In the past, the concept of Remote Working Arrangement (RWA) was subject to debate among management executives but the disruptions to the traditional work environment by the Covid-19 pandemic ultimately forced many organizations to adopt virtual/ remote working arrangements for their employees. Indeed, the adoption of RWA was critical to the survival of most businesses at the height of the pandemic, notwithstanding the negative ripple effect of the pandemic on several industries.
The RWA forced organizations to adapt to a new style of working, alter some long-standing office cultural beliefs, tweak traditional organizational policies and adjust sets of established values. In some instances, office buildings and roles have permanently been shut-down or considered surplus to requirements. More specifically, many organizations have had to adopt new strategies in talent sourcing and recruitment, through the remote work option, so as to attract top talents from competitors and retain the top talents in-house. The impact of technology and digitalization has also made it possible for a firm based in Lagos, to have employees scattered all over the globe while customers' needs are still met efficiently.
Undoubtedly, these recent changes to work as we knew it distorted the long-established tax schemes and arrangements for taxing employment income, not just in Nigeria but all over the world. This article seeks to evaluate the recent changes to work arrangements as occasioned by the pandemic, assess the adequacy of the existing taxing framework in Nigeria, and suggest workable solutions to right-taxing employment income in this dispensation.
What Constitutes Employment Income in Nigeria?
Employment income ordinarily comprises salary, wages, allowances, overtime pay, pension, annuity, directors' fees, bonuses, management fees, gratuities, retirement allowances, extra salary, or any emolument of any other kind paid or payable in relation to the taxpayer's employment. Typically, pay components for most organizations in Nigeria include amongst other items, basic allowance, housing allowance, transport allowance, utilities, leave allowance, wardrobe allowance, and airtime allowance. These could also include other forms of Benefits-In-Kind (BIK), such as the provision of accommodation, vehicles, club membership subscriptions, and official drivers to employees.
As a result of the work requirement changes, some organizations have added pay components that provide additional relief or support to employees. This is in recognition of the additional cost borne by the employees in order to work remotely. Some costs (such as water, coffee, internet data subscriptions etc.) that are ordinarily borne by organizations have now been passed to employees and the recently added pay components such as (covid relief/support, power subsidy, internet data subscription etc.) for most organizations in the country is an attempt to recognize these additional costs.
Provisions of the Personal Income Tax Act (PITA) in Relation to Employment Income
Traditionally, Section 3 of PITA (as amended), provides that 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. Further, Subsection 1b of the aforementioned section, provides that "any salary, wage, fee, allowance or other gain or profit from employment including compensations, bonuses, premiums, benefits or other perquisites allowed, given or granted by any person to any temporary or permanent employee other than so much of any sums as or expenses incurred by him in the performance of his duties, and from which it is not intended that the employee should make any profit or gain".
Although, the above-mentioned income categories and types are taxable, it is important to note that reimbursements paid to an employee, arising from expenses incurred by him in the performance of his duties, will not be liable to tax. However, companies will be required to justify such payments by providing the necessary third-party receipts/invoices for the related reimbursements.
A question that therefore begs an answer is whether or not the recently added pay components such as covid relief/support, power subsidy, cost of internet data, being paid to employees should be included in the computation of their Pay-As-You-Earn (PAYE) taxes for the month. Some organizations are of the view that such components are reimbursement of costs borne by employees in the performance of their duties and should not be taxable, while others opine that these are employee benefits earned in the course of an employment and should therefore be subject to tax. As expected, tax authorities during tax audits relating to the 2020 tax year took the position that such payments should be duly included as benefits enjoyed by employees and, be duly taxed. However, it is noteworthy that the provisions of section 3(1)(b) earlier mentioned above is clear, that any expenses incurred by an employee in the performance of his duties, and from which it is not intended that the employee should make any profit or gain should be exempted from tax. In view of the foregoing, in the event of a tax audit, it is advisable that organizations keep appropriate records/necessary supporting documents, in other to justify any "reimbursements" paid to their employees.
In order to further examine whether an employee's employment income is derived and therefore liable to tax in Nigeria, Section 10(1) of the PITA (as amended) plays a very critical role. This section provides 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, unless –
- the duties are performed on behalf of an employer who is in a country other than 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 a period or periods amounting to an aggregate of 183 days or more, inclusive of annual leave or temporary period of absence in any period; and
- the remuneration of the individual is liable to tax in that other country under the provisions of the avoidance of double taxation treaty with that other country.
- If the employer is in Nigeria unless the employment duties are wholly performed, and the remuneration paid, in a country other than Nigeria except during a temporary visit to or leave in Nigeria.
Based on the above, taxpayers and organizations would have to further consider the impact of the above provisions when crafting the unique work arrangements that have now been occasioned by the pandemic.
Remote Working Arrangements and PAYE Tax Considerations
a. In-country arrangements
The Nigerian tax laws provide for the determination of the Place of Residence (PoR) of employees in ascertaining which tax authority should receive the PAYE taxes deducted from their employment income. Over the years, emphasis was placed on PoR as employees largely reside in states where their organizations are based. The law further provides for the concept of Primary Place of Residence (PPoR), in the case of employees with multiple places of abode while working for an organization. In determining the PPoR, Paragraph 1 of the First Schedule of PITA provides that, an individual with two or more places of residence on a relevant day, who has a source of earned income other than a pension in Nigeria; the principal place of residence will be that which is nearest to his usual place of work. These further buttress the assumption that it is the intention of the law to channel the tax of an employee to the state where he mainly resides and by extension, where the organization he works for is mainly situated.
In recent times however, employees of organizations with RWA are allowed to work from any location where they are based. For instance, Mr. Y, who is an employee of XYZ Ltd, a company based in Kano State, can elect to work remotely from Imo State, where he currently lives. The implication of this arrangement birthed by advent of the pandemic is that, even though economic activities of the company may have been largely generated in Kano State, the PAYE taxes of Mr. Y would be remitted to Imo State where the employee resides. In essence, this is a fundamental departure from the assumption that taxes on employment income are paid in the state of residence, which will largely be the state where the economic activities of the company are generated.
The major challenge for organizations in relation to RWA, will be the additional burden of tracking the residence of employees, in order to ensure that their PAYE taxes are remitted to the appropriate State Tax Authorities (STAs).
b. Cross-border arrangements
One of the inherent advantages of RWA considering technological advancement in the area of video-conferencing, is the wider catchment it provides during recruitment of talents. Companies are likely to attract the best, most talented persons for various roles, regardless of their location. A more diverse workforce also has its benefits, through diversity of thoughts deployed towards solving organizational problems. In essence, this arrangement could mean that organizations based in Nigeria, could have employees (in this case, Nigerians/ Foreigners) that are based in other countries.
These employees are provided with offshore employments from a Nigerian employer, duties of which can be completely facilitated through many of the technological tools that the pandemic has recently pronounced. In this case, since they are not resident in any state in Nigeria, some employers may not pay much attention to the PAYE tax implications of such arrangement. However, where the employee was resident in Nigeria as at January 1st of the given tax year, before relocating abroad, it will be expected that the PAYE tax on the income earned while still in Nigeria is deducted accordingly, and remitted to the appropriate tax authority based on his PPoR. Meanwhile, during a tax audit exercise, since the amount paid to the employees (where it has been established that they were not resident in Nigeria in a given tax year) will form part of the companies' staff cost, the PAYE tax consequence on the income would appear inadequate. In fact, such organizations may review the applicability of the provisions of Section 2 (1) (b) of PITA to such arrangement, and remit any PAYE taxes due to the federal government.
Now more than ever, the above has far reaching implication on the PAYE tax compliance of an organization, given the proliferation of RWA that has now been created post-pandemic, merely out of business necessities.
What is Obtainable in other Jurisdictions
In the United Kingdom (UK), a taxpayer's residence status will determine whether he/she needs to pay tax in the UK on foreign income. In most cases, non-residents only pay tax on their UK income as they do not pay UK tax on their foreign income while residents normally pay UK tax on all their income, whether it is derived from the UK or abroad. However, there are special rules for UK residents whose permanent home ('domicile') is abroad. In this context, a taxpayer's "Domicile" is usually the country the father considered his permanent home when the taxpayer was born. Also, Nigeria currently has an operational double-tax treaty (DTT) with the UK, which further helps in mitigating the impact of any eventuality of a dual tax residency for employees that are resident in the UK but earn employment income from Nigeria.
In the United States of America (U.S.) however, a citizen is regarded as resident in the U.S. irrespective of the length of stay abroad. As a general matter, under the U.S. Internal Revenue Code, all U.S. citizens and U.S. residents are treated as U.S. tax residents. This, as we will see, may potentially create a problem of dual tax residence, since Nigeria currently has no DTT with the U.S.
For Ireland, remote working arrangements shifted significantly over a relatively short period precipitated by the Covid-19 pandemic and the imposition of public health restrictions. From a tax perspective, The Revenue Commission ("Revenue") through its Revenue Guidance, has special considerations for remote working or e-working conditions. Amongst other incentives, there is a Revenue administrative practice in place, whereby the employer can choose to make a contribution of €3.20 per day (tax free) to employees, in order to reimburse them for the costs incurred in working from home or alternatively, the employee can make a claim directly to Revenue at the end of the year for such costs. Notwithstanding the fact that the Irish law has been designed to recognize remote working arrangements, a person resident and domiciled in Ireland is chargeable to tax in Ireland on his/her worldwide income.
Conclusion
Clearly, the benefits of remote working to the business environment during the period have since brought about inferences, that it could become part of the "new normal", even in the post-Covid-19 era and this realization has ignited rapid developments to tax administration in Nigeria. These developments include digitalization of tax filings, promulgation of new provisions and other technological tools deployed by tax authorities, in order to ease administrative burdens on taxpayers and help administrators carry out their core functions effectively.
As attention turns to the post-pandemic working environment, it is worth considering how the concept of remote working is now well established, and tax administrators may need to consider how this new environment has changed the nexus between tax administration and taxpayers. This could create a number of challenges for tax administrators to address, as well as present new opportunities.
Therefore, the need arises for policymakers to conduct a holistic review of the PITA to better capture the emerging realities of RWA and its tax implications, as they relate to employment income. This will be key in ensuring equitable distribution of revenue generated from PAYE taxes for the various regions, and close the unintended gap that could give rise to misinterpretation or ambiguity in the application of the PITA, as far as employment income is concerned.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
