Tax Relief Allowances in Nigeria: What Corporate Employers Should Know March 2009 Vol.

22: Issue # 3
Virtually all modern tax codes make provisions for tax relief allowances to cushion the effects of various taxes and instrumentalities imposed by government. The Nigerian tax code is no exception. Under Nigerian tax laws, tax relief allowances cut across family, life assurance, pension, rents, those living with dependants, leave allowance for the employed, meal subsidy, entertainment, and utility. Under the guidelines issued by the Nigerian Joint Tax Board (JTB), direct tax relief allowance is fixed at 20 percent of earned income plus N5,000. In addition, a family of our is entitled to a tax relief of N2,500 per child up to a maximum of four children. Given that the average number of children in a Nigerian family is six children and that many Nigerian families have more than four children, this provision is inconsistent with cultural and social realities. For families with other dependants, the guideline provides for tax relief of N2,000 per dependant up to a maximum of two dependants. Again, this provision is out of step with the sociocultural norms in Nigeria. For Nigerian tax payers who have life assurance policies, the guidelines provides for a 100 percent tax relief for the sum paid. Similarly, 100 percent of sum paid for pension contribution is given as tax relief. Other allowable tax reliefs include transportation (maximum of N20,000 per annum), rent, leave (maximum of ten percent of annual basic salary), meal subsidy, utilities, entertainment, interest on loans, et cetera. Tax practitioners in Nigeria generally agree that majority of tax payers in Nigeria are unaware of the numerous tax reliefs recognized by the Nigerian tax code. Indeed, many employers are unaware of the tax reliefs. Most employers fail to give their employees forms relating to their taxes. It is not unusual for employees to be paid without pay notifications (often described in local parlance as pay slips) to guide them on the amount they pay as tax. In the few instances where pay notifications or pay slips are issued to employees, tax reliefs are not issued simultaneously so that employees can fill them. This boils down to a frequent issue confronted by tax practitioners: how can a Pay As You Earn (PAYE) taxpayers know what to pay or access as

The increasing level of multiple taxes springing across states and the aggressiveness on the side of revenue authorities have called for an increase in the knowledge of what provision the law makes, especially with regards to Personal Income Tax (PIT).

Therefore, in a bid to keep more money in your purse, especially expendable income, the Federal Inland Revenue Service (FIRS) on its side believes that you need to start asking yourself questions like: what expenses can I deduct before paying PIT? According to FIRS, in calculating income tax, the law allows deduction of all expenses and outgoings from emoluments of the fiscal year in which they are incurred, on the condition that they are: incurred in the production of income, that is the performance of duties and "wholly, exclusively, necessarily and reasonably" so incurred. In a related development, there is also limit to every strategy you use to have more money in your purse, because, according to the law, there are allowed and disallowed expenses. FIRS disclosed that the law allows certain expenses, but disallows others. "Expenses, specifically allowed under the law in calculating income tax include: interest paid on borrowed money employed as capital in acquiring the income; rent and premiums in respect of land and buildings occupied for the purposes of acquiring profits; expenditure on repairs of premises, plant, machinery and fixtures and for the renewal, repair or alteration of such items used in acquiring income; bad and doubtful debts, any recoveries being treated as income when received," FIRS stated. A list of disallowed trading expenses include: domestic or private expenses; capital withdrawn from a trade, business, profession or vocation and any expenditure of a capital nature; any loss or expense recoverable under an insurance or contract of indemnity; taxes on income or profits levied in Nigeria or elsewhere except as provided by the law; the depreciation of any asset. Meanwhile, you need to know which parts of a person's income that is subjected to tax. FIRS disclosed: "Tax is calculated for each year of assessment on the aggregate amounts of the income of every taxable person, for the year. The following incomes are subject to tax under the law: gains or profits from any trade, business, profession or vocation for whatever period of time it may have been carried on by the taxable person; dividends, interests or discounts; any pension, charge or annuity; the gains or profits including any premiums arising from a right granted to any other person for the use or occupation of any property." Are there tax relief and allowances available under PIT? "With effect from January 1, 1999, the following tax relief and allowances were incorporated in the law. They are tax free earned income: annual income of N 30,000 and below is exempted from tax, although a minimum tax of 0.5 percent will be charged. "Others include tax free allowances which include rent subsidy/allowance of N100, 000 per annum; transport allowance N15,000 per annum; meal subsidy/allowance N5,000 per annum; utility allowance N10,000 per annum; and entertainment allowance N6,000 per annum; leave grant 10 percent of annual basic salary," according to PIT Act.