George (not real name) has just gotten a demand notice from the Lagos State Internal Revenue Service (LIRS), stating that he had under-declared his taxable income/ assets and had paid less taxes than he should have. The LIRS demand notice does not make sense to him because his Personal Income Tax (PIT) was deducted at source by his employer, which is a major telecommunications service provider. His fashion store in Lagos Island has also been constantly visited by tax officials and he has ensured that all taxes are paid when due because he does not want any 'government wahala'. Hence, his reaction to the demand notice was, "so where did this notice come from?" He immediately called his tax consultant and arranged a meeting. After presenting relevant documents, including his bank account statements to the consultant, the tax consultant asked: "did the tax people see this?" "Yes", George answered. "Then I guess the problem is with this ?3.2m that is in your business account", the Consultant pointed out. "It does not appear to be part of what you calculated to pay the taxes". George replied, "But it was a gift. My friends gave me some money for my birthday and I put some in the business. Gifts are not part of taxable income, or are they?"

The above scenario may appear very familiar and/or plausible, hence, the article will focus on George's problem.

Nigerians are known around the world to be generous and philanthropic and thus, it is common in Nigeria for persons to advance gifts in money or money's worth or grant friends, family members or close associates special treats, favours, rewards or support. When Nigerians advance gifts to others, both the donor and the receiver or donee hardly ever consider the tax implications of such generosity and gestures.

In other jurisdictions, the implications of such gifting are typically front burner issues, so much that the potential implications are duly considered before the gifting arrangements are concluded. For instance, specialised gift tax exists in some developed nations and there may be special deductions that will accrue to the donor by reason of the gifts awarded. In Nigeria however, hardly would anyone be concerned about the tax implication of the gift given or received. This article therefore, discusses the meaning of gifts under Nigerian law, highlights the provisions of the Personal Income Tax Act (PITA or "the Act") with respect to gifts and then analyses the tax impact of gifts received in Nigeria and the practice in some other jurisdictions.

Taxation of Personal Income in Nigeria

The PITA (as amended) is the enabling law for the taxation of personal income earned by individuals, whether in paid employment or as business proprietors or self-employed. The Act contains elaborate provisions regarding what constitutes income, what income is taxable, what portion of a taxpayer's income is taxable and what portion is exempt from taxation.

Notwithstanding the detailed provisions of the PITA and the recent amendments through the Finance Acts, 2019, 2020 and 2021, there exists some grey areas in the law. One of such areas has again come to fore with public discourse on whether gifts received by individuals constitute taxable income to such individuals or not. In particular, the recent developments where various groups and individuals have overtly come forward to buy political party nomination forms running into millions of Naira on behalf of aspirants (some of which were publicly accepted by such individuals), has again brought this issue into focus.

Meaning of Gifts?

The Nigerian tax legislation does not have an express definition of gift, likewise, the tax legislations in several other jurisdictions do not define gifts. Hence, recourse will be made to judicial and regulatory definitions or descriptions of gifts. According to Black's Law Dictionary, a gift is a voluntary conveyance of land, or transfer of goods, from one person to another, made gratuitously, and not upon any consideration of blood or money. A judicial definition of gifts was made in the case of Gordon vs. Barr,1 as the voluntary transfer of personal property without consideration. In the case of Hays' Adm'rs vs. Patrick,2 gifts were also defined as a parting by an owner with property without pecuniary consideration. The United States Internal Revenue Service defines gifts as any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.3

From the above definitions, it should be noted that there must be a voluntary transfer from the giver to the receiver for an item to qualify as a gift. The second ingredient is that there must be no consideration for a transfer to constitute a gift.

Provisions of PITA in relation to taxation of gifts / other income

Section 3 of the PITA, 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, including, gain or profit from any trade, business, profession or vocation, 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 employee other than 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. Other taxable income as stated in Section 3(f) of PITA includes gain or profit including any premiums arising from a right granted to any other person for the use or occupation of any property, dividend, interest or discount and others listed in the Act.

The Third Schedule to the PITA also provides for the different forms of income to be exempted from income tax. The provision of Section 3 and the Third Schedule to the PITA make no specific provision for the inclusion or exclusion of gifts as a source of income in Nigeria. However, Section 3(f) of PITA provides that "any profit, gain or other payment not falling within paragraphs (a) to (e) inclusive of this subsection", forms part of the taxable income of an individual. The clause "other income" as stated above can be analysed intently and given closer considerations. Hence, the next part of this article, analyses possible scenarios that will fit into the definition of gift within the meaning of Section 3 of PITA.

Gift Considerations under PITA

1. Gifts by an Employer to Employees

Gifts received by employees of an organisation from their employer would form part of the taxable income of such employee, as the gifts, if received in cash or kind, will be considered as additional benefits and would be subjected to Pay-as-You-Earn (PAYE) tax. Section 3(b) of PITA only gives exemption to 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. Thus, other income received even as a gift should form part of the taxable income of the employee.

2. Deed of Gift

A Deed of gift is a method of estate planning in which the possessor of a property called the Donor voluntarily transfers property along with the legal ownership of such property to another person called the Donee, without receiving any consideration in return.

PTA does not make any specific provision for taxation of properties transferred by way of gift through a deed of gift. However, Section 63(1) of the Stamp Duties Act (as amended) provides that any conveyance or transfer operating as a voluntary disposition inter vivos shall be chargeable with the like duty as if it were a conveyance or transfer on sale, with the substitution in each case of the value of the property conveyed or transferred for the amount or value of the consideration for the sale.

In addition, Section 7(2) and 40 of the Capital Gains Tax Act makes provision for characterisation and taxation of gifts received by taxable persons. Section 7(2) of the Capital Gains Tax Act characterises any gift received by a taxable person who had in the first instance acquired the asset as a gift (excluding gifts acquired through an inheritance), as an acquisition and the value will either be the arm's length price at the time the donor acquired the asset by way of a gift or current market value at the time of grant to the donee. On the other hand, Section 40 of the Capital Gains Tax Act states that where an asset is disposed in a manner as described under Section 7(2) above, capital gains shall not be charged on such disposal. In other words, capital gains will not apply to disposal of any asset which is disposed by a gift, if it had been acquired by way of a gift. The only exception is disposal of an asset by way of a gift where it had been acquired as a gift through an inheritance.

3. Cash Gifts

Cash gifts can be termed as voluntary transfer of cash, whether as a physical or electronic transfer. While the PITA does not state any provision for the taxation of cash gifts, Section 48 of the Finance Act 2020 introduced Section 89(a) of the Stamp Duty Act to include Electronic Money Transfer Levy (EMTL). This levy is charged on bank deposits of ?10, 000.00 and above by the recipient of the cash deposit. Hence, cash gifts done through bank transfer will attract EMTL. In addition, the provision of Section 3(f) of PITA which uses the clause ''other payment'' will cover cash gifts, and such gifts will be taxable under PITA. However, it may appear that this extension of the scope of PITA to taxation of payment, that is, cash gift, will not be broad enough to cover taxation of non – cash gifts.

Income Derived from Assets Received as a Gift (i.e. Non – Cash Gifts)

In our view, where a gift is given as a non-cash gift, the provisions of PITA will not apply and it will not qualify as taxable income. However, where income is derived from properties received as gift in the hands of the recipient, the provisions of PITA will apply because it clearly provides for the taxation of such income under Section 3.

What Obtains in Other Jurisdictions

United Kingdom (UK)

Section 1 of the United Kingdom Inheritance Tax Act 1984 (as amended) provides for the taxation of gifts in the United Kingdom. In the United Kingdom, there is a seven (7) year rule on gifts tax, which states that no tax is due on gifts if you live for seven (7) years with the exception of gifts given as part of a Trust. However, if the donor dies within 7 years of giving a gift, tax would apply on the gift item depending on when the gift was given. The amount of tax due would vary depending on when the gift was given. The tax due on gifts in the United Kingdom is known as inheritance tax.

United States of America (USA)

Section 2501(a)(1) of the Internal Revenue Code provides that a tax is imposed for each calendar year on the transfer of property by gift during such calendar year by any individual, resident or non-resident. However, gifts that are not more than the annual exclusion for the calendar year, gifts to a political organisation for its use, gifts to charities, medical or tuition expenses paid directly to a medical or educational institution on behalf of someone, and gifts passed on to an individual's spouse (which are exempted from gift tax until the spouse's death), do not form part of taxable gifts.

India

In India, the Gift Tax Act 1958 provides for the levy of gift tax. Section 4 of the Act outlines gift items that are considered as income for tax purpose. Additionally, Section 6 of the Gift Tax Act provides for method of valuation of gifts in order to determine the value of the portion of the gift to be taxed.

Ghana

Section 105(1) of the Internal Revenue Act 2000 (IRA as amended) provides that gift tax shall be payable by a person on the total value of taxable gifts received by a person by way of gift within a year of assessment. The Fourth Schedule of the IRA further provides for the rates of tax to be applied on taxable gifts in every relevant year of assessment. Specifically, gifts are included as part of the income of the recipient and forms part of the taxable income of the recipient of the gift.

Conclusion

The Nigerian Government has been seeking measures to expand its revenue generation streams and one avenue available to be explored is for the government to close the loopholes in the tax administration system in order to increase its ability to generate revenue and bring more people, income and taxable items within the tax net. This can be achieved by targeted amendments to some existing grey areas in the tax laws.

Unlike other jurisdictions, PITA does not specifically provide for the taxation of gifts in Nigeria. However, the Nigerian Government can consider an amendment to Section 3 of PITA to include gifts as part of the taxable income in the hands of the beneficiary or expressly exempt such income from the income taxable for individuals. Other considerations could include the establishment of a threshold for the value of gifts to be taxed in the hands of the beneficiary as other jurisdictions have enacted very comprehensive legislation on taxation of gift. Given recent happenings in our polity, this may just be the right time for the tax authorities to begin to consider amending the relevant laws to expand its scope and bring clarity to this area.

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.