Taxation of Employees in Nigeria

                            Taxation of Employees in Nigeria

Abdulateef Olatunji Abdulrazaq (AOA)

Manager, International Tax & Advisory Services

Saffron Professional Services,

Lagos, Nigeria.

Introduction

Personal Income Tax (PIT) is a compulsory tax imposed on the income earned by an individual during a given year. The amount of tax payable is NOT a fixed sum but a variable amount, depending on the aggregate or gross income of the taxable employee, and the tax relief granted to him under Personal Income Tax Act (PITA).

The Nigerian tax system imposes tax on the income of individuals who are considered to be tax residents in Nigeria, and they will be taxed on their worldwide income. PITA is the legal basis for the imposition of personal income tax (“PIT”) on the income of employees in Nigeria. Under 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.

The PITA bestows the administration of PIT onto the State Internal Revenue Service (SIRS) in each State. For individuals resident in the Federal Capital Territory, the PITA is administered by the Federal Inland Revenue Services (FIRS).

Determination of Employee Residence.

The incidence of taxation on employment income and the relevant tax authority are determined by residence. Once a place of residence is determined, the relevant tax authority is the State Internal Revenue Service (SIRS) in which the taxpayer has a permanent place of residence. Therefore, if an employee resides in Lagos State but works in Ogun State, the relevant SIRS will be in Lagos State. As such, income tax due from employment (individuals and partners) is due to the state where such employees are resident.

Under the PITA, a person’s place of residence is defined as a place available for their domestic use in Nigeria on a relevant day. This excludes hotels, rest houses or other places at which they are temporarily lodging, unless the more permanent place is not available for their 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 their place of residence, or principal place of residence, as the case may be.

Determination of Income Tax Liability

The basis for taxation in Nigeria is based on certain conditions as provided by PITA. Income from an employment derived from Nigeria will be taxable in Nigeria if:

·         The duties of such employment are performed wholly or partly in Nigeria, unless

1.    The employer is not resident in Nigeria and the remuneration of the employee is not borne by a fixed base of the employer in Nigeria.

2.    The employee is not in Nigeria for an aggregate of 183 days (inclusive annual leave or a temporary period of absence) or more in any 12-month period.

3.    The employee’s income is proved to have been taxed in another country under the provisions of the double taxation treaty with that other country.

·         The employer is in Nigeria, or has a fixed base in Nigeria.

The Personal Income Tax (Amendment) Act, 2011 has consolidated all the personal income tax reliefs or allowances now allowed, when computing a person's individual tax, into a single Consolidated Tax Relief Allowance ("CTRA") of N200, 000 (Two Hundred Thousand Naira) or a minimum of 1% of the person's annual gross income, whichever is higher of the two, plus 20% of the individual's annual gross income as CTRA. After deduction of Consolidated Relief, the residue of an individual's income is liable to Personal Income Tax at an average graduating rate of between 7% to 24% of the individual's annual income.

In computing the gross emoluments of all employees, the employee's wages, salaries, allowances (including his or her benefits-in-kind) and any other income derived by reason of employment shall be computed for purposes of arriving at the employee's Payee tax that will be remitted to the revenue authorities. The due date for remitting the PAYE is the 10th day of every month following the month of deduction.

Tax Income Rates

The Nigerian personal income tax is based on a Pay-As-You-Earn system (PAYE) and the scale is graduated from a minimum percentage of 7 percent of taxable income to a maximum of 24 percent of taxable income. The tax income rates are presented in the Table below:

	Taxable Income	Cumulative Taxable Income	New Tax Rates
Up to	300,000.00	300,000.00	7%
	300,000.00	600,000.00	11%
	500,000.00	1,100,000.00	15%
	500,000.00	1,600,000.00	19%
	1,600,000.00	3,200,000.00	21%
Over	1,600,000.00		24%

PAYE Documents to be submitted to Relevant Tax Authorities.

The following are the PAYE documents to be submitted to the State Board of Internal Revenue (SBIR) by the employer after receiving relevant input from its employees:

1. Form A – Annual Declaration of Income and Claims for Allowances and Reliefs Form: Income tax for return of income and claims for allowances and reliefs. This is required to reflect the personal details and income expected to be earned by the employee for the current year of assessment. It is filed by employer on behalf of the employee. Taxpayers are required to prepare and file their Form A within 3 months from the beginning of each Calendar year.

2. Form H1 – Employers Annual Declaration & Certificate: This contains the names, gross income and taxes paid by employees who were in the Company's employment for the immediate preceding tax year. The Revenue relies on the information on this Form to determine if accurate taxes have been paid. Where the Revenue determines that taxes have been underpaid, additional assessment including penalty (10%) and interest (21%) of the amount underpaid, will be raised. Until the underpayment is settled / resolved, the Company's employees will not be issued Tax Clearance Certificate. The deadline for the filing of annual return is 31 January of the following year. The penalty for non-compliance by an individual and a corporate body is N50,000 and N500,000 respectively.

3.  Form G – Employers‟ Remittance Card: This should be completed with details of the Revenue receipt obtained evidencing remittance of PAYE tax liability during the year of assessment. The total tax paid per the receipt should equal that stated on the Form H1. Copies of the receipt should be attached to the Form G.

Other Statutory Deductions:

These are contributions made by employees to statutory bodies set up by the Federal Government. The duty to deduct and pay over to the relevant institutions rests with the employer.

Currently, the following schemes to which contributions are made are as follows:

1. Contributory Pension Scheme: This was established by the Pension Reform Act (PRA), as amended. The Act requires every employee to contribute a minimum of 8% and employer to contribute and remit a minimum of 10% respectively of employee monthly emolument (i.e. basic, housing and transport allowance), towards the scheme. The employee / employer may decide to contribute an amount higher than what is stipulated in the law.

2.  National Housing Fund (NHF): The National Housing Fund Act, 2007, is the legal basis for the operation of the NHF in Nigeria. The Act requires employees to contribute 2.5% of their basic salary to the Fund, which should be remitted on a monthly basis.

Olatunji is a Manager (International Tax & Advisory Services) with Saffron Professional Services(Member firm of Geneva Group International), Lagos, Nigeria.E-mail:Oabdulrazaq@saffron-ng.com,Oabdulrazaq11@gmail.com