly empowered the State tax authorities to request such information directly from commercial banks.
Based on our discussions with the LIRS, we were informed that the Service intends to put in place IT-based safeguards critical to effective and efficient tax administration practice. The LIRS also assured us of its commitment to confidentiality and safeguard of taxpayers' information in its custody. This calls for utmost care and diligence on the part of the tax authority. Heavy sanctions could also be put in place on any officer of the LIRS who uses the information obtained through the BVN for ulterior motives.
"The question on the minds of many taxpayers is: 'Does the LIRS really have the power to make BVN a requisite parameter for registration and tax compliance? What mechanisms will be put in place to protect and guard the privacy of taxpayers?'"
Need for Proper Record Keeping by Taxpayers
There is now an increasing need for taxpayers to pay more attention to how their personal and business affairs are organized. The days of commingling business and personal records to memory are gone. It is important to clearly record all transactions involving taxpayers' businesses and maintain an archive of source documents issued in respect of such transactions. Source documents for purchases and other expenses can be used to create accounting ledgers and journal entries. Essential documents that should be kept in relation to taxpayers' businesses include incorporation documents, general ledgers, fixed asset schedule, payroll information, financial statements, company's policies, etc.
In addition to tracking business expenses, it is equally important to separate personal records from business records, especially those linked with bank statements. The LIRS will now, more than before, require explanation on any transaction reported on taxpayers' statement for which taxes have not been accounted for. For instance, care should be taken in using business funds to make personal payments, such as children school fees, vacation expenses, etc. These may be regarded as additional benefits to the business owners, with the attendant tax obligations. It is equally important to have concrete explanations for inflows into and outflows from taxpayers' accounts which have been left out of tax filings in prior years.
Taxpayers are also encouraged to seek advice from experienced tax professionals on how to manage their businesses going forward.
What is clear from the above is the need for taxpayers to be proactive and ensure that their affairs, businesses and transactions are structured in a manner that minimizes tax exposure while at the same time, remain fully tax compliant.
Andersen Tax is a global firm with a wealth of knowledge in various areas cutting across transaction advisory, business restructuring, payroll management and advisory practice, family wealth practice, private client services, restructuring, tax advisory, and regulatory service, amidst others. We will be happy to work with you in providing advisory services to ensure your affairs, businesses and transactions are structured in tax efficient manner even within the current tax and regulatory climate. We operate in a manner that accommodates terms of business that small and growing businesses can afford, without compromising on quality.
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