A REVIEW OF THE MAJOR CHANGES INTRODUCED BY THE PERSONAL INCOME TAX (AMENDMENT) ACT 2011.

Personal Income Tax which is charged on the income of an individual, community, family, trusts etc. (other than a company) is regulated by the Personal Income Tax Act. The Personal Income Tax (Amendment) Act was assented to by the President of the Federal republic of Nigeria on the 14th of June, 2011 and publicised on the 12th of December, 2011. A review of the major changes introduced by the personal income tax amendment act 2011 will be done by reviewing the implications or effects of the amended sections and the compliance matters will be considered. Thereafter recommendations will be made based on the review in general. DEFINITION OF TERMS -VAT: Value added tax -PIT: Personal income tax -WHT: Withholding tax -NHF: National housing fund -NHIS: National health insurance scheme -LAP: Life assurance premium -NPS: National pension scheme -MPR: Monetary policy rates -PAYE: Pay-as-you-earn Scheme Personal Income Tax (Amendment) Act 2011 -Section 2(8) expanded the meaning of personal emoluments to include benefits in kind. These are benefits received by an employee in the course of employment that does not take the form of money. Does it mean that when an employer buys a phone or Christmas gift etc for the employee(s), such so called benefits in kind are taxed? The implication of this is that not only is the income of an employee taxed, any form of benefit other than money enjoyed by or that accrues to an employee by virtue of employment is taxable. However, 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. -Section 3(1) (b) was amended by inserting the phrase temporary or permanent after the phrase person to any in line 5. The section will now read; any salary, wage, fee, allowance or other gain or profit from employment including compensations, bonuses, premiums, benefits or other prerequisites allowed, given or granted by any person to any temporary or permanent employee should make any profit or gain other than... This amendment clearly captures all employees within the ambit of the law, regardless of whatever name such an employee is so called. This is an indication that even temporary staff are now specifically liable to tax. This will include casual workers, contract staff, a paid intern, a corps member or any person seen as an employee in any work will be captured by this provision and consequently, his income will become taxable. This may incur hardship as some people may pay more in tax while others pay less depending on place of work and money paid to each individual.

-Section 10 (1) :1) The gain or profit from an employment shall be deemed from Nigeria if: a) The duties of the employment are wholly or partly performed in Nigeria, unless i) The duties are performed on behalf of an employer who is in a country other than Nigeria and the remuneration of the employee is not borne by a fixed base of the employer in Nigeria; and - ii) The employee is not in Nigeria for a period or periods amounting to an aggregate of 183 days (inclusive annual leave or temporary period of absence) or more in any 12 month period commencing in a calendar year and ending either within that same year or the following year; and - iii) The remuneration of the employee is liable to tax in that other country under the provisions of the avoidance of double taxation treaty with that other country. - b) The employer is in Nigeria or has a fixed base in Nigeria. (All amendments captured in bold italics.) It follows that the argument that a person must be in Nigeria for a consecutive period of 183 days to be caught up by this section and be taxable in Nigeria can no longer hold water. The section has become more stringent such that it includes the annual leave or temporary leave of absence. In other words, a person who: works outside of the country where there is the avoidance of double taxation treaty with that country; is an employer in that other country and his remuneration is not borne by the fixed base of the employer in Nigeria, but comes into Nigeria on annual leave or (and) other casual visits for a period amounting to a sum-total of 183 days in a calendar year will be a taxable person under the Act. The summary of the above is that the conditions for exemption from personal income tax for any employment wholly or partly performed in Nigeria is 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. A major shortcoming of the section is that it may result in double taxation. This is especially so considering that all the conditions are conjunctive and inseparable. Thus, regardless of the fact that the person may be in a country where there is avoidance of double taxation treaty, such a person will still be taxable if he falls short of any of the stipulated conditions. Therefore, 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. Furthermore, 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. -Section 10(5) of the Act which reads subject to the foregoing provisions of this section, the gain or profit from any employment, the duties of which are mainly performed outside Nigeria, shall be deemed to be derived from Nigeria to the extent that those duties are performed in Nigeria has been removed. The subsection deals with the old PITA which

provides that a non Nigerian employee be taxed to the extent that the duties of employment are performed in Nigeria. This has been deleted by the present amendment. 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. -Section 33 (1) was amended and reads there shall be allowed a consolidation relief allowance of N200,000.00 subject to a minimum of 1 percent of gross income whichever is higher plus 26 percent of the gross income and the balance shall be taxable in accordance with the income table in the sixth schedule to this 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. -Section 2 was inserted and defines gross emoluments to include: wages, salaries, allowances (including benefits in kind), gratuities, superannuation and any other incomes derived solely by reason of employment. However, children allowance, alimony and allowance accrued to a widow were not reviewed regardless of the change in times. Deductible allowance to maintain children is still at N500.00, alimony- is still not exceeding N300.00 and permissible allowance to a widow is still N500.00 for every child (to a maximum of 4 children). It is advisable that these deductible allowance for child maintenance, alimony and permissible allowance to widow be reviewed considering the change in time and the present value of the Nigerian currency as against what was obtainable in 1993 when the old PIT Act was enacted. Considering that a maximum of 4 children is stipulated in the Act, it should be reviewed as to how the realities of the excess of 4 children can be handled as this has and will continue to pose a challenge. -Minimum tax in section 37 which was formerly 0.5% has been reviewed to 1%: Minimum tax here means that when a persons taxable income (after all permissible deductions) is nil or lower than a certain percentage of his total income, such a person will be required to pay a minimum tax. As a result of this amendment, many may have to pay more, some will pay less while a few will be indifferent. Below is the analysis of the annual gross income bands and the implications for different categories of income earners made by a Lagos based tax analyst:
Gross annual income N345,000 Tax implication Higher taxes Comments 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 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) Individuals in this gross income bracket will see a reduction in their

N441,500

Indifferent

N441,500 - N12,150,000

Lower taxes

tax liability of up to 4.8% Above N12,150,000 Higher taxes 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%.

Assumptions: The above analysis is based on the following assumptions: No other allowances are granted under the amended PITA other than the consolidated allowance and personal relief. Individuals comply with all statutory deductions and contributions including NHF and pension. 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.

-Section 38(1) of the Act was also amended to read: "(1) Where the Government of the Federal Republic of Nigeria has entered into agreement with the Government of any country outside Nigeria with a view to affording relief from double taxation in relation to tax imposed under the provisions of this Act, any tax of a similar character imposed by the laws of that country, and that it is expedient that the agreement have effect, the Agreement shall have effect upon ratification by the National Assembly. This amendment brings the law to conform with the provisions of the Constitution of the Federal Republic of Nigeria particularly section 12 which states that no treaty shall have the force of law in Nigeria unless it is enacted into law by the National Assembly. -Penalties in the Act were also reviewed: Such reviews include the penalty for a person engaged in banking services who fails to give the necessary information, documents or books to the relevant tax authority (section 47 and 19 of the Act); penalty for failing to keep the proper books of account (section 52), and for making false statements in tax returns (section 96) have been reviewed from N5, 000.00 for a corporate body and N500.00 for an individual to N500,000.00 and N50,000.00 respectively. -The mode of service of notice of assessment as contained in section 57 has been expanded from solely registered post to include courier service and electronic mail. -Section 60 vests the Tax Appeal Tribunal established under the Federal Inland Revenue Service with jurisdiction to entertain all cases relating to the PIT Act. -Section 74 was also amended to remove the requirement of first conviction on a person who fails to remit the withholding tax before liability to pay the penalty.

-By virtue of section 74(2) of the amended Act, the Accountant General is empowered to deduct from the budgetary allocation, unremitted taxes due from any Government parastatal and transfer to the relevant state upon request by such state. -Based on section 77 of the Act, Interest payable on late payment of taxes shall now be computed on an annual basis. -Section 81 has also been amended with the following implications: i. Employers are obliged to file with the relevant tax authority not later that 31st of January of every year, all emoluments paid to employees for the preceding year. In the old Act, it was 31st of March. ii. Failure to do this shall attract a penalty of N500, 000.00 for a corporate body and N50, 000.00 for an individual. iii. Excess tax paid under the PAYE scheme shall be refunded within 90 days after assessment by the relevant tax authority, or the taxpayer may request it to be set off against future taxes. -Section 85 has been expanded to include the following transactions to the list of activities that will require tax clearance certificate for the preceding three years: i. Change of ownership of vehicle by vendor ii. Application for a plot of land. This means that Individual tax clearance certificates (TCC) to be demanded for change of ownership of vehicles and application for land title transfer or perfection. In line with this expansion, a new section, 85(9) was introduced. By that section, a person who fails to demand for a tax clearance certificate for any of the listed activities as stated in the Section shall be guilty of an offence and liable to a fine of N5, 000,000.00 or 3 years imprisonment or both. -The penalty for making incorrect returns has been reviewed from what was stipulated in the old Act which was 10 percent of the correct tax to N20, 000.00. -Pursuant to the amendments made in the third schedule, this is the current position: i. The official emoluments of the President, Vice President of Nigeria, Governor and Deputy Governor of each State in Nigeria are no longer tax exempt. ii. All pensions made pursuant to any law in force in Nigeria are tax exempt. iii. Bonds issued by the Government or any of their agencies, corporations or supranational organizations and the interest earned are tax exempt. A very salient amendment made is the computation of taxable income. The 1993 Act stated the below as the methodology for computation of taxes after removal of all allowances and permissible deductions. Income to be taxed Rate of Tax Per centum

For Naira of the First N 20,000 5k per N 1 or 5% For every Naira of the next N 20,000 10k per N 1 or 10% For every Naira of the next N 40,000 15k per N 1 or 15% For every Naira of the next N 40,000 20k per N 1or 20% For every Naira of the next N 120,000 25k per N 1 or 25% However, the amended Act changed the basis of computation after removal of allowances and permissible deductions as follows: Old Bands First Next Next Next N30,000 N30,000 N50,000 N50,000 Old Rates 5% 10% 15% 20% 25% New Bands First Next Next Next Next Above N300,000 N300,000 N500,000 N500,000 N1,600,000 N3,200,000 New Rates 7% 11 % 15 % 19 % 21 % 24 %

Above N160,000

The impact of the change in this section is that lower income earners will pay less tax, and the burden of tax will be carried more by the higher income earners. In the former Act, a person whose income (after permissible deductions) is N1,100,000 per annum, would have been paying about N262,000.00 as tax which is about 24% of the taxable income, whilst a person earning same amount under the amended law will pay less than 12% of taxable income which will amount to about N129,000.00. In contrast, a person earning N10,000,000.00 (after permissible deductions) under the old Act will pay about N2,487,000.00 as tax (about 25% of taxable income) and under the new law, such a person will pay about N2,192,000.00 ( about 22% of taxable income). One will notice that under the old Act, high and low income earners paid closely related percentages in taxes regardless of the disparity in the income earned. On the other hand, the new Act takes into the cognisance this disparity which reflects in the difference in percentage of taxes paid by each class. Pursuant to the amendment in the third schedule, the following deductions are tax exempt:

a. b. c. d. e.

National Housing Fund contribution National Health Insurance Scheme Life Assurance Premium National Pension Scheme Gratuities

-In 1st schedule, Principal place of residence has been 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. 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. -Reimbursements and expense claims are still applicable as the relevant provision of the law was not deleted by the amendments. What this means is that employees will continue to enjoy tax free cost of passage, medical and dental expenses etc. It cannot be argued that reimbursements (by their nature) are included in consolidated allowances. -The 1% bonus for early filing of assessment by individuals provided for in section 45 of the old PIT Act has been removed. -Provision for the refund of excess withholding tax (WHT) section 81(4): 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. -Interest on WHT default is now to be at the Central Bank of Nigeria Monetary Policy Rate (MPR) section 74: This means that the interest on WHT default is now to be by CBN MPR. It is not clear whether this will be the rate at the time of assessment following an audit of the WHT or the MPR prevalent for the period of default. This should be the latter given that interest is generally designed to compensate for the time for value of money applicable to the default period. Also it is not clear whether interest on annual basis will be calculated or assessed for part of a year and whether it will apply to default for periods before the amendment. This should be reviewed as it should not be applied retrospectively. -Interest on default in payment of tax due to be at bank base lending rate is to be imposed on an annual basis from the date when the tax becomes due until it is paid section 77: This means that simple interest will now be charged as against the current practice of a flat rate (one-off) interest. Potential conflict and confusion may arise as a result of the introduction of MPR to replace commercial rate considering that the section on bank base lending rate as basis for interest determination for tax default was not replaced by the present amendment.

-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 was redefined in section 108 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. This amendment may pose a challenge as 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 Compliance matters It is apparent that the PIT amendment Act was made based on the increasing focus on good corporate governance and emphasis on revenue generation by government. As a result, it is more critical now than ever before to comply fully with the law including ensuring that tax filing and payment deadlines are met. Many employers especially those in major cities grounded by the recent strike action on the removal of fuel subsidy in January, must have missed the January deadline for the remittance of December 2011 Pay-As-You-Earn (PAYE) tax and pension contribution which were both due on the 10th of January. However, given that the failure to meet the deadline arose from circumstances beyond their control, the default can be excused but payment must be made as quickly as possible. All those affected need to make appropriate notes on the relevant remittance documents in the event of a future audit by which time you may have forgotten the reason for the late remittance. CONCLUSIONS AND recommendation It must be taken into cognizance the fact that the amendments will mean different things to different people, possibly with some unintended consequences. There is no doubt that the PIT Amendment will have implications for all taxpayers - employers and employees alike. However, subject to clarification of some of the grey areas by the relevant authorities in due course, the following are recommended: Employers have to recalculate their payroll taxes with effect from 14 June 2011 and re-file their returns under the new amendment. In the event that the recalculations result in overpayment, it should be set off against future PAYE tax payments while refunds should be paid to relevant employees as appropriate. Employers should review their PIT compliance structures and processes including a review of employment contracts, staff policy documents including pay structure and component, payroll software, compensation structure etc to align with the new amendments and optimize their tax positions.

For employers with expatriates staff, it may be necessary to review and redraft their employment contracts, salary agreements and any other arrangements to avoid tax exposures considering section 10(5) of the amended Act. 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. It is advisable for employers to carry out a tax health check on their PAYE and state WHT compliance for open periods 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.

On the whole, 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.