Welcome to 2012!
I hope you had a good holiday notwithstanding the New Year gift of fuel subsidy removal.
As many of us may already know, the President on Tuesday 13 December 2011 while presenting the 2012 Federal Budget proposal to the joint session of the National Assembly confirmed that the Personal Income Tax (Amendment) Bill has been signed into law.
Based on the amendment dated 14 June 2011, which is yet to be gazetted, we provide our comments on the changes below.
Key changes
· Introduction of a consolidated tax free allowance of N200,000 or 1% of gross income, whichever is higher, plus 20% of the gross income. Gross emolument (or income) is defined to include benefits in kind, gratuities, superannuation and any other incomes derived solely by reason of employment.
· Principal place of residence redefined to include places where branch offices and operational site of companies are situated. Operational sites are defined to include oil terminals, oil platforms, flow stations, construction sites, etc with a minimum of 50 workers.
· Revised graduated tax bands as shown below.
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Old Bands
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Old Rates
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New Bands
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New Rates
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First N30,000
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5%
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First N300,000
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7%
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Next N30,000
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10%
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Next N300,000
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11%
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Next N50,000
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15%
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Next N500,000
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15%
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Next N50,000
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20%
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Next N500,000
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19%
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Above N160,000
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25%
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Next N1,600,000
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21%
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Above N3,200,000
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24%
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· Increase in minimum tax rate from 0.5% to 1% of gross income
· Benefit in kind now specifically included in gross emolument and by implication taxable income
· Temporary staff now specifically liable to tax. This will include casual workers, interns and other contract staff.
· Reimbursements and expense claims still applicable as the relevant provision of the law was not deleted by the amendments. Also it cannot be argued that reimbursements (by their nature) are included in consolidated allowances. This means that employees will continue to enjoy tax free cost of passage, medical and dental expenses etc
· Conditions for exemption from personal income tax for any employment wholly or partly performed in Nigeria now modified to require evidence that such individuals are liable to tax in another country under the provisions of a double tax treaty. Also where the remuneration is borne by a fixed base of the nonresident employer in Nigeria, the individual will be deemed to be liable to tax in Nigeria. In addition, the 183-day residency rule has been modified to include periods of temporary absence or leave.
· Appeal against unresolved assessments to be handled by the Tax Appeal Tribunal.
· 1% bonus for early filing of assessment by individuals has been removed.
· Provision for the refund of excess withholding tax (WHT).
· Interest on WHT default to be at the Central Bank of Nigeria Monetary Policy Rate (MPR).
· Interest on default in payment of tax due to be at bank base lending rate to be imposed on an annual basis from the date when the tax becomes due until it is paid. This means simple interest will now be charged as against the current practice of a flat rate (one-off) interest.
· Filing of annual returns now 31 January (previously 31 March).
· Minimum of 5% retention of revenue collected by tax authorities for administrative purposes. It is not clear whether this would also cater for tax refunds.
· Tax officers now required to apply to the High Court for a warrant of distrain before exercising their powers to distrain for failure by taxpayers to pay final and conclusive tax liability under the law.
· Itinerant worker redefined to include any individual irrespective of status who works in more than one state for at least 20 days in at least 3 months of every assessment year.
· Tax exemption for individuals on interest income on debt instruments including corporate bonds.
· Individual tax clearance certificates (TCC) to be demanded for change of ownership of vehicles and application for land title transfer or perfection.
Analyses of implications
The amendments will mean different things to different people, possibly with some unintended consequences. Many may have to pay more while some will pay less and a few will be indifferent. Below is the analysis of the annual gross income bands and the implications for different categories of income earners:
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Gross annual income
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Tax implication
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Comments
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N345,000
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Higher taxes
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These category of individuals will suffer 100% increase in tax as a result of the increase in minimum tax from 0.5% to 1% of gross emolument
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N441,500
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Indifferent
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Tax payable is the same under the new amendment but any individual earning less than this would see their taxes increase by up to 100% in some cases (see above)
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N441,500 - N12,150,000
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Lower taxes
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Individuals in this gross income bracket will see a reduction in their tax liability of up to 4.8%
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Above N12,150,000
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Higher taxes
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Any individual earning more than N12.15m per annum will pay higher taxes by up to 1.5% in view of the higher effective tax rate under the new amendments notwithstanding the marginal reduction in the top tax rate from 25% to 24%.
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Assumptions:
The above analysis is based on the following assumptions:
o No other allowances are granted under the amended PITA other than the consolidated allowance and personal relief.
o Individuals comply with all statutory deductions and contributions including NHF and pension.
o The compensation under the old PITA was structured for tax efficiency (the result will be different if otherwise). If the compensation under the old PITA was not structured for tax efficiency then the amended PITA will result in a decrease in tax liability for all individuals regardless of income bracket.
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Contentious issues
· The Amendment Act was dated 14 June 2011 but only communicated to the public during the budget presentation by the president on 13 December 2011. As at the time of this publication the amendment is yet to be gazetted. Technically the amendment should become effective from the date it was signed into law and gazetted unless a specific commencement date is indicated in the act.
· It is not clear if existing tax free allowances will continue to apply along with the consolidated allowance given that the section on these allowances was not deleted in the amendment. However, Schedule 6 contained in the amendment states specifically that the remainder of income after deducting the consolidated allowance, personal relief and specified exempt deductions is taxable.
· Expatriates who meet all the conditions for tax exemption including being liable to tax in another country may now be exposed to tax in Nigeria if such other country does not have a double tax agreement with Nigeria.
· The subsection of the old PITA which provides that a non Nigerian employment be taxed to the extent that the duties of employment are performed in Nigeria has been deleted. This could mean that such individuals will be liable to tax on their worldwide income notwithstanding that the duties of their employment were only partly performed in Nigeria.
· Also, the 183 day rule which has been modified to include period of temporary absence or leave will pose some challenges regarding temporary absences from Nigeria to perform employment duties abroad.
· Interest on WHT default is MPR. It is not clear whether this will be the rate at the time of assessment following an audit or the MPR prevailing for the period of default. Our view is that it should be the latter given that interest is generally designed to compensate for the time value of money applicable to the default period. Also it is not clear whether interest on annual basis will be prorated for part of a year and whether it will apply to default for periods before the amendment. Our view is that it should be prorated and should not be applied retrospectively.
· Potential conflict and confusion may arise as a result of the introduction of MPR to replace commercial rate while the section on bank base lending rate as basis for interest determination for tax default was not replaced.
· The provision to refund excess WHT is welcome but there is no clarity as to whether this covers other taxes payable under the PITA other than WHT.
· Place of residence rule modified to include location of branch office or similar presence with a minimum of 50 staff – this means that an individual (other than an itinerant worker) may become liable to tax in more than one state for a given year of assessment.
· It may be difficult to track the movement of employees between different states for tax purposes in order to implement the modifications to the place of residency rule and redefinition of itinerant worker.
· It is not clear whether benefit in kind to be included in gross emolument should be limited to the taxable portion only or the actual value of such benefits.
Conclusions and next steps
There is no doubt that the PIT Amendment will have implications for all taxpayers - employers and employees. We understand that the relevant authorities will issue guidelines to clarify some of the grey areas in due course. However in the meantime we recommend the following:
· Commencement of the act – Given that the Amendment is yet to be gazetted, it is premature to begin the implementation. We understand that a commencement date will be indicated in the Amendment before it is gazetted with the intended date of January 2012. In the event that this is not done, then the amended act will commence from the date it was signed meaning that taxpayers will be required to revise their tax returns for the relevant period.
· Tax free allowances - Although a law should not be interpreted with any intendment, but based on Schedule 6 paragraph 3 of the Amendment only consolidated allowances, personal relief and the 5 listed deductions (Gratuity, Pension, Life assurance premium, NHF and NHIS) are deductible. Therefore it is unlikely that the tax authorities will grant the existing allowances together with the consolidated allowance. This will be resisted by the tax authorities and if necessary the law could be specifically amended and backdated leaving taxpayers who have taken an aggressive position exposed.
· Employers should review their PIT compliance structures and processes including review of employment contracts, staff policies, pay structure and component, payroll software etc to align with the new amendments and optimize their tax positions.
· For expatriates staff it may be necessary to review and redraft their employment contracts, secondment arrangements and salary recharge agreements to avoid tax exposures.
· Employers must bear in mind possible impact of any compensation restructuring on statutory contributions such as NHF, pension contribution etc and other benefits especially post employment benefits which are linked to certain components of salary such as basic pay.
· We advise employers to carry out a tax health check on their PAYE and state WHT compliance for open periods to 31 December 2011 and consider remediating any identified non compliance. This will reduce the risk of higher penalty and accumulating interest on annual basis pending audit by the tax authority.
· Overall, the amendments will reduce the income tax rate for many individuals in line with the National Tax policy objective of reducing direct tax and increasing indirect tax.
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