Introduction
The Nigerian economy has continued to face the challenge of a remarkably low tax revenue to Gross Domestic Product (GDP) ratio, compared to other economies worldwide. It is therefore not surprising that one of the main avenues utilised by the Nigerian government at all levels to boost revenue is taxation. The government has been on an increased drive to increase its tax base by expanding the net for taxable persons and, taxing previously non-taxable / exempted items. In addition, while more emphasis has been placed on ensuring compliance by all taxable persons, there has been a shift in recent times to the taxability of certain items such as gifts received by individuals in Nigeria.
The Personal Income Tax Act (PITA) provides no clear guidelines on taxation of gifts, leading to widespread ignorance among individuals and employers regarding the tax implications of giving and receiving both cash and non-cash gifts. It is important to note, however, that despite the lack of clear provisions regarding the taxation of gifts, recipients of such gifts may be obligated to pay taxes on the gifted item(s). The reference of Section 3 (1) of the PITA to "any profit, gain, or other benefits" as taxable income implies that gift items, whether in monetary or non-monetary form, may be considered a form of gain, and therefore taxable.
To ensure that taxpayers (individuals and employers) are aware of the type and rate of taxes that may be imposed on them, implementing a defined gift taxation regime would be a crucial step towards building the trust of taxpayers while enhancing revenue generation.
This article seeks to explore the gains of implementing a more defined gift taxation regime in Nigeria.
Definition of Gift
There is no clear definition of what constitutes a gift in the Nigerian tax legislations. However, the Black's Law Dictionary defines agiftas "avoluntary conveyance of land or transfer of goods from one person to another, made gratuitously, and not upon any consideration of blood or money". In the law of property, a gift is "the voluntary and immediate transfer of property from one person (thedonoror grantor) to another (the donee or grantee) without consideration".
We can therefore deduce that, for an item to be considered 'a gift', there must be a voluntary transfer of the item (monetary or non-monetary) from person to person without any consideration or payment.
Current State of Gift Taxation in Nigeria
Section 3 of the PITA provides that "any income, profit, gain or other benefits/perquisites allowed, given, or granted to every taxable person is taxable for every year except such benefit is clearly exempted". Also, the third and sixth schedules of the PITA, which provide for the different forms of income to be exempted from income tax, made no mention of gifts as an exempted item/income. It is therefore safe to consider gifts as a source of income.
Given that there is no explicit definition of "gift" in the PITA and as such, the law does not explicitly categorise gifted items as taxable or non-taxable, taxpayers have either neglected to tax such items or largely taxed such items based on their own discretion. Assumptions have also been made on the provision of Section 40 of the Capital Gains Tax Act which exempts the payment of capital gains tax by a person who disposes his assets by way of a gift. However, this provision only exempts the giver of the gifts and does not exempt the payment of all applicable taxes on the gifts by the beneficiaries of such gifts.
Consequently, there is a lack of clear guidance as to how different categories of gifts should be taxed and this could have significant implication for individuals and taxpayers generally in the future.
The Need for a Defined Gift Taxation Regime
Giving gifts is a long-time tradition that would persist. Thus, it is in the best interest of all parties to have a defined tax regime for gifts in Nigeria, as seen in other jurisdictions. We have exemplified below the gift tax regimes in France and Ghana:
- France: In France, gift tax is paid on gift received, though there are exemptions on certain types of property donated or the recipient of such gifts. French gift tax liability depends on several criteria, including the tax residency status of the donor and the donee, the amount and nature of the gift, and the location of the gift (in the instance of physical assets or real estate). There is a gift tax exemption for gifts between family members up to a certain threshold, and reasonable gifts such as wedding or birthday presents are generally exempt. Gifts are subject to gift tax based on their value and the relationship between the donor and the recipient. In addition, the tax is applied on a 'sliced' basis so that each slice of the total sum is taxed at a different rate.
- Ghana: In Ghana, there are two distinctions of gifts under the Internal Revenue Act, Act 592. The first distinction is gifts that could arise out of one's employment relationship, donated by the employer, an associate of the employer or a third party under an arrangement with the employer or an associate of the employer. The tax payable on gifts from employment is at a graduated rate that is added to the employee's income and taxed appropriately like PAYE. The second distinction is gifts that do not arise out of one's employment relationship. In this case, the gift is not taxable where it does not exceed GHS 50.It is only the excess amount that is taxable at a rate of 15%.
In examining the applicability of gift tax in other jurisdictions outside Nigeria, it is evident that various countries have established legal frameworks that regulate the giving and receiving of gifts within specified limits, while creating exemptions for certain scenarios like items gifted between family members up to a certain threshold. Gifts may take the form of either cash or non-cash items, making it essential to carefully evaluate and explicitly outline the tax implications associated with either form.
A common type of gift that is certainly taxable in most countries are employment related gifts such as payment for non-work-related trips, employee appreciation gifts, long service awards, consolation allowance, end of service awards etc. which are largely added to the employee's income and taxed as part of the employee's personal income tax. Other forms of gifts like deeds, cash, assets etc also have specific provisions on their taxability in some territories.
A well-structured and functioning tax system is instrumental to improving the tax to GDP ratio of any country. Therefore, it is essential to establish a clear and transparent tax administration system for the taxation of gifts given in or received in Nigeria. This is crucial for economic development, enabling the effective collection and management of tax revenues. It will also effectively minimize ambiguity in the interpretation of the tax laws, improve compliance by taxpayers and promote taxpayers trust in the government by providing clarity and transparency.
Recommendations and Conclusion
- Establishment of Comprehensive Gift Taxation Regime in Nigeria
The lack of clear guidelines and proper enforcement mechanisms contributes to the problem of tax evasion in Nigeria. The canons of taxation of equity, certainty, convenience, and economy need to be evident to taxpayers in the Nigerian tax administration system.
Therefore, it is vital to establish a well-defined, efficient, and transparent gift administration system to continue to address the current grey arears in the PITA and related tax laws, thereby improving compliance by taxpayers.
Different forms of gifts should be segmented into categories with a clear statement in relation to the basis for computation, rate, timelines, and compliance requirements for each category. Furthermore, exempted gift items, and the process for gifting (to qualify for exemption) should be clearly stated in the PITA and other relevant legislations.
- Filing of Annual Individual Tax Returns
Some countries do not only have defined gift tax system, but also have a gift tax returns regime which is distinct from the Personal Income Tax Returns. Considering the administrative burden that this may pose on individuals, the tax authorities may adopt the approach of mandating employers to include information on gifts (cash and non-cash) provided to employees in the employers' PAYE tax returns while individual taxpayers should also include the information on employment related and other forms of gifts received during the year, in their individual tax returns.
One effective strategy for the government to encourage the filing of annual tax returns is by linking the issuance of Tax Clearance Certificates (TCCs) to filing of returns, as currently implemented by the Lagos State Internal Revenue Service (LIRS). Given the growing importance of obtaining a TCC, linking the application for TCCs to filing of the annual individual tax returns by other State Internal Revenue Service (SIRS) would further encourage compliance.
- Proper Sensitization and Education of Individuals and
Organizations About Gift Tax Obligations
It is crucial to ensure that individuals and organisations are properly educated about their gift tax responsibility. It is widely acknowledged that awareness and deeper understanding of tax matters have a significant impact on the compliance of taxpayers. Therefore, adequate information should be made available to the public regarding their gift tax obligations and the potential effects on the economy.
Nigeria's low tax revenue to GDP ratio indicates that there is a huge potential for increasing tax collection. To address this gap, government could consider amending the Personal Income Tax Act (PITA) to include gifts as taxable income in the hands of the beneficiary. Additionally, the government could introduce a threshold, as observed in other jurisdictions, on the tax-free amount that one can receive in a fiscal year.
Given the recent trend of government to increase tax revenue by increasing the tax rates and reduction of tax relief, it is essential for the government to consider closing certain loopholes in the tax laws. This will make implementation easier, improve compliance, and establish a more cohesive tax framework and reduce tax avoidance.
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.
