When Covid-19 made landfall in Nigeria in Q1 2020, many Nigerians, for the first time in their professional careers, had a taste of remote work. However, this had been the norm in some sectors such as Information Technology (IT), Data Analysis, the Copywriting Industry, and the like. The new reality is that remote or location-irrelevant work arrangements leveraging technology have become more commonplace, a situation that is likely to assume increasing dimensions in the years to come, especially as they obviate or minimise expatriate mobility costs. However, whilst associated regulatory issues with “offshoring” may be presumed to be insignificant, this may not always be the case.
This article examines, at a high level, the tax issues surrounding the gains and profits earned from the provision of such services to non-residents, regardless of the existence of an employer-employee relationship.
Residence vs Source: The Two Pillars of Nigerian Taxation
The basis for the imposition and collection of tax in Nigeria is twofold, to wit: residence and source. The source basis of taxation grants taxing rights to the tax authority of the country or jurisdiction from which the income is derived, while the residence basis ascribes taxing rights to the country of residence of the person with taxable income. In Nigeria, under the Personal Income Tax Act (PITA), the residence and source bases are also applicable. Pursuant to section 2(1)(b)(iv) PITA, a non-resident is liable to tax on any income or profit derived from Nigeria (source basis), and under section 2(1)(a) PITA, a Nigerian resident is subject to tax on his/her total income.
: The Rise of Remote Work in Nigeria Post-Covid-19
PITA imposes tax on the income of individuals, and tax is payable for each year of assessment on the aggregate amount of the income of every taxable person from a source inside or outside Nigeria, including: “(a) gain or profit from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried on or exercised; (b) any salary, wage, fee, allowance or other gain or profit from employment, including compensation, bonuses, premiums, and benefits allowed, given or granted to any temporary or permanent employee.”
In essence, any person resident in Nigeria for tax purposes is taxable by the relevant tax authority (RTA) on his/her worldwide earnings, subject, however, to certain exceptions (considered later in this article), as well as the provisions of applicable Double Taxation Agreements (DTAs).
Residence vs Source: The Two Pillars of Nigerian Taxation
Section 108 PITA states that, in relation to an individual, the RTA for a year of assessment (YoA) is the tax authority of the territory in which the individual is deemed to be resident in that year.
PIT, which is determinable from the table in the Sixth Schedule to PITA, is to be paid in each YoA on the total income of every individual deemed to be resident for that year in the relevant State. Hence, although PITA is federal legislation, its administration is within the purview of the States in Nigeria, and thus the RTA for the purposes of PIT is the State Boards of Internal Revenue (SBIRs). However, for residents of the Federal Capital Territory, Abuja, the RTA is the Federal Capital Territory Internal Revenue Service (FCT-IRS), and not the Federal Inland Revenue Service.
How PITA Defines Tax Residency (The 183-Day Rule)
It is submitted, on the authority of sections 2 and 108 PITA, that in Nigerian tax jurisprudence, it is the taxpayer’s deemed place of residence that counts for PIT purposes. It is salutary to state at this point that although PIT is collected by the RTA of an individual’s deemed place of residence, PITA fails to define “deemed place of residence.”
However, the Court of Appeal (CoA) in Ecodrill Nigeria Limited v. Akwa Ibom Board of Internal Revenue[7] provided clarity, per Nweze JCA (as he then was), thus:
“Instructively, there is no specific provision in the PITA that expressly, or pinpointedly, defines the term ‘deemed residence’… The term ‘deemed residence’ could be inferred from a harmonious and community interpretation of sub-paragraphs 10(1)(a)(ii) and paragraph 3 to the First Schedule to the PITA; paragraph 4(3) of the Second Schedule to the PITA; and paragraph 6(2) of the Third Schedule to the PITA. From these provisions, we deduce that a person is deemed to be resident in Nigeria for a year of assessment if he/she is in Nigeria for a period or periods amounting to 183 days or more in a twelve-month period commencing in the calendar year and ending either in the same year or the following year.” (Emphasis supplied).
This means that an individual is expected to pay tax to the tax authority of the State where he/she spends a total of 183 days or more in a twelve-month period. However, the question that must be asked is: what is the applicable RTA for an individual who, though resident in Nigeria, fails to spend a minimum of 183 days in any State in Nigeria?
For purposes of determining residence, a “remote worker” is classified as being under Nigerian employment, per Paragraph (Para) 1, First Schedule to PITA.[8] Also, PITA gives the term “employment” a very wide definition, whereby section 3(2)(d) PITA defines employment as: “‘employment’ includes any service rendered by any person in return for any gains or profits.” This means that individuals providing services to non-resident individuals and businesses are deemed to be under employment.
Are Remote Workers Deemed to Be in Employment Under PITA?
Bearing in mind the sweeping definition of employment above, section 10(1)(a) PITA states, in essence, that gain or profit from any employment, the duties of which are wholly or partly performed in Nigeria, shall be deemed to be derived from Nigeria unless: (i) the duties are performed for a non-resident individual; (ii) the employee is not in Nigeria for a period of up to 183 days in a twelve-month period; and (iii) the remuneration of the employee is liable to tax in the source country under its DTA with Nigeria. All these conditions must co-exist for the income to be deemed to be derived from outside Nigeria.
Again, section 10(3) PITA provides that: “The gain or profit from any employment exercised in Nigeria shall be deemed to be derived from Nigeria whether the gains or profits from the employment are received in Nigeria or not.”
These provisions, without any doubt, are wide enough to cover Nigerian residents who provide services for non-resident individuals and businesses.
When Is Income from Non-Residents Taxable in Nigeria?
Nigerians in paid employment are normally subjected to tax, in the first instance, through the Pay-As-You-Earn (PAYE) system, where the employer deducts and remits tax on behalf of the employee to the RTA.
However, the practical impossibility of getting non-residents to register in Nigeria for PAYE purposes means that individuals earning income from remote work must self-assess, taking into cognisance the consolidated relief allowance under the Sixth Schedule to PITA and other exemptions pursuant to section 19(1) PITA. For the sake of emphasis, the RTA is the tax authority of any State in Nigeria where he/she spends a minimum of 183 days in a 12-month period.
It is instructive to note that where the individual does not spend a minimum of 183 days in any State in Nigeria, the law provides no solution. However, it is submitted that the RTA should be that of the State where the individual has a place available for his/her domestic use, or the place closest to his/her place of work if he/she had more than one place of residence before taking up the “foreign” employment.
Is There Any Tax Exemption for Remote Workers?
As stated earlier, section 1(a) PITA imposes tax on the income of individuals and, in setting out the income chargeable to tax, section 3(1) PITA states that “subject to the provisions of this Act, 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” (Emphasis supplied).
Section 19 PITA expressly exempts from tax all the income specified in its Third Schedule. Interestingly, Paragraph 29 of the Third Schedule to PITA exempts income earned from outside Nigeria by a temporary guest, lecturer, teacher, nurse, and other professional and brought into Nigeria from tax, provided that such income is deposited in a domiciliary account in an authorised bank in Nigeria.
PITA, however, does not define the word “professional.” In Nigeria, it seems that whether or not an occupation or vocation qualifies as a “profession” is dependent on whether the practice or entry into same is statutorily regulated—that is, whether there exists legislation stating it as such. For example, Paragraph 1 of the Schedule to the Professional Bodies (Special Provisions) Act, which vests the Federal Government with the power to allow foreigners to practise certain professions in Nigeria, lists “Law, Medicine, Dentistry, Midwifery and Nursing, Engineering, Surveying, Architecture, Accountancy and any other Technological or Scientific Discipline” as professions. Furthermore, Black’s Law Dictionary defines the term “professional” as “a person who belongs to a learned profession or whose occupation requires a high level of training and proficiency.”
On a clear and dispassionate reading of the provisions of PITA, it is humbly submitted that Nigerian residents engaged in remote work for non-residents will not enjoy this exemption. This is because the income earned from such employment is deemed to be derived from Nigeria and not from abroad. Thus, the answer to the question above is in the negative.
Policy Implications: Digital Taxation and Revenue Leakage
The difference in PAYE remittances versus self-assessment in all the States in Nigeria lays bare the difficulties facing tax authorities in Nigeria as regards tax collection from persons outside the scope of the PAYE system.
However, the duty to pay tax is not voluntary, nor is it necessarily subject to a request by the RTA, although the latter might be the case where there is compliance default. Thus, individuals who are resident in Nigeria and earn income or gain from offering services to non-residents are not thereby shielded from tax liability. Since compliance is cheaper to the taxpayer than non-compliance, it is apt that such workers make an effort to carry out their civic responsibility without coercion. This is more so because it would be quite challenging for the RTAs to assess, in every YoA, every resident to tax.
Undoubtedly, post-Covid-19, offshoring and remote working arrangements will be on the increase. Nigerian revenue authorities are likely to pay closer attention to income from these arrangements, especially those in foreign currency, which could translate into potentially significant revenue, in order to prevent tax value leakage. Again, there would be no surprises here, as Nigeria has given a strong signal of its intent to no longer ignore digital taxation via the recent Finance Act 2020 amendments.
According to the Igbo proverb popularised by the revered Chinua Achebe of blessed memory in his classic Things Fall Apart, since the hunters have learnt to shoot without missing, it is imperative that the birds (the RTAs) also learn to fly without perching.
LeLaw Disclaimer:
Thank you for reading this article. Although we hope you find it informative, please note that the same is not legal advice and must not be construed as such. However, if you have any enquiries, please contact the authors, Afolabi Elebiju at a.elebiju@lelawlegal.com, Chimezirim Echendu at c.echendu@lelawlegal.com, or via the LeLaw office email: info@lelawlegal.com.
