Lagos Government Unveils Aggressive Tax Recovery Strategy Through Third Parties
The Lagos State Internal Revenue Service (LIRS) has triggered significant public discussion with its recent announcement regarding the recovery of unpaid taxes through third-party enforcement. This bold initiative represents a major shift in tax administration strategy that could have far-reaching implications for businesses and individuals across Nigeria's commercial capital.
Understanding the Power of Substitution Mechanism
At the heart of this new approach lies the statutory "Power of Substitution" provision under Section 60 of the Nigeria Tax Administration Act, 2025 (NTAA 2025). This legal framework empowers tax authorities to intercept funds belonging to or owed to taxpayers who have failed to settle confirmed tax assessments within specified deadlines. The mechanism allows tax authorities to direct third parties—referred to as "substitutes"—to remit funds directly to settle established tax liabilities.
Taiwo Oyedele, Chairman of the Presidential Fiscal Policy & Tax Reforms Committee, has provided comprehensive clarification through a detailed Q&A session addressing public concerns about this enforcement method. According to Oyedele, this power represents a carefully controlled, last-resort measure rather than a routine administrative action.
Key Questions and Answers About the New Tax Recovery System
Q1. What exactly constitutes the "power of substitution" in tax recovery?
The power of substitution serves as a specialized tax recovery mechanism that enables tax authorities to direct third parties holding funds belonging to defaulting taxpayers to remit those funds directly to settle final, established, and unpaid tax liabilities. This enforcement action can only be exercised after all legal and administrative processes, including court appeals, have been completely exhausted.
Q2. Is there potential for arbitrary application of this power?
No. The implementation of the power of substitution is neither arbitrary nor discretionary. Its application is strictly governed by established due process protocols and can only be invoked after comprehensive completion of all enquiries, assessments, objections, final notices, and court appeals. This represents a controlled, final-resort measure rather than routine administrative procedure.
Q3. How does this affect low-income earners and small business operators?
Individuals earning the national minimum wage and small businesses operating below established taxable thresholds remain outside the scope of this enforcement measure. The power of substitution applies exclusively to situations involving substantial tax liabilities, which these demographic groups typically do not accumulate.
Global Context and Legal Foundations
Q4. Is this power of substitution a novel introduction to Nigerian tax legislation?
No. This enforcement mechanism already exists within Nigeria's tax legislation framework, including Section 50 of the repealed Personal Income Tax Act (PITA) and various other statutory provisions. The current implementation represents a more systematic application of existing legal authority.
Q5. Does this approach align with international tax administration practices?
Yes. The utilization of third-party collection mechanisms corresponds with global best practices in tax administration. Similar enforcement powers, including garnishment procedures and third-party payment notices, operate effectively in numerous tax jurisdictions worldwide.
Operational Parameters and Safeguard Mechanisms
Q6. Why has this enforcement power become necessary?
This mechanism ensures fundamental fairness within the tax system. Without such enforcement capabilities:
- Compliant taxpayers face disproportionate financial burdens
- Tax evasion practices may experience increased prevalence
- Government finances encounter undue pressure, potentially necessitating higher tax rates for all citizens
Q7. Under what specific conditions can tax authorities exercise this power?
The power of substitution operates strictly as a final-resort measure requiring simultaneous fulfillment of all following conditions:
- Exhausted process – All procedures to establish tax liability (including enquiries, assessment, objection, final notice, and court appeals) have reached completion
- Final liability – The taxpayer possesses a confirmed, legally due tax liability
- Refusal to pay – The taxpayer has failed, neglected, or refused payment within the period specified by tax authorities
Q8. Who qualifies for appointment as a "substitute" in this process?
Tax authorities can issue substitution notices to any individual or entity holding funds belonging to or owing money to defaulting taxpayers. This category includes financial institutions, employers, tenants, business partners, and other relevant third parties.
Q9. What obligations do appointed substitutes face, and can they decline appointment?
Upon receiving official notice, appointed parties must either comply with the directive or formally object in writing within 30 days, providing specific grounds for refusal. Legal provisions for appealing tax assessments apply equally to substitution notices.
Protection Mechanisms and Implementation Philosophy
Q10. What safeguards prevent potential abuse of this enforcement power?
Multiple legal and administrative safeguards ensure controlled, accountable implementation subject to comprehensive review:
- Due process requirements – Mandatory procedures to establish final tax assessment
- Right to object – Substitute parties retain written objection rights within 30-day window
- Appeal rights – Comprehensive appeal framework under tax dispute resolution laws
- Taxpayer protections – Oversight by the Office of the Tax Ombud
Oyedele emphasized that the power of substitution represents a carefully calibrated mechanism designed to ensure equity within Nigeria's tax system. He clarified: "This enforcement tool is neither punitive nor arbitrary, which explains its historically rare application. The fundamental purpose involves ensuring that confirmed, lawful tax debts receive ultimate payment from those who might otherwise disregard statutory obligations."
Broader Tax Administration Context
This development occurs alongside other significant tax administration initiatives, including the Nigerian government's introduction of the Tax ID Portal to streamline Tax Identification Number (TIN) acquisition processes. This unique 13-digit identifier, assigned to every taxable individual and organization, links individual TINs to National Identification Numbers (NIN) while connecting business entities to Corporate Affairs Commission (CAC) registration numbers.
The Lagos State government's assertive approach to tax recovery through third-party enforcement reflects growing sophistication in revenue collection methodologies while raising important questions about implementation protocols and taxpayer rights protection in Nigeria's evolving fiscal landscape.
