Personal Tax | |
Personal Tax | |
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Thursday,
August 16, 2018/09:45AM/Deloitte
Nigeria operates a federal system of
government. Governing bodies at the centre differ from governing bodies in the
sub-units (states). This dichotomy also impacts tax administration, with the
Federal Inland Revenue Service (FIRS) overseeing taxation of companies,
non-resident individuals etc., and State Boards of Internal Revenue (SBIRs)
administering taxation of individuals resident within its territory.
This tax administration dichotomy
sometimes degenerates into controversies on the authority with taxing rights in
some situations – e.g. income of workers exercising their employment duties on
offshore oil-drilling platforms on Nigeria's territorial waters.
Territorial waters generally mean the
waters under the sovereign jurisdiction of a nation. Internationally and based
on the Territorial Waters Act (TWA), Nigeria's territorial waters (in terms of
ownership, control, and proprietary right to land) include every part of the
open sea, not exceeding 12 nautical miles from the coast of Nigeria. This
jurisdiction is under the exclusive purview of the Federal Government (FG) and
only Federal laws are applicable there.
Personal Income Tax Act (PITA), which is
a federal legislation applies within Nigeria's territorial waters. Generally,
section 2(2) of PITA, provides that personal income tax (PIT) be paid to the
State where an individual taxpayer resides. Therefore, it becomes imperative to
ascertain the relevant “State” with taxing rights on territorial waters
considering it is under the control of Federal Government. There appears to be
no direct legislation at this point to ascertain the relevant State. However,
we can draw an analogy from the provision of Allocation of Revenue (Abolition
of Dichotomy in the Principle of Derivation) Act 2004 (ARDPDA), which provides
that “the two-hundred-meter water depth Isobaths. contiguous to a State of the
Federation shall be deemed to be a part of that State,” when determining
resources from the states in accordance with Nigeria's constitution.
Although ARDPDA was enacted for another
purpose, it can safely be assumed that for PITA administration purposes, a
State includes territorial waters close to it. This however does not solve the
potential issue on taxing rights where the “territorial water” spans more than
one State or the employee has more than one place of residence.
In
this regard, PITA provides that where an individual has more than one place of
residence in different states, PIT is payable to the State where he has his
principal place of residence by 1 January of the year or soon thereafter. The
First Schedule of PITA provides tiebreaker rules in determining an individual's
principal place of residence. Relevant rules are evaluated below vis-a-vis
probable scenarios:
1. One State of residence
Where the territorial water is deemed to be within one State and an offshore worker maintains actual residence in the same State, there is no need to refer to the tiebreaker rules.
2. More than one place of residence in different states
Offshore worker who works on offshore oil drilling platforms deemed to be located in one State and his home in a different State triggers the tie-breaker rule. In this regard, the rule stipulates the principal place of residence of such a person to be the place where the offshore platform exists provided he has at least 49 other co-workers. This comes with inherent issues described below:
Controversy
around State control over territorial waters:
Territorial
waters where the offshore platform exists are within the exclusive jurisdiction
of the FG. FIRS, being the tax authority of the FG, is not empowered under PITA
to collect taxes on income from territorial waters. Neither does the tax law
empower SBIRs to collect same. Ÿ Controversy around State control over
territorial waters: However, the analogy of the provision of ARDPDA described
above may be useful in determining the relevant State boundaries for PIT
collection purposes.
Spread
of platform across two states:
Working
across multiple places during the year: Issues get more complicated where the
relevant platform on the territorial waters spreads across 2 “states”. Each of
the states may lay claim to taxing rights, thus leading to potential double
taxation. In this regard, another tiebreaker rule could be used – (actual
residence closest to his place of work). Alternatively, contiguous states could
agree on modalities to apportion the income. In this instance, taxpayers and
employers are obliged to keep appropriate documentation. Where an employee
works across multiple rigs or offices, the employee may be treated as an
itinerant worker (i.e. worker carrying out employment in different states for
at least 20 days in 3 months within an assessment year). Section 3 of PITA
empowers SBIRs to impose and collect tax from an itinerant worker wherever
he/she is found during the year.
In
recognition of possible double taxation, PITA provides that credit is given against
any tax paid to other tax authorities for the same year of assessment on an
itinerant worker. This also requires collaboration by the states and proper
record keeping by the taxpayer
Less
than 50 workers on the platform:
Where
the offshore worker has more than one place of residence in different states
and works with less than 49 co-workers on Nigeria territorial waters, his
principal place of residence is determined by principal place of residence
closest to where he normally works. In view of the inherent issue with taxing
rights, it is common practice for the tax authorities of littoral states to
demand PIT (under the Pay-As-You-Earn scheme) from employers of offshore
workers, on the basis of some geographic determination that allocates a portion
of the territorial waters to their States –possibly ARDPDA.
On
the potential multiple taxation of income, possible resolution will emanate
from automation, collaboration and information dissemination by each SBIR.
SBIRs are encouraged to automate their processes (similar to FIRS' automation
of corporate income taxes) to enable taxpayers retrieve their records of tax
payment (across all states) when needed. There may be light at the end of the
tunnel with the recent communique by the Joint Tax Board, urging all SBIRs to
automate their processes.
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