TAXATION OF MANAGING DIRECTOR/PROPRIETOR/PARTNER: PAYE OR DIRECT ASSESSMENT?

Investopedia definition of Taxation

INTRODUCTION

For most small and medium-scale businesses, the business owner also doubles as the Business Owner and the Managing Director/Proprietor/Partner as the Business Structure may be.

WHAT IS DIRECT ASSESSMENT?

Direct Assessment tax in Nigeria is a system through which self-employed persons are assessed and charged to pay tax based on their income.

WHAT IS PAYE:

Pay As You Earn is a tax that employer deducts from employees’ salaries and wages. This tax rate moves from 7 to 24 per cent of taxable income. The taxable income band ranges from NGN300,000 to above NGN3.2 million in a year.

THE TAX MAN

Tax authorities more often than not subject Managing Director/Proprietors/Partner to Direct Assessment and the reasons are not far-fetched: to comb and get a declaration of all sources of income, investment etc. after that subjecting the gross income, less the reliefs to tax in line with Section 41(3) and 36 of the Personal Income Tax Act (PITA).

Therefore, if you have multiple sources of income and avoid being double taxed then a Direct Assessment will be the perfect match. Direct Assessment must be filed within 90 Days from the beginning of the year (on or before March 31st).

ONLY SOURCE OF INCOME

However, if the Business is the only source of income, it is advisable to subject oneself to salary and come under the Pay-As-You-Earn PAYE scheme.

FEATURE OF DIRECT ASSESSMENT  

  1. Ideal for multiple sources of income individuals
  2. For High Net Worth Individual

PROs

  1. It prevents double taxation
  2. One payment serves all the Companies

CONs

  1. The declaration/assessment form will be subjected to verification by the tax man before an assessment is raised.
  2. Lump sum payment

FEATURES OF PAYE

  1. Monthly Tax Payment
  2. To be remitted on or before the 10th of the Month for the preceding Month
  3. It is single employment or single salary based
  4. Employer’s responsibility

PROs

  1. Monthly Payment (flexible)
  2. 8% Pensions, NHIS, NHF are Tax Deductibles

CONs

  1. Must be filed monthly on or before the 10th of the Month for the preceding month.
  2. For some States such as Lagos State, the Tax Clearance Card carries both the Tax Payer Details and the Company’s Name.

CONCLUSION

The route to take largely depends on your income (the sources) and your tax planning strategies.

To this end, it is advisable to consult a competent tax practitioner or tax firm for guidance.

For Taxation, Tax Planning and Tax Filing, feel free to contact us:

Tolulope Oguntade
Regville Associates
compliance@regville.com
08065111667

Taxation of Expatriates in Nigeria

Expat Tax

Introduction

There have been instances whereby people move from a different country to another for different reasons. This is due to Globalization and trans-border migration. As a result, these people move across various national borders for permanent migration, tourism, and work.

Moreover, it should be noted that such persons who find jobs abroad or overseas are usually referred to as expatriates. There are several countries in the world where expatriates migrate to another country for the sake of a new life and greener pastures. However, when it comes to recruiting or employing expatriates, Nigeria is included, especially in the sphere of oil and gas and also the mining industries.

Regardless of their respective countries, every expatriate in Nigeria is bound by the Federal Republic of Nigeria’s laws, which also include the various tax laws that exist in the country. There are certain tax obligations on expatriates and Nigerian nationals based on income and others.

Importantly, every expatriate must get familiar with his/her tax obligations by the various tax laws which are done to abide by the tax laws imposed.

Who Are Expatriates?

Expatriates are those people who chose or have been chosen to live in another country other than where they legally reside for employment or tourism. On the other hand, they are citizens of other nations who have chosen to live in other places of the world. They are also known as expats, who sometimes form their communities in their foreign country.

Tax Obligations of Expatriates in Nigeria

Generally, all expatriates are subject to similar tax laws as Nigerian citizens based on their income. Every expatriate should note that their assessable income for taxation about the income from their employment is the amount of the income of the particular year of assessment.

However, any expatriate whose employment duties are done wholly or partly in Nigeria will not be seen to derive the income from their employment in Nigeria where;

  • If the duties are executed on behalf of an employer in another country, and the remuneration of expatriates is not borne by a fixed base of the employer in Nigeria; and
  • If the expatriate is not in Nigeria for 183 days, including annual leave or a temporary period of absence.
  • The employee’s income is taxed in the other country under a treaty preventing double taxation in that country.

The personal income tax of an expatriate is paid to the relevant tax authority in their state of residence. Therefore they must pay their income tax for any particular year of assessment to the State if they have been there for that particular year. An expatriate’s place of residence must necessarily be the place that is available for his domestic use for a relevant day. Note that the place of residence does not include hotels or other temporary lodging places.

However, if an expatriate is a temporary worker, he must remit income tax to any state where he is found during the year. Any income tax that the expatriate may have paid to the tax authority of another State during a specific assessment year would be applied as a tax credit against the tax due.

What Portion of an Expatriate’s Income is taxable?

Every expatriate is taxed based on the aggregate amount of their yearly income, which may come from salary, fee, wage, allowance, or other employment gain or profits, which include bonuses, compensations, premiums, benefits, or other favors granted by the employer to the expatriate.

Income Tax Rates

When it comes to taxation, Nigeria works on a progressive tax rate system whereby people are required to pay taxes based on total taxable income. Therefore, Consolidated Tax Relief Allowance is granted to those who pay taxes before the income and application of the tax rate band. The relief is granted as high as N200,000 or One per cent of the Annual Gross Income, including 20 per cent of the Annual Gross Income.

It should be noted that the Annual Gross Income serves as the total gross emoluments less all tax exemptions, deductions, and statutory reliefs. Below are the Annual Total income and Marginal Rate;

Total Annual Income (NGN)Marginal Rate
First N300,0007%
Next N300,00011%
Next N500,00015%
Next N500,00019%
Next N1,600,00021%
Above N3,200,00024%

Deduction of Personal Income Tax

The personal income tax of an expatriate under paid employment must be deducted at the source from any remuneration paid or from the payment made on account of the remuneration by his or her employer based on the Pay-As-You-Earn (PAYE) Scheme.

Additionally, the employer must submit a return detailing all remuneration given to the expatriate by January 31st of each year with regard to the year prior. This return must be submitted to the appropriate State tax authorities.

Frequently Asked Questions

Which items are Exempted from Taxes?

The dividends, interests, rents, and royalties earned abroad and brought into Nigeria through channels approved by governments are exempted from Nigerian tax.

What Taxation System does Nigeria Use?

Nigeria uses a decentralized tax system that works in a way that each level of government is independently responsible for the administration of taxes within its jurisdiction. The revenues generated to fund government expenditures are sourced from a pool of taxes from each tier of government.

Is Foreign Income Taxable in Nigeria?

Once a fixed base/taxable presence is established, foreign persons making business profits in Nigeria are subject to taxation under Section 6 of the PITA, subject to any applicable treaties.

Conclusion

The Personal Income Tax Act outlines what income is subject to taxation, what deductions are permitted by law, and who is responsible for collecting personal income tax in Nigeria as a method of determining how much tax is owed by people or employees. For this purpose, expats in Nigeria need to have a fundamental awareness of their tax obligations.

For more information, inquiries and filings about the taxation of expatriates in Nigeria, kindly reach out to us.

Tolulope Oguntade 
Regville Associates                                                                                                                    08065111667                                                                                                   compliance@regville.com