Nigeria

Nigeria

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The enabling legislation, which is the Personal Income Tax (PIT) Act, provides the conditions for deeming income taxable in Nigeria. It provides, among others, that the gain or profit from an employment shall be deemed to be derived from Nigeria if the duties of the employment are wholly or partly performed in Nigeria or the employer is in Nigeria, unless the duties of the employment are wholly performed, and the remuneration paid, in a country other than Nigeria except during a temporary visit or leave in Nigeria.

Income tax

The PIT Act vests the administration of the PIT on theState Internal Revenue Service (SIRS) in each State and the Federal Capital Territory(FCT) Abuja. 

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 taxation of income from employment in Nigeria is based on certain conditions as provided by the Personal Income Tax (PIT) Act. Income from an employment shall be deemed to be derived from Nigeria and therefore taxable in Nigeria if:

  • the duties of such employment are performed wholly or partly in Nigeria, unless
    • 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, and
    • the employee is not in Nigeria for an aggregate of 183 days (inclusive annual leave or temporary period of absence) or more in any 12 calendar month period, and
    • the employee’s income is liable to tax in that other country under the provisions of the avoidance of double taxation treaty with that other country.

Note that conditions a to c must be jointly met for the expatriate to be exempted from taxes in Nigeria. 

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

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 income streams are tax exempt; 

  • reimbursement of expenses incurred by the employee in the performance of his duties, and from which theemployee is not expected to make any profit; 
  • retirement gratuities andcompensation for loss of office;
  • interest on loans fordeveloping an owner-occupied residential house

On a related note, the following are tax deductible contributions; 

  • National Housing FundContribution;
  • National Health InsuranceScheme;
  • Life Assurance Premium;
  • National Pension Scheme

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.

Tax rates

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.

Compliance obligations

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 31st January of each year. Monthly remittance of PAYE tax should be made not later than the 10th day of the following month of deduction.

Pension

The Pension Reform Act 2014 (PRA 2014) which repeals the Pension Reform Act 2004, governs and regulates the administration of the contributory pension scheme in Nigeria.

Major changes in PRA 2014 include:

  • Scope of application - The minimum threshold for private sector employers to participate in the Scheme is now 3 (previously 5) employees. However, the Act also provides that self-employed persons and private sector employees of an employer, who does not meet the minimum threshold, shall be entitled to participate in the scheme,not withstanding the minimum threshold.
  • Change in contributory rate - The Act has increased the rate of contribution for employees and employers to a minimum of 8% and 10%, respectively. Employers, who choose to bear the full pension cost of their employees, will be required to contribute a minimum of 20% to the Scheme. The rates remain applicable to monthly emoluments.
  • The Act defines monthly emoluments as ‘total emoluments as may be defined in the employee’s contract of employment but shall not be less than a total sum of basic salary, housing allowance and transportation allowance.
  • Furthermore, every employer is required to maintain a Group Life Insurance Policy in favour of each employee for a minimum of three (3) times the annual total emolument. Premium shall be paid not later than the date of commencement of the cover.

The PRA 2014 does not make specific provisions on the requirements for foreigners to participate in the Nigerian pension scheme. However, guidance from the National Pension Commission indicate that foreigners may at their sole discretion join the Nigerian Pension Scheme, without considering whether he/she has an existing pension arrangement in his/her home country. 

Other issues

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.

Transfer pricing

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 Nigerian 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.

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