Corporate Criminal Liability: Avoiding The Murky Waters of Tax Evasion

Introduction

In Nigeria, a “company” is defined by section 105 of the Companies Income Tax (“CITA”)as any company or corporation (other than a corporation sole) established by or under any law in force in Nigeria or elsewhere; a “foreign company” as any company or corporation (other a corporation sole) established by or under any law in force in any territory or country outside Nigeria; “Nigeria company” as any company incorporated under the Companies and Allied Matters Act or any enactment replaced by the Act;

A company is a separate legal entity from the individuals who are the shareholders and directors that direct and manage the business of the company. This concept which accords a company its own legal entity was postulated in the celebrated English case of Salomon v. Salomon Co. Ltd. where Lord McNaugthen stated as follows:

“When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate “capable forthwith‟, of exercising all the functions of incorporated company”. Those are strong words; there is no period of minority on its birth, no interval of incapacity. I cannot understand how a body corporate such as this made capable by statute can lose individuality by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not. The Company is at law a different person altogether from the subscriber… Nor are the members (subscribers) liable…”

This toga of personae juris on a company is not absolute. The shell can be cracked open by a sledge hammer forged either by statutes or the courts to avert fraud and injustice on the person of the company which has no mind of its own any more than it has a body of its own. Lennards Carrying Co. v Asiatic Petroleum Ltd.

Tax Evasion

According to the provisions of extant tax laws, a company is liable to pay tax. If such company fails to act accordingly, such may be avoiding tax.

Tax evasion is an illegal activity in which a person or entity deliberately avoids paying tax. It is an intentional effort by people, corporate bodies, trust and other institutions to illicitly refuse to pay taxes and reporting true and fair value of their earnings. It is a violation of tax laws in which the tax rate due by a taxable person or company is unpaid after the minimum required period.

One of the situations wherein the corporate personality of an incorporation is lifted for proper dealings is tax evasion.

Where a company has not paid its tax as required, by Section 49 CITA and Section 31 of the Federal Inland Revenue Service (Establishment) Act (“FIRSEA”), the FIRS may by notice in writing appoint any person to be the agent of a taxable person which may be required to pay any tax payable by the taxable person from any money which may be held by the agent of the taxable person.  If the agent defaults, the tax shall be recoverable from him.

By Section 49(2) of the FIRSEA,

“Where the offence is committed by a body corporate or firm or other association of individuals – every director, manager, secretary or other similar officer of the body corporate; every partner or officer of the firm; every person concerned in the management of the affairs of the association; or every person who was purporting to act in any capacity, commits an offence and shall be liable to be proceeded against and be punished for the offence in like manner as if he had himself committed the offence, unless he proves that the act or omission consulting the offence took place without his knowledge, consent or connivance.

Can the FIRS Validly Proceed Against Officers of a Company?

This approach of proceeding against directors, managers, secretaries and other persons concerned with the management of the company may be said to have been adopted to avoid injustice of the company knowing that the person of the company has no mind of its own any more than it has a body of its own, but whose active and directive will must consequently be sought in the person of somebody who for some purposes may be called an agent but who is really the directing mind and will of the corporation, the very ego and centre of personality of the Corporation.

The Court held in Norwest Holst v Secretary of State for Trade that;

“The whole management and control are in the hands of the directors. They are self-perpetuating oligarchy; and are virtually unaccountable…. The question is asked: quis custodiet ipsos custodies? Who will guard the guards themselves…”

Being an artificial person, the company is therefore made an abstract entity that unfortunately cannot by itself organize and conduct its own affairs and business. On this, the company seeks assistance through the law of agency principles. Thus, through the human agencies the company’s polity and policies are formulated, and decisions made or taken on the behalf of the company by human beings. These individuals essentially stand in a fiduciary and agency relationships with the company. Similarly, the individuals are the alter ego through which the “mind” and “will” of the company are carried out or directed.

Takeaway

Companies and their officers concerned should attend to their tax matters in order to avoid tax authorities from exploring the tool to recovering tax in an unfriendly manner. This put the companies and their officers at risk of losing businesses and being prosecuted. 

For further information, please contact:
Farouk Obisanya farouk.obisanya@roukco.com