Taxation of Expatriates in Nigeria
This edition of point-of-view examines in a very general way the existing framework for the taxation of expatriates in Nigeria. It considers in brief the applicable tax rate, the portion of the expatriate income that is actually subject to tax, how the tax is calculated, when an expatriate would be deemed resident in Nigeria and how the tax filing is carried out. It is a general overview of the regime of expatriate taxation in Nigeria and not intended to provide legal or tax advice.
With the recent global economic downturn, companies are increasingly focused on exploring business opportunities in regions with significant projected growth opportunities such as in Africa and Asia. Nigeria has been a target investment destination due to the recent stable political climate, immense population (currently estimated at over 165 million), and projected double digit growth rate. Ordinarily, to adhere to local laws and to pursue the business opportunities, such companies incorporate entities in Nigeria. However, such newly incorporated companies, which are predominantly staffed with indigenous citizens; do not always possess adequate knowledge, experience, or skill sets necessary to carry out the business for which the company has been formed. Accordingly, it is common for such companies to employ the services of international experts commonly referred to as “expatriates” to perform these essential services.
The taxation of such expatriates under the Nigerian Personal Income Tax Act (PITA), and specifically the PAYE provisions, has proved to be an area of significant challenges in recent times. Accordingly, it is imperative that international companies planning to pursue business opportunities in Nigeria obtain a very good understanding of this particular area of taxation in Nigeria and put special emphasis on this aspect when planning for tax issues. Prior to discussion of the PAYE provisions and its application to expatriates, it should be noted that, in order to employ the services of expatriates in Nigeria, certain immigration hurdles must first be overcome. Specifically, where a Nigerian company wishes to employ expatriates from abroad, it must have obtained expatriate quota for the positions it intends to fill with these expatriates. An expatriate quota is a permit issued by the Ministry of Interior Affairs, which authorizes a Nigerian company to employ non-Nigerian workers. This permits the company to employ expatriates to specifically approved job designations and for specific time periods. An expatriate quota is usually granted for a period ranging between two to three years at the discretion of the Ministry and is subject to renewal. The quota is issued to the company and not the expatriate: as such, when the expatriate leaves the company, the position reverts to the company and the company may place another expatriate in the same position for as long as the quota position remains valid.
In regard to the taxation of expatriates in Nigeria, it should be noted that there are no specific provisions within PITA dedicated to the taxation of expatriates. Instead, provisions as they relate to individuals who derive income from Nigeria or are deemed resident in Nigeria apply to both local and expatriates employees in Nigeria. The tax rate is progressive with a top marginal rate of 24%. Generally, an employee is regarded as resident in Nigeria throughout an assessment year if he is domiciled in Nigeria for a period of 183 days (including periods of temporary absence or leave) or more in any 12 month period. However, expatriates who have a permanent residence permit in Nigeria are liable to tax in Nigeria even if they spend less than 183 days in Nigeria. In addition, where remuneration is borne by a fixed base of the non-resident employer in Nigeria, the individual will be deemed to be liable to tax in Nigeria. The only exception is if there is strong evidence that such individuals are liable to tax in another country under the provisions of a double tax treaty in which Nigeria is a party.
Although the tax law outlining the rules pertaining to taxation of residents and taxation of foreign individual’s income derived within Nigeria are fairly straightforward, conflicts usually arise with the local taxing authorities on the interpretation and implementation of such provisions. Specifically, conflicts usually arise in the determination of the actual amount of income derived within Nigeria, on the qualification for exemptions from taxation such as the 183-day threshold requirement, and on numerous minor details pertaining to an expatriate’s employment within Nigeria. However, such areas of conflict, although they could be cumbersome and time-consuming, are ordinarily resolved satisfactorily when such issues pertain to expatriates from related parties with which the companies usually have reliable and complete records.
An area of continued frustration, however, pertains to PAYE issues in regard to expatriates from third-party companies. Particularly, companies sometimes find it necessary to employ the services of expatriates from unrelated companies. In such cases, although the primary PAYE responsibility for such individuals ordinarily lies with the unrelated employer, in cases where such individuals are granted a visa under the quota of an indigenous company, such companies are often held liable for any unpaid and outstanding PAYE liability for such unrelated individuals performing work on their behalf in Nigeria. Companies that find themselves in this situation often are not aware of this responsibility and do not possess the required information for filing purposes such as remuneration and length of stay. In addition, such companies are often unable to obtain recourse on such liability from the unrelated company whose primary responsibility it was to meet the payment and filing responsibilities for the expatriates. Accordingly, to eliminate or mitigate this potential significant issue, companies are finding they must ensure they accumulate all necessary information for meeting PAYE obligations for all individuals coming into Nigeria on their quota, whether such employees are actually employed via related or unrelated parties. In addition, it is recommended that companies include indemnity clauses in contracts with unrelated vendors such that they would be indemnified for PAYE liabilities suffered in regard to the vendor’s employees working on their behalf in Nigeria.
As regards the taxable income, taxation generally focuses on a taxpayer’s earned income. In accordance with the provisions of PITA, any salary, wage, fee, allowance, gratuity, compensation, bonus, premium, benefit or other gains, profits and perquisites allowed, given or granted by any person to an employee categorized as either cash paid to employee or expenses incurred by the employer for the employee’s benefit is taxable. However, in calculating the actual taxable income of an employee, PITA allows certain deductible tax reliefs and allowances (which are not discussed in this paper).
However, under the provisions of PITA the relevant tax authority (Various State Inland Revenue Services) has the power, where they have reason to believe that the taxable income is understated, to use their discretion to determine on a best of judgment basis ,what is the tax liability where none or insufficient tax has been paid. This is the basis of the deemed income assessment. In practice, the Revenue has a minimum amount which an expatriate is deemed to earn depending on the expatriate’s nationality and industry. Where however, an expatriate can prove his actual income with valid documents, the Revenue will be left with no option other than to accept the expatriate’s actual income as the basis of assessment even where this is lesser than the deemed income as determined by the Revenue. The onus is on the expatriate’s employers not to give the Revenue any basis to challenge the validity or otherwise of the documents presented as proof of the expatriate’s employment. It appears though that some companies in practice prefer their expatriates to be assessed on a deemed income basis. The documents necessary to establish actual income include but are not limited to the Contract of Employment of the Expatriate, travel passport of the Expatriate, expatriate Quota Position granted to the company and the monthly quota returns for the company.
How we can help?
Every company must constantly re-evaluate its tax structure and exposure. Compliance is at minimum an annual undertaking, and tax planning, with the objective that the tax burden is no higher than it should be, is of utmost importance. We develop relationships with our clients with the aim of understanding every aspect of their business so that we can provide realistic solutions that can solve their problems.
Our talented people, consistent methodologies and tools and unwavering commitment to quality service will help you build strong compliance and reporting foundations, sustainable organizational strategies and effective risk management protocols, helping your business achieve its potential. We offer a wide array of services that assist companies to reduce their tax burden and proactively address the underlying issues to make future compliance more effective. Our services includes the development of tax efficient payroll structures and assisting in implementing the preferred option. We also assist our clients to review their local and expatriate staff PAYE taxes for compliance. We will be happy to discuss your situation, concerns and challenges with you.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.