FAQs on power of substitution in tax administration

Q1: What is “power of substitution”?
The power of substitution is a tax recovery mechanism that allows the tax authority to direct a third party (a ‘substitute’) to remit funds belonging to a defaulting taxpayer to settle a confirmed, unpaid tax liability. This power is exercised only after all legal and administrative processes, including court appeals, have been exhausted.

Q2: Is there a risk of arbitrary use of this power?
No. The power of substitution is strictly controlled and cannot be used arbitrarily. It is invoked only after enquiries, assessments, objections, final notices, and court appeals have concluded, ensuring the tax liability is final and conclusive.

Q3: Does this affect low-income earners or small businesses?
No. Individuals earning the national minimum wage or small businesses below taxable thresholds are generally outside the scope of this measure. The power targets substantial tax liabilities.

Q4: Is this a new provision in Nigerian tax laws?
No. This power is not new. It has existed under Nigeria’s tax legislation, including Section 50 of the repealed Personal Income Tax Act (PITA) and other statutes.

Q5: Is this a globally accepted practice?
Yes. Third-party collection mechanisms are consistent with global best practices, such as garnishment or third-party payment notices, widely used in tax jurisdictions worldwide.

Q6: Why is this power necessary?
It ensures fairness in the tax system. Without it, compliant taxpayers bear extra burden, tax evasion increases, and government revenues are pressured, potentially leading to higher tax rates.

Q7: Under what conditions can this power be exercised?
The tax authority may only use it when:

• Exhausted process – all steps to establish the liability have concluded.

• Final liability – the tax due is legally confirmed and payable.

• Refusal to pay – the taxpayer fails or refuses to pay within the specified period.

Q8: Who can be appointed as a ‘substitute’?
Any person holding funds or owed sums by the defaulting taxpayer can be appointed.

Q9: What are the obligations of a substitute, and can they decline?
The substitute must comply or formally object in writing within 30 days, specifying grounds for refusal. Appeals follow the same legal provisions as normal tax assessments.

Q10: What safeguards prevent abuse of this power?
Safeguards include:

• Due process – final tax assessment must follow mandatory procedures.

• Right to object – substitutes can object in writing within 30 days.

• Appeal rights – full rights under tax dispute resolution frameworks.

• Taxpayer protections – oversight by the Office of the Tax Ombud.

Concluding Message

The power of substitution is a carefully controlled mechanism to ensure equity in tax administration. It is not punitive or routine, and its historical use has been rare. Its purpose is to guarantee that lawful tax obligations are ultimately fulfilled, even if a taxpayer ignores their statutory duties.

— Presidential Fiscal Policy & Tax Reforms Committee