ARTICLE
18 July 2023

Personal Income Tax Obligations For Non-Resident Employers Of Labour In Nigeria

Ai
Andersen in Nigeria

Contributor

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Andersen in Nigeria is the Nigerian member firm of Andersen Global. We are an independent tax and advisory services firm with a worldwide presence through the other member firms and collaborating firms of Andersen Global. The firm consists of professionals with many years of experience in taxation, transactional, transfer pricing, accounting and business advisory services both at local and international levels.
Remote working arrangements have become the new-normal following the impact of the general lock down experienced across the world arising from Covid-19.
Nigeria Tax

Remote working arrangements have become the new-normal following the impact of the general lock down experienced across the world arising from Covid-19. The general rise in business and operational costs have made local and foreign businesses adopt remote working arrangements. It is not a surprise that Non-Resident Employers of Labour (NREs) with some business activity in Nigeria embrace remote working arrangements for their employees especially where their nature of business does not require a physical presence in the country. This implies that their employees are able to work remotely outside the jurisdiction of the employer.

The number of NREs in Nigeria continues to grow albeit at a slow pace. In 2022, a report by the Nigerian Bureau of Statistics revealed an increase in NREs from 1.2 million in 2021 to 1.5 million. The report also states that the NREs accounted for 11% of the total employed persons population in Nigeria. Considering the dynamic nature of the Nigerian tax and regulatory environment, it is crucial for NREs to keep abreast of their obligations and ensure compliance with the applicable laws, to enable them enjoy seamless operations in Nigeria.

For the purpose of this article, it is important to understand the disparity between NREs and Non-Resident Companies (NRCs). A NRE is an employer without a physical presence in Nigeria and whose activities in Nigeria does not require the registration of a business but has contractual arrangements with employees or independent contractors in Nigeria. On the other hand, an NRC is an entity that has Significant Economic Presence (SEP) in Nigeria; hence, they have income tax obligations in Nigeria, based on the provisions of the Companies Income Tax Act (CITA), as encapsulated in the SEP Order.

This article provides highlights on the Personal Income Tax (PIT) obligations for NREs in Nigeria as it pertains to their Nigerian employees. Our discussions herein are limited to NREs that do not require any form of business registration in Nigeria.

Nigerian Personal Income Tax Obligations of NREs

A NRE's PIT obligations will typically depend on the nature of the contractual arrangements with their employees or consultants. Such contractual arrangements could either be a contract of employment or a contract for service (independent contractor relationship). A contract of employment typically involves an employer-employee agreement, whereby the employee agrees to provide services to the employer in return for wages or salary. In contrast, a contract for service entails a contractual relationship between a business and an independent contractor in which the services of the independent contractor are engaged for a specific purpose in return for fees.

Section 3(1b) of the Personal Income Tax Act (2011) as amended, provides that tax shall be payable on the earnings for the year from a source inside or outside Nigeria, including, "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". Where an employment relationship exists, the Pay-As-You-Earn (PAYE) regulations confer on the employer the duty to compute the PAYE tax that is due on the employee's income every month, deduct the tax and remit same to the relevant tax authority (being the state of residence of the employee). Considering that the personal income tax laws did not specifically state any exemptions in relation to residence status of the employer, this obligation applies to resident and non-resident employers in Nigeria. However, in practice, NREs may experience a difficulty in this regard as tax processes for most of the state tax authorities are still manual. As such, some level of physical presence or reputable representation may be required to fulfil the compliance requirements. Needless to say,

the tax penalties for non-compliance are usually steep and may impact the NREs in Nigeria. For independent contractual arrangements between NREs and Nigerian consultants, the relevant taxes due on the fees paid to the independent contractor (individual) is Withholding Tax (WHT) at 5%. The tax is to be deducted by the paying entity (being the NRE) and remitted to the relevant tax authority.

Social Security Contributions

The Employee Compensation Act requires employers to make monthly contributions to the Nigeria Social Insurance Trust Fund (NSITF), while the Industrial Training Fund (ITF) Act stipulates that Nigerian employers with 25 or more employees, are required to register with the ITF and make the necessary contributions. In a similar vein, he Pension Reform Act of 2014, provides that both the employer and employee make contributions to the Nigerian Pension Scheme at the rates specified in the Act.

There are different schools of thoughts regarding the applicability of the above regulations to NREs. However, considering that the Acts did not provide for any specific exemptions from compliance, it is advisable for NREs to make necessary arrangements locally, to fulfil the respective compliance requirements. What Triggers Corporate Tax Obligations for NREs in Nigeria

Our discussions so far have focused on NREs without presence or business registration requirement in Nigeria. However, the functions or activities of their employees in Nigeria, may pull the NRE into the corporate tax net in Nigeria. The Nigeria Company Income Tax Act provides that a non-Nigerian company will be subject to income tax in Nigeria where it habitually operates a trade or business through a person in Nigeria that is authorised to conduct business on its behalf. The applicable tax will be based on the income derived from such trade or business. Hence, NREs need to carefully consider the functions and activities of their employees in Nigeria and examine their income tax obligations resulting from such activities. Where an obligation is deemed established, the NREs will be required to fulfil this obligation in order to avoid any form of tax penalty.

Conclusion

NRE arrangements are increasingly becoming a part of the employment dynamics in Nigeria today. Whilst the business model or arrangements have its numerous benefits and justifications, NREs will need to devise means for complying with their tax obligations. The NREs also need to keep aware of the changes in the Nigeria tax laws so that they do not err in any way. We advise that reputable professional support be sought to assist with compliance, drafting of contractual agreements and periodic updates on the Nigeria tax environment. This will help to ensure a good standing locally and in their home countries.

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.

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