adebimpe a balogun managing partner/ceo saffron professional services local strength, global...

PERSONAL INCOME TAX ISSUES FOR EMPLOYEES AND EMPLOYERS

Adebimpe A BalogunManaging Partner/CEOSaffron Professional Services

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Scope of Discussion

(a) Source of Tax Law

(b) Interpretation of Taxing Statutes

(c) Avoidance in the Nigerian Tax

Jurisdiction

(d) Issues relating the new PITA amendment

(e) Issues in Payroll Structuring


Source of Tax Law

(a) 1999 Constitution

(b) Tax statutes

(c) Case law

(d) Information circulars

(e) Revenue practice and rulings


Interpretation of Taxing Statutes

(a) In Cape Brandy v. IRC, Rowlatt J. stated that:

In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One has to look fairly at the language used.


Avoidance in the Nigerian Tax Jurisdiction

Section 3 of PITA 2004

-……..Tax shall be payable for each year of assessment on the aggregate amounts each of which is the income of every taxable person, for the year from a source inside or outside Nigeria, including, without restricting the generality of the foregoing:

a) Profit from a trade or business ……..

b) Any salary, wage, fee allowance or other gains or profit from employment ………..


COMPARISON OF THE OLD AND NEW PITAOLD PITA RULES Personal allowance

– Each employee is granted 20% of his or her total earned income plus NGN5,000

Children allowance

– Each tax -payer is entitled to children allowance of NGN2,500 per child to the maximum of four children. The maximum allowance is NGN10,000. The age of the child should not be more than 16 years. If the age is more than 16 years the child must be a student or an apprentice. The child should not be married. The tax- payer needs not to be the biological father in order to claim the allowance. He may be the guardian.

NEW PITA RULES Personal allowance

– Section 33(1) of PITA has been amended by Section 5(1) of PITAM by substituting the personal relief of N5000 with N200,000 or 1% of gross income plus 20% of gross income and this is now known as the Consolidated Relief Allowance (CRA).

– The exact computation of the CRA is not clear as the provisions of Section 5(1) conflicts with the paragraph (1) of the Sixth schedule to the PITAM.

Children allowance

– This provision remains the same


COMPARISON OF THE OLD AND NEW PITAOLD PITA RULES

Life assurance

– Any insurance premium paid by a tax -payer in the preceding year to an insurance company in respect of insurance on his life, or the life of his spouse, or of a contract for a deferred annuity on his own life or the life of his spouse, should be granted as relief to the tax –payer.

Additional allowance for disabled person

– Disabled person is entitled to additional allowance of the higher of NGN3,000 or 20% of earned income.

Nigeria Social Insurance Trust Fund (NSITF)

– All the deductions are allowed for tax purposes

NEW PITA RULES Life assurance

– This provision remains the same.

Additional allowance for disabled person


Nigeria Social Insurance Trust Fund (NSITF)



COMPARISON OF THE OLD AND NEW PITAOLD PITA RULES

Pension schemeWhere it is contributory the minimum contributionbetween the employer and employee shall be as follows:Public servant ( FCT):

Employer’s contribution 7.5%Employee’s contribution 7.5%

MilitaryEmployer’s contribution 12.5%Employee contribution 2.5%

OthersEmployer’ contribution 7.5%Employee’ contribution 7.5%

Dependant relative allowance Each employee is allowed maximum dependant relative

allowance of NGN2,000 per dependant. The maximum number of the dependants is two. The total allowance is NGN4,000. The dependant relatives may be incapacitated, or aged or widowed parent. The cost of assisting the dependant relative must be incurred in the preceding year. The dependant must not earn more than NGN600 (six hundred naira per annum) before the allowance can be granted. This condition seems to be too harsh if one considers the current inflationary rate.

NEW PITA RULES Pension Scheme

– This provision remains the same.

Dependent Relative allowance



COMPARISON OF THE OLD AND NEW PITA-Deductible allowancesOLD PITA RULES

Housing allowance

The allowable maximum housing allowance payable to an employee by employer is NGN150,000.

Transport allowance

Each employee is entitled to NGN20,000 per annum as the maximum amount of transport allowance that could be claimed for tax purposes.

Leave allowance

Leave allowance is restricted to 10% of the basic salary.

Entertainment allowance

The maximum entertainment allowance that could be paid to any employee in a year is NGN6,000. Any excess would be taxable in the hands of the staff and would not be allowed for offset against income in preparing companies tax

NEW PITA RULESHousing allowance

Removed completely.

Transport allowance

• Removed completely.

Leave allowance

Removed completely.

Entertainment allowance Removed completely.



Utility allowance

Each member of staff could be paid NGN10,000 as utility allowance. Any excess would lead to additional payment of tax by the employee and is not tax deductible under the Companies Income Act CAP 60 of 1990 LFN (as amended)

Meals

Cost of meals provided in the canteen for the staff is not part of the earned income of the employees and is not taxable in the hands of the staff. It is also tax deductible under companies income tax. If cash payments are made to the staff as meals subsidy, the maximum allowed by tax law is NGN5,000 per annum

Mortgage interest

Annual interest paid on owner –occupied building is tax deductible

NEW PITA RULESUtility allowance

Removed completely.

Meals

Cost of meals provided in the canteen for the staff is not part of the earned income of the

employees and is not taxable in the hands of the staff. It is also tax deductible under

companies income tax. If cash payments are made to the staff as meals subsidy, no cash

amount is allowed as non-taxable

Mortgage Interest

Remains the same.



Cost of passage

Cost of any passage to or from Nigeria incurred by the employee is tax exempt. Necessary documents should be submitted as evidence of the cost incurred.

Medical or dental expenses

Medical and dental expenses incurred by the employees are tax-exempt. These are reimbursable expenses and should be supported with necessary documents before they could be tax deductible.

Uniform, overall or protective clothing

The cost of providing any uniform, overall or other protective clothing for the employees by the employer is not taxable in the hands of the employees.

NEW PITA RULESCost of Passage

Removed completely.

Medical or Dental expenses


Uniform, overall or protective clothing

Remains the same



Benefit-in-kind

Some amounts that are treated as benefit-in-kind are added to the income of an employee who enjoys some facilities provided by his/her employer.

Assets

If an asset, which is wholly owned by an employer, is provided for an employee for his or her use, 5% of the cost of the asset is taxable as benefit-in-kind in the hands of the employee. This forms part of the earned income of the employee. If the asset is hired for the use of the employee, the total, amount paid by the employer for this becomes benefit-in-kind in the hands of the employee.

.

NEW PITA RULESBenefit-in-Kind

Remains the same.

Assets




Living accommodation Living accommodations could be provided for the staff.

This simply means that the company pays the rent to the landlords on behalf of the staff. The maximum amount allowed by tax law as rent that could be paid for an accommodation is the total annual basic salary of the employee. Any amount over and above the basic salary would not be allowed for tax purposes. Withholding tax of 10% should be deducted from the rent and paid to the relevant tax authorities. Tenancy agreement would be requested by the Revenue in order to determine that rent was actually paid to landlords.

The benefit- in- kind that should be added to the employee’s earned income for tax purposes is the rateable value of the property. The relevant local government authority determines rateable value of each property. As from 22 June 2001, Lagos State Land Use Charge Law replaced tenement rate with land use charge. This is applicable in Lagos State only. Land use charge is payable by landlord on property rented for residential and commercial purposes.

NEW PITA RULES

Living accommodation

Removed completely.



Residency for Tax purpose Tax may be imposed on an individual only by SIRS of

the State in which he is deemed to be resident for that year.

The rules for the determination of residence are detailed in the First Schedule of PITA.

Place of residence means a place available for his domestic use in Nigeria on first day of the year of assessment and it excludes any temporary lodging like hotels, etc. unless no permanent place of residence is available to him on 1st January of the year of assessment.

NEW PITA RULESRedefining Residency for tax purpose

Amendment to entire Section 10 has now tightened the existing tax window that may

have been exploited by expatriates. This was achieved as follows;

Inclusion of the phrase “and the remuneration of the employee is not borne by a fixed base

of the employer in Nigeria” to the existing subsection 1 (a)(i);

Modification of the 183 day rule to include period of temporary absence or leave. This

will pose some challenges regarding temporary absences from Nigeria to perform

employment duties abroad.

There was also the inclusion of the phrase “under the provisions of the avoidance of

double taxation treaty with that other country” to restrict the definition of the

phrase “other country” to only countries that are in Double Tax


Other Issues in the New Law to be noted

COMMENCEMENT OF THE AMENDMENT

The time lapse between the President signing the new Act and the public circulation of the Act has practitioners asking when the act can be deemed to take effect and if there will be opportunity for refunds if applicable

Both versions of the amendment (PITAM) was signed into law by President Goodluck Jonathan on the 14th June 2011 but was not made public until Monday, 12 December 2011. A major omission on the bill itself before it was passed into law was the date the amendment is supposed to take effect The time lapse between the signing and the public circulation of the Act has generated questions from different tax practitioners about when the act can be deemed to take effect. Also, whether there would be an opportunity for adjustments, refunds and regularizations if the President’s signature date is adjudged to be the effective date for the bill to have taken effect.

Recent letters from the Revenue (LIRS) suggests that the board has opted to adopt January 2012 as the commencement date of the amendment.



The Section 3 (1)(e) of the Principal Act was amended by removing the word “pension” in the first version. However, the second version did not remove it.

Also the amendment to Section 2(8) (in the both versions of PITAM) included “benefit in kind” as an integral part of “Personal emolument.

The modification of the 183 day residence rule may pose a challenge to expatriates

Deletion of subsection 5. The old provision included the duties of an employment performed outside Nigeria as deemed to be derived in Nigeria to the extent to which it is performed in Nigeria. The removal of this Subsection creates a Lacuna as to gains or profit from employment outside Nigeria where the duties of the said employment may sometimes be performed in Nigeria.

Section 60 of the Act has been replaced with a new section now allows ALL appeals to go to the Tax Appeal Tribunal (TAT) established under Section 59 of Federal Inland Revenue Services (Establishment) Act 2007. Sections 61 – 67 have also been deleted since they relate to the conduct and composition of the now non-existent Body of Appeal Commissioners.



TCC Verification

The new Act has placed a compulsory duty on government agencies and corporate entities to verify the authenticity of Tax Clearance Certificates (TCC) presented by individuals or companies and consequent penalties on non-compliance. See penalties table above for applicable offence rate.

Distrain procedure for non-payment of tax

The new Act substitutes the existing Section 104 of the Principal Act with a new Section 104 that requires “an officer duly authorized by the relevant tax authority to apply to a judge of a high court sitting in Chambers, under oath for the issue of a warrant”. This limits the powers of the State Revenue board to carry out a distrain order without first consulting with the High Court and obtaining approval before any warrant of distrain is levied.

Amendment of the Third Schedule (Removal of Tax-exempt status)

On the Principal Act, the “official emoluments” of the President, Vice President, Governors and Deputy Governors are stated as tax exempt. Both copies of the signed Act removed the paragraph (1) and paragraph (2) of the Third Schedule to the act. This implies that the income of these officials whether official or non-official is now taxable.



The amendment to section 73 creates a refund mechanism for excess WHT deducted. This provision is a welcome development. Though it should apply to all taxes

Amendment to Section 37 increased the Minimum Tax rate from 0.5% to 1%. In addition, the threshold has increased from N30,000 to N300,000 in conformity with the tax table in the schedule to the Act. This implies that after all allowable deductions have been made, and the individual has no chargeable income or where the tax payable on the chargeable income is less than 1% of his total income, the individual will be charged to tax at the rate of 1% of his total income.

Amendment to Section 73 is to create a refund mechanism for any excess WHT deducted and remitted to the Government. It is now expected to take only 90 days of the decision of the Service to effect the refund or use the credit to offset future tax liabilities payable. The provision to refund excess WHT is a welcome development although there was no clarity as to whether this covers other taxes payable under the PITA other than WHT.

Empowerment of the Minister to make regulations for the administration of the Act on recommendation by the Joint Tax Board (JTB);



REDEFINING THE ROLE OF THE STATE BOARD OF INTERNAL REVENUE

In both versions, the word “imposed” is replaced with the word “collect” in the marginal note to limit the powers of the State Revenue authorities to collection of taxes only. The implication of this is that the SIR and FIRS merely collect the tax revenue but cannot regulate or enact any legislation on taxpayers.


Sections

Offence

PenaltiesPITA PITAM

47 (3) Failure to submit further returns as required by the relevant Tax authority

N500 for individuals

N5000 for a body corporate

N50,000 for individuals

N500,000 for a body corporate

49 (3) Failure of Bankers to prepare end of the month returns of new customers and file within 7 days of the following month

N500 for individuals

N5000 for a body corporate

N50,000 for individuals


52 (1) Failure to keep books of account N/A N50,000 for individuals



Sections

Offence

PenaltiesPITA PITAM

74 Failure to deduct taxes The higher of N 5,000 or 10% of the amount of tax due plus amount deductible plus interest at prevailing commercial rate

10% of the amount of tax due plus amount deductible plus interest at the prevailing monetary policy rate of the CBN.

81 (3) Failure to file annual returns by employer

N/A N50,000 for individuals


85 (9) Failure to demand for and verify genuineness of TCC provided

N/A N5,000,000 or imprisonment of 3 years or both (liable on conviction)


Income Tax RatesSections

OffencePenalties

PITA PITAM

Currently under the new PITAM Chargeable income

in Nigerian Naira (NGN)

Tax ratesPreviously Chargeable income in

Nigerian Naira (NGN)

Tax rates

First 300,000 7% First 30,000 5%

Next 300,000 11% Next 30,000 10%

Next 500,000 15% Next 50,000 15%

Next 500,000 19% Next 50,000 20%

Next 1,600,000 21% Above 160,000 25%

Above 3,200,000 24%


Issues relating to Payroll structuring Tax free allowances not included in employment

contract

Evidence of payment of tax free allowances not available to tax auditors

Employment cost in Financial statement not adequately analysed to the satisfaction of Tax auditors

Tax free allowance constituting a higher proportion of total compensation


SAMPLE COMPUTATION

NAME Annual Basic Other allowancesGross Pay Personal Relief/CRATax Free relief Tax PayableMr AA 140,000.00 205,000.00 345,000.00 74,000.00 221,640.00 318,943.86

Mr AA 140,000.00 205,000.00 345,000.00 269,000.00 416,640.00 3,450.00

Mr AA 140,000.00 205,000.00 345,000.00 269,000.00 322,440.00 3,450.00

Mr CC 4,371,818.18 628,181.82 5,000,000.00 1,005,000.00 2,752,886.36 543,778.41

Mr CC 4,371,818.18 628,181.82 5,000,000.00 1,200,000.00 2,947,886.36 318,943.86

Mr CC 4,371,818.18 628,181.82 5,000,000.00 1,200,000.00 2,319,704.54 450,862.05

Mr DD 22,553,636.36 2,446,363.64 25,000,000.00 5,005,000.00 13,116,522.73 2,952,869.32

Mr DD 22,553,636.36 2,446,363.64 25,000,000.00 5,250,000.00 13,361,522.73 2,585,234.55

Mr DD 22,553,636.36 2,446,363.64 25,000,000.00 5,250,000.00 10,915,159.09 3,172,361.82

adebimpe a balogun managing partner/ceo saffron professional services local strength, global...

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