Nigeria is a significant player on the African continent. It currently boasts the largest economy, while its Stock Exchange is number two in terms of intra-African trading volumes. Although South Africa was the region’s economic leader for many years, Nigeria took the number one slot after going through a rebasing exercise in 2014, in which it updated its approach to calculating gross domestic product for the first time in more than 20 years.
But Nigeria’s top economic position could now be at risk. During the last few quarters, it has struggled due to low oil prices and sabotage to its oil pipeline infrastructure. As a result, economists have revised growth predictions for 2016 downwards, and lowered the growth forecast for 2017 to a projected 3.9% (Focus Economics Consensus Forecast).
In July 2016, the Central Bank of Nigeria (CBN) reported that economic activities during the previous month had declined faster than anticipated. It also confirmed that the country had entered into recession in the second quarter of the year. Notwithstanding, Nigeria continues to provide employment for many locals and expat workers.
Nigerian tax coverage
Anyone considered to be a tax resident in Nigeria is subject to tax on their worldwide income. (Extending the tax “net” to cover worldwide income is actually a growing international phenomenon.) Tax is charged at progressive rates, after taking allowable deductions into consideration.
The Personal Income Tax (PIT) Act provides guidance for recognising income that would be deemed taxable in Nigeria. In essence, if a worker’s duties of employment are conducted wholly or partly in Nigeria, or their employer is resident in Nigeria, then the income earned from performing those duties is taxable in the country.
The exception to this rule occurs when an individual performs their duties wholly in a country other than Nigeria even if employed by a Nigerian resident, or if the duties are performed in Nigeria during a temporary visit or leave. In these instances, income would not fall into the “net”. But it would still be necessary to take double taxation agreements into consideration as the tie break clauses contained in some of them may award income to another country.
Administration of PIT
Nigeria currently comprises 36 states, including the Federal Capital Territory (FCT). State Internal Revenue Services have been empowered by PIT in each state to administer income tax. In the FCT, administration is done by the Federal Inland Revenue Services (FIRS).
Permanent residency is the determining factor in establishing which relevant tax authority will administer and collect taxes. This means that if an employee works in Delta state but has a permanent place of residence in Lagos, they would be liable for taxes in Lagos and fall under the administration of FIRS. Their employer would, therefore, need to remit any PAYE withheld from their wages to Lagos state.
Taxable income and taxes
In relation to PIT, any salary, wages, fees, allowances or other gains or profits such as bonuses and benefits due to employment, forms part of an employee’s taxable income. But there are a few payments or benefits that are exempt from taxation:
• Direct reimbursement of expenses incurred by
the employee in performing their duties
• Medical or dental expenses
• Retirement gratuities and compensation
payments for loss of office
• The cost of any passage to or from Nigeria
• Contribution to any pension, provident or other retirement benefit fund approved by the Joint Tax Board
• The sum paid in relation to the maintenance or education of a child, provided that the amount received by the employee is deducted from the personal reliefs (see below) likely to be granted for the subsequent year
• Interest on loans for developing an owneroccupied residential house.
As with most countries, benefits in kind are deemed to be part of taxable income. The taxable benefit is 5% per annum of the cost when the asset is owned by the employer, or the actual rental paid if the asset is leased by the employer.
With regards to accommodation, the taxable value is not the cost of the actual rental paid. It is instead the value of the premises based on the fees charged for local rates, or as determined by the relevant tax authority.
Employees can also be granted a Consolidated Relief Allowance based on whichever is higher, so either:
• 1% of gross income or
• 200,000 Nigerian naira (NGN) plus an additional 20% of gross income.
Taxable income is assessed at graduated progressive rates ranging from 7% to 24%, depending on the income band being assessed. PAYE must be paid to the relevant authority by the 10th day of each month following the relevant deductions via payroll. Late submission could result in a 10% penalty on the total amount due and interest being levied at the prevailing commercial rate per annum.
Employers are also required to submit a return detailing all emoluments paid to employees by employees’ earnings for the preceding year. A return must be filled in for every location in which an employee is resident.
On 20 June 2016, meanwhile, FIRS rolled out an electronic-tax payment platform (ePP) to enable taxpayers to remit their taxes online through a payment portal. This initiative was a direct result of FIRS’s Integrated Tax Administration System (ITAS) project, which was launched in 2013.
ITAS was intended to simplify Nigeria’s tax compliance process and is likely to prove useful for global payroll managers. The aim is to have a fully implemented e-filing system in place by the time that the initiative is complete.
“If a worker’s duties of employment are conducted wholly or partly in Nigeria, or their employer is resident in Nigeria, then the income earned from performing those duties is taxable in the country.”
Other payroll costs
1. Pension
Both employer and employees were previously required to contribute 7.5% of basic pay as well as housing and transport allowances to a registered pension fund.
Although expatriate workers are not specifically exempted from contributing to a fund under the Pension Reform Act (PRA) 2014, the Guidelines on Cross Border Arrangements issued by the Pension Commission state that it is not compulsory for them to join the Nigerian pension scheme either. Therefore, they may join at their own discretion and if their employers agree.
Under the terms of the PRA, all organisations employing more than 15 staff are legally obliged to pay into a contributory pension scheme. The minimum contribution is set at 18% of emoluments, 10% being the employer contribution and up to 8% being the employee’s. Where an employer decides to be the sole contributor towards the pension, contributions must be no less than 20% of the employee’s monthly emoluments.
2. Employee Compensation Scheme
The Nigerian Social Insurance Trust Fund (NSITF) manages all social security insurance schemes other than pensions. During the initial two years of the Employees Compensation Act which came into force in January 2011, every employer was required to contribute a minimum of 1% of their total monthly payroll into an Employee Compensation Fund.
The Act also enables the NSITF Board to assign different contribution and assessment rates to each employer based on the risk category of the particular class or sub-class of industry to which they belong. The contributions must be submitted to NSITF by no later than the last day of each month.
3. Industrial Training Fund
Any employer with an annual turnover of NGN 50 million ($146,951), or employing five or more workers, has to contribute 1% of their annual payroll costs towards the Industrial Training Fund. The figure must be paid no later than 1 April of the following year.
Penalties for non-compliance result in 5% of the unpaid amount being added to the bill for each month or part of a month after the date on which payment should have been made.
4. National Housing Fund
Employers are required to deduct a contribution from the salary of employees earning above NGN 3,000 ($8.82) per annum towards the National Housing Fund. They also need to remit the contribution to the Federal Mortgage Bank of Nigeria within one month of it being deducted.
Penalties for non-compliance range from NGN 5,000 ($14.7) to NGN 50,000 ($146.95) and five years imprisonment. Contributions amount to 2.5% of basic salary.
5. Life Insurance cover
The Pension Reform Act places a legal obligation on employers to provide cover for employees at a level equivalent to three times their annual remuneration. The cost of this cover must be borne solely by the employer.
Non-compliance
Because the cost of non-compliance in Nigeria is high, it is important for payroll managers with responsibility for the country to ensure that their payroll is set up correctly and, especially in light of a predicted economic slow-down, that payments are made within the time frames specified.
It is during period of economic difficulty that tax authorities generally seek to enforce compliance most stringently as a means of boosting revenue for the country. A recent article published in the local Guardian newspaper suggests that tax compliance is currently very low, which means that the risk for many employers is rather high.
After graduating with a degree majoring in taxation, accounting and managerial accounts and finance, Sharon gained considerable experience in the fields of training, tax issues and financial ICT management, including mergers and acquisitions. She progressed to a position within South African Revenue Services before moving on to Anglo American Property Services, where she became group financial director with responsibility for ICT and payroll. Sharon joined Praxima Payroll Systems in 2001 and steered the company through the development of its own software. It is now a provider of payroll services to some of the largest legal practices in South Africa. She moved to Celergo to take up the role of head of operations UK. She was tasked with rightsizing its operations and refining the payroll processes to improve productivity. Sharon was asked to take on the COO role at Praxima Holdings in 2013 and has helped the company extend its footprint into Africa and beyond. She is a registered tax practitioner and member of CIPP and GPA.
Nigeria is a significant player on the African continent. It currently boasts the largest economy, while its Stock Exchange is number two in terms of intra-African trading volumes. Although South Africa was the region’s economic leader for many years, Nigeria took the number one slot after going through a rebasing exercise in 2014, in which it updated its approach to calculating gross domestic product for the first time in more than 20 years.
But Nigeria’s top economic position could now be at risk. During the last few quarters, it has struggled due to low oil prices and sabotage to its oil pipeline infrastructure. As a result, economists have revised growth predictions for 2016 downwards, and lowered the growth forecast for 2017 to a projected 3.9% (Focus Economics Consensus Forecast).
In July 2016, the Central Bank of Nigeria (CBN) reported that economic activities during the previous month had declined faster than anticipated. It also confirmed that the country had entered into recession in the second quarter of the year. Notwithstanding, Nigeria continues to provide employment for many locals and expat workers.
Nigerian tax coverage
Anyone considered to be a tax resident in Nigeria is subject to tax on their worldwide income. (Extending the tax “net” to cover worldwide income is actually a growing international phenomenon.) Tax is charged at progressive rates, after taking allowable deductions into consideration.
The Personal Income Tax (PIT) Act provides guidance for recognising income that would be deemed taxable in Nigeria. In essence, if a worker’s duties of employment are conducted wholly or partly in Nigeria, or their employer is resident in Nigeria, then the income earned from performing those duties is taxable in the country.
The exception to this rule occurs when an individual performs their duties wholly in a country other than Nigeria even if employed by a Nigerian resident, or if the duties are performed in Nigeria during a temporary visit or leave. In these instances, income would not fall into the “net”. But it would still be necessary to take double taxation agreements into consideration as the tie break clauses contained in some of them may award income to another country.
Administration of PIT
Nigeria currently comprises 36 states, including the Federal Capital Territory (FCT). State Internal Revenue Services have been empowered by PIT in each state to administer income tax. In the FCT, administration is done by the Federal Inland Revenue Services (FIRS).
Permanent residency is the determining factor in establishing which relevant tax authority will administer and collect taxes. This means that if an employee works in Delta state but has a permanent place of residence in Lagos, they would be liable for taxes in Lagos and fall under the administration of FIRS. Their employer would, therefore, need to remit any PAYE withheld from their wages to Lagos state.
Taxable income and taxes
In relation to PIT, any salary, wages, fees, allowances or other gains or profits such as bonuses and benefits due to employment, forms part of an employee’s taxable income. But there are a few payments or benefits that are exempt from taxation:
• Direct reimbursement of expenses incurred by
the employee in performing their duties
• Medical or dental expenses
• Retirement gratuities and compensation
payments for loss of office
• The cost of any passage to or from Nigeria
• Contribution to any pension, provident or other retirement benefit fund approved by the Joint Tax Board
• The sum paid in relation to the maintenance or education of a child, provided that the amount received by the employee is deducted from the personal reliefs (see below) likely to be granted for the subsequent year
• Interest on loans for developing an owneroccupied residential house.
As with most countries, benefits in kind are deemed to be part of taxable income. The taxable benefit is 5% per annum of the cost when the asset is owned by the employer, or the actual rental paid if the asset is leased by the employer.
With regards to accommodation, the taxable value is not the cost of the actual rental paid. It is instead the value of the premises based on the fees charged for local rates, or as determined by the relevant tax authority.
Employees can also be granted a Consolidated Relief Allowance based on whichever is higher, so either:
• 1% of gross income or
• 200,000 Nigerian naira (NGN) plus an additional 20% of gross income.
Taxable income is assessed at graduated progressive rates ranging from 7% to 24%, depending on the income band being assessed. PAYE must be paid to the relevant authority by the 10th day of each month following the relevant deductions via payroll. Late submission could result in a 10% penalty on the total amount due and interest being levied at the prevailing commercial rate per annum.
Employers are also required to submit a return detailing all emoluments paid to employees by employees’ earnings for the preceding year. A return must be filled in for every location in which an employee is resident.
On 20 June 2016, meanwhile, FIRS rolled out an electronic-tax payment platform (ePP) to enable taxpayers to remit their taxes online through a payment portal. This initiative was a direct result of FIRS’s Integrated Tax Administration System (ITAS) project, which was launched in 2013.
ITAS was intended to simplify Nigeria’s tax compliance process and is likely to prove useful for global payroll managers. The aim is to have a fully implemented e-filing system in place by the time that the initiative is complete.
“If a worker’s duties of employment are conducted wholly or partly in Nigeria, or their employer is resident in Nigeria, then the income earned from performing those duties is taxable in the country.”
Other payroll costs
1. Pension
Both employer and employees were previously required to contribute 7.5% of basic pay as well as housing and transport allowances to a registered pension fund.
Although expatriate workers are not specifically exempted from contributing to a fund under the Pension Reform Act (PRA) 2014, the Guidelines on Cross Border Arrangements issued by the Pension Commission state that it is not compulsory for them to join the Nigerian pension scheme either. Therefore, they may join at their own discretion and if their employers agree.
Under the terms of the PRA, all organisations employing more than 15 staff are legally obliged to pay into a contributory pension scheme. The minimum contribution is set at 18% of emoluments, 10% being the employer contribution and up to 8% being the employee’s. Where an employer decides to be the sole contributor towards the pension, contributions must be no less than 20% of the employee’s monthly emoluments.
2. Employee Compensation Scheme
The Nigerian Social Insurance Trust Fund (NSITF) manages all social security insurance schemes other than pensions. During the initial two years of the Employees Compensation Act which came into force in January 2011, every employer was required to contribute a minimum of 1% of their total monthly payroll into an Employee Compensation Fund.
The Act also enables the NSITF Board to assign different contribution and assessment rates to each employer based on the risk category of the particular class or sub-class of industry to which they belong. The contributions must be submitted to NSITF by no later than the last day of each month.
3. Industrial Training Fund
Any employer with an annual turnover of NGN 50 million ($146,951), or employing five or more workers, has to contribute 1% of their annual payroll costs towards the Industrial Training Fund. The figure must be paid no later than 1 April of the following year.
Penalties for non-compliance result in 5% of the unpaid amount being added to the bill for each month or part of a month after the date on which payment should have been made.
4. National Housing Fund
Employers are required to deduct a contribution from the salary of employees earning above NGN 3,000 ($8.82) per annum towards the National Housing Fund. They also need to remit the contribution to the Federal Mortgage Bank of Nigeria within one month of it being deducted.
Penalties for non-compliance range from NGN 5,000 ($14.7) to NGN 50,000 ($146.95) and five years imprisonment. Contributions amount to 2.5% of basic salary.
5. Life Insurance cover
The Pension Reform Act places a legal obligation on employers to provide cover for employees at a level equivalent to three times their annual remuneration. The cost of this cover must be borne solely by the employer.
Non-compliance
Because the cost of non-compliance in Nigeria is high, it is important for payroll managers with responsibility for the country to ensure that their payroll is set up correctly and, especially in light of a predicted economic slow-down, that payments are made within the time frames specified.
It is during period of economic difficulty that tax authorities generally seek to enforce compliance most stringently as a means of boosting revenue for the country. A recent article published in the local Guardian newspaper suggests that tax compliance is currently very low, which means that the risk for many employers is rather high.
After graduating with a degree majoring in taxation, accounting and managerial accounts and finance, Sharon gained considerable experience in the fields of training, tax issues and financial ICT management, including mergers and acquisitions. She progressed to a position within South African Revenue Services before moving on to Anglo American Property Services, where she became group financial director with responsibility for ICT and payroll. Sharon joined Praxima Payroll Systems in 2001 and steered the company through the development of its own software. It is now a provider of payroll services to some of the largest legal practices in South Africa. She moved to Celergo to take up the role of head of operations UK. She was tasked with rightsizing its operations and refining the payroll processes to improve productivity. Sharon was asked to take on the COO role at Praxima Holdings in 2013 and has helped the company extend its footprint into Africa and beyond. She is a registered tax practitioner and member of CIPP and GPA.
