Privacy Conversations on Lagos State’s Eco Fiscal System

Introduction

On November 20, 2023, the Lagos State Internal Revenue Service (LIRS) announced the implementation of the Eco Fiscal System (EFS). The EFS is a software integrated into Point of Sale (POS) machines to track revenue inflow and administer the collection of Lagos State’s Hotel Occupancy and Restaurant Consumption Tax (HORCT or Consumption Tax) from the relevant businesses. Lagos State had in 2009, enacted the Hotel Occupancy and Restaurant Consumption Law (HORC Law) by which it imposed a 5% (five percent) tax on goods and services consumed in hotels, restaurants and event centers in Lagos State, vesting LIRS with the power to assess and collect the Consumption Tax. The Consumption Tax is required to be assessed exclusive of Value Added Tax (VAT) which is remittable to the Federal Inland Revenue Service (FIRS). In this brief, we review the practical workings of the EFS and highlight relevant privacy issues that the system brings in its wake.

The Eco Fiscal System

Lagos, Nigeria’s most populous city, boasts one of the most thriving hospitality industries in Africa, featuring luxury hotels, fine dining, art centers, and leisure spots. The industry contributes significantly to Nigeria’s economy and continues to attract the fiscal attention of the 3 (three) strata of government, that is Federal, State and Local.

For example, under the HORC Law, which is a State law, businesses operating within the industry are classified as hotels, restaurants and event centers including motels, guest houses, apartments for short letting, taverns, food sale outlets, bars, inns, cafes, halls, and places designated for public use at a fee.  Proprietors and managers of such businesses are referred to as ‘Collecting Agents’ and are mandated to register with the LIRS and remit Consumption Tax on or before the 20th day of each month. Where a Collecting Agent fails to remit the Consumption Tax, such agent is liable to pay 5% interest per annum above the prevailing Central Bank of Nigeria (CBN) Minimum Rediscount Rate (MRR) as determined at the time of actual remittance. An additional 10% interest on the amount due is charged as a penalty for default where a Collecting Agent fails to file a report and remit taxes within the stipulated time frame. Furthermore, directors, managers, officers, agents and employees of defaulting Collecting Agents may be liable on conviction to 6 (six) months imprisonment, a fine of N2,000,000 (Two Million Naira) or both.

In 2017, LIRS introduced the Hotel Occupancy and Restaurants Consumption Tax Regulation (HORC Regulation) as a framework for developing the EFS. The EFS is a software designed to automate the collection of Consumption Tax from industry operators by integrating directly with the POS systems used in their operations. This integration enables real-time monitoring of their transactions and ensures that all taxable sales are accurately recorded and reported to the LIRS. According to LIRS, the notable benefits of EFS include:

i.        automation of invoices for each transaction and applying the 5% Consumption Tax as well as issuing a receipt with a unique invoice number;

ii.      monitoring and transmitting of transactions in real-time to the LIRS Online Tax System (OTS), allowing for immediate oversight and reducing the likelihood of tax evasion;

iii.     reducing the administrative burden of the tax collection process on businesses thereby facilitating compliance with tax regulations;

iv.     promoting transparency in tax collection, ensuring that all transactions are accounted for and reducing the potential for discrepancies.

The EFS and the Realtime Monitoring of Transactions: Privacy Considerations

 The right to privacy, guaranteed under the Constitution of the Federal Republic of Nigeria (CFRN), and covered under the nascent area of data protection has become increasingly prevalent in Nigeria, especially with the enactment of the Nigeria Data Protection Act, 2023 (NDPA). Although the NDPA in its objective serves to preserve the right to privacy, this right is not absolute and may be limited by considerations of public interest. When evaluating policies that could potentially infringe upon individuals\’ privacy rights, such as the implementation of the EFS, the doctrine of proportionality is often applied to balance individual rights against public objectives like ensuring tax compliance. The EFS, which enables the LIRS to monitor real-time sales and consumption data from hospitality businesses, presents notable privacy concerns, particularly in relation to the handling of customers\’ personal data during business transactions.

Operators argue that the monitoring capabilities of the EFS could extend beyond tax purposes, potentially leading to government overreach and the tracking of personal consumption habits. This raises the question of whether the system can safeguard the privacy of individuals whose data may be collected incidentally. The NDPA, Nigeria’s primary legislation for data protection, prescribes measures that data controllers and processors must implement when handling personal data of data subjects. The NDPA defines personal data as any information relating to an identified or identifiable natural person, such as a name, phone number, or address, and includes financial details like bank information and transaction history.

Under the NDPA, data controllers and processors must ensure the lawful processing of personal data, establish robust security measures, and maintain transparency regarding data collection, storage, and use. Additionally, data subjects must be informed in the event of any breaches, and non-compliance carries significant penalties. These provisions emphasize the need for authorities like LIRS to handle data with utmost care, particularly when monitoring private sector activities.

Prior to the NDPA, the National Information Technology Development Agency (NITDA) had released the Guidelines for the Management of Personal Data by Public Institutions (“the Public Institutions Guidelines” or “NPIG”) which focused on regulating the collection and management of personal data by the 3 (three) strata of governments, that is Federal, State and Local Governments, including by their respective Ministries, Departments and Agencies. The NPIG, which remains in force alongside the NDPA contains specific provisions, including lawful basis on which a government body – referred to as a “Public Institution” may access the personal data of Data Subjects. It is pertinent that in the implementation of the EFS, the LIRS pays particular attention to the provisions of the NPIG, especially in its management of the information it would be accessing.

Globally, it is common practice for tax authorities to use automated systems that integrate with businesses\’ financial operations to ensure tax compliance. For instance, countries like the United Kingdom, the United States of America, and Canada have implemented similar mechanisms to track and collect taxes from businesses. In these jurisdictions, privacy concerns are managed by setting up clear frameworks that regulate data collection, storage, and usage. Consequently, as LIRS deploys the EFS, it must ensure compliance with the NDPA as well as the NPIG by implementing robust security and compliance measures, such as conducting a Data Protection Impact Assessment on the EFS, to ensure the security of data and prevent unauthorized access or breaches. Establishing a transparent system with clear legal boundaries is crucial for gaining the trust of business operators and maintaining the integrity of personal data.

Conclusion

The deployment of the EFS by the LIRS is a commendable step towards enhancing tax compliance and transparency in the hospitality industry. However, its implementation must be approached with caution to address the potential privacy risks it presents. Given the sensitive nature of transactional data and the possible exposure of personal consumption habits, it is imperative for LIRS to align the EFS with the requirements of the NDPA and ensure that robust data protection measures are in place.

Achieving a balance between tax efficiency and the right to privacy is essential, and LIRS must establish a transparent legal framework that minimizes the risk of government overreach while fostering compliance and trust among industry operators. By doing so, the EFS can fulfill its intended purpose without undermining the privacy rights of individuals or eroding public confidence in the system.

For further information on the foregoing or related matters, please generally contact us at info@ao2law.com, or specifically contact the key contacts

Get the full article

Bidemi Olumide
Managing Partner
bidemi.olumide@ao2law.com

Joseph Ajah
Senior Associate
joseph.ajah@ao2law.com

Uwemedimo Atakpo Jnr.
Senior Associate
uwemedimo.atakpo@ao2law.com

Oghenekaro Isiorho
Associate
oghenekaro.isiorho@ao2law.com

Share