The PIT Act vests the administration of the PIT on the State Internal Revenue Service (SIRS) in each State. For individuals resident in the Federal Capital Territory, the PIT is administered by the Federal Inland Revenue Services (FIRS).
The incidence of taxation on employment income and the relevant authority are determined by residence. Once a place of residence is determined, the relevant tax authority is the SIRS in which the taxpayer has a permanent place of residence. Therefore, if an employee resides in Lagos State but works in Delta State, the relevant SIRS will be the Lagos State.
As such, income tax due from employment (individuals and partners) is due to the state where such employees are resident.
Liability for income tax
The basis for taxation in Nigeria is based on certain conditions as provided by the Personal Income Tax (PIT) Act. Income from an employment derived from Nigeria will be taxable in Nigeria if:
The concept of residence is critical in determining the relevant tax authority for the purpose of assessing and collecting taxes.
Under the PIT Act, a person's place of residence is defined as a place available for his domestic use in Nigeria on a relevant day. This excludes hotel, rest house or other place at which he is temporarily lodging unless no more permanent place is available for his use on that day.
Once a place of residence is determined, the relevant tax authority is the tax authority of the territory in which the taxpayer has his place of residence or principal place of residence, as the case may be.
Types of taxable income
Under the PITA, any salary, wages, fees, allowances or other gains or profits from an employment including bonuses, premiums, benefits or other perquisites allowed, given or granted to an employee are chargeable to tax. However, the following are tax exempt:
- reimbursement of expenses incurred by the employee in the performance of his duties, and from which the employee is not expected to make any profit;
- medical or dental expenses incurred by the employee;
- retirement gratuities and compensation for loss of office;
- the cost of any passage to or from Nigeria incurred by the employee;
- any sum paid in respect of the maintenance or education of a child provided that such amount received by the employee would be deducted from the personal reliefs to be granted for the subsequent year;
- interest on loans for developing an owner-occupied residential house; and
- contribution to any pension, provident or other retirement benefits fund approved by the Joint Tax Board (JTB);
Along with the above listed tax exempts, the Consolidated Relief Allowance (CRA) will be granted as a relief. The CRA is the higher of 1% of gross income or N200,000.00, plus an additional 20% of gross income.
Taxable income is assessed to tax at graduated rates ranging from 7 percent to 24 percent, depending on the income band being assessed. Non- residents are subject to the same tax rates as residents. The maximum tax rate is currently 24 percent on taxable income.
Employee compliance obligations
Every employee is required to complete / submit an income tax form for return of income and claims for allowances and relief (Form A), within 90 days of commencement of every year; i.e. 31st March (90 days) of each year to the SIRS through his/her employer.
Employer reporting requirements
Every employer must process/file an employer’s annual declaration and certificate (Form H1) and employers remittance card (Form G) for the company, per location where the employees are resident. These forms are expected to be submitted annually on or before 30th January of each year. Monthly remittance of PAYE tax should be made not later than the 10th day of the following month of deduction.
Double taxation treaties
Nigeria has a broad network of double taxation treaties, which includes the United Kingdom, the Netherlands, France, Pakistan, Belgium, Romania, Canada, South Africa, Philippines, China, and South Korea. Subject to certain conditions, the total (or part of) tax paid in any of the treaty countries by a taxable person would be utilised as a relief on his/ her income in the treaty country of residence.
There are also various draft treaties at either negotiation stage or ratification stage.
Permanent establishment implications
Generally, a company would be taxable in Nigeria if it is deemed to derive income from Nigeria. The relevant legislation for taxation of companies in Nigeria, the Companies Income Tax (CIT) Act, provides that the profits of a non-resident company shall be deemed to be derived from (and, therefore, taxable) in Nigeria if that company has a fixed base of business in Nigeria and to the extent that the profit is attributable to the fixed base. The Nigerian Courts have found sufficient permanence in the presence of employees of a foreign company in temporary lodgings (e.g hotel lodgings) as sufficient to create a fixed base.
The transfer pricing regulation has been released in Nigeria. Companies are generally required to conduct transactions with related parties at arm’s length. The regulations require documentation sufficient to verify that the pricing of controlled transactions is consistent with the arm’s length principle.
Work permit/visa requirements
Where the non-residents enter the country on a Temporary Work Permit (a permit granted to expatriates who intend to come into Nigeria for a period not exceeding three months) and spend less than a cumulative period of 183 days, then they would not be liable to Pay as You Earn (PAYE) taxes, as long as the salaries of those individuals are not recharged to the non-resident company.
However, where the non-resident enters into the country on an expatriate quota (document obtained from the immigration office permitting a company to import the services of expatriates) and the non-residents have duly obtained residence permits, which enables them to work in Nigeria, they would be liable to PAYE taxes even where they spend less than a total of 183 days.