Personal Income tax vs. Residency

Personal Income Tax Law And Residency Debate.

Some neighbouring states in the country have been at loggerhead over who should collect personal income tax of workers. Should it be state where such workers reside or the state where they work?

OLUGBENGA SOYELE examines the issue The recent drop in the monthly revenue allocations from the federal government to the 36 states of the federation has no doubt affected the finances and smooth-running of various states and this has compelled most states government to embark on other measures to aggressively grow their Internally Generated Revenue (IGR) by implementing tax laws. However, this renewed drive for increase in revenue generation is not without its controversy particularly over which State Government is the relevant tax authority authorised to collect Personal Income Tax (PIT) where the tax payer resides in one State but works in another, or where the tax payer works in more than two States, during each year of tax assessment. In Nigeria like other parts of the world, many people live in a particular state and work in other states because of a combination of reasons including: close proximity to their place work, low cost of accommodation and opportunity for improved living standards. States that have these peculiarities in the country are Lagos and Ogun, Rivers and Abia, FCT; Niger and Nassarawa,  Ondo and Ekiti, Oyo and Osun, Anambra and Delta. A common example is the case of some civil servants residing in neighbouring states such as Nasarawa and Niger states but who earn their meal tickets in ministries, government agencies and parastatals in Abuja, the Federal Capital Territory. The situation is the same in Lagos and Ogun as most residents of Agbara, Akute, Agbado, Alagbole, Sango, Ojodu-Isheri , Ibafon and Mowe, which are all towns in Ogun State, work in Lagos. Though the controversy over the payment of PIT to the state where one resides other than where one works is not entirely a new one because it is statutory, however the recent shortfall in revenue allocation and generation for most states of the federation has opened their eyes to what they are losing to neighbouring states in PIT and the fact that such losses may be enough to carry out massive infrastructural development to improve the living standard of the people. Section 2 (1) (A) and (2) of the Personal Income Tax Act, CAP P8, Laws of the Federation of Nigeria, 2004 (‘’PITA’’) provides that Personal Income Tax shall be paid for each year of assessment on the total income of every individual based on the State where the tax payer resides, in the relevant year of personal income tax assessment, and not based on where the individual tax payer works or carries on business. The individuals excluded from the above PAYEE Residency Rule include Itinerant workers, persons employed in the Nigerian Armed Forces and Police other than in a civilian capacity, employees in the Nigerian Foreign Service, residents of the Federal Capital Territory, Abuja and Nigerians residing outside Nigeria but deriving income or profit from Nigeria. With the exception of itinerant workers who work from place to place, all other persons mentioned in this exception to the Residency Rule are obligated to fulfil their tax obligations to the Federal Government of Nigeria (represented by the Federal Inland Revenue Service). Under the Personal Income Tax Act also, an individual tax payer’s place of residence is the place where such an individual lives or uses as his residence most frequently in Nigeria. A tax payer’s residence does not include his hotel room, vest-room or office place at which he may be temporarily lodging. However, for individuals with multiple residences, Section 32 of the Personal Income Tax (Amendment) Act, 2011 has amended the First Schedule to the principal Personal Income Tax Act – which is on the determination of individual tax payer’s residence – by inserting a new sub-paragraph (d) after paragraph 1(c). The new sub-paragraph 1(d) provides that “in the case of an individual who works in the branch office or operational site of a company or other body corporate, the place at which the branch office or operational site is situated is where payment is made : provided that operational site shall include Oil Terminals, Oil Platforms, Flow Stations, Factories, Quarries, Construction Sites with a minimum of 50 workers, etc.” But despite the provisions of the laws, some questions that arise includes the following: ‘If the residents of Ogun State have been paying their income taxes in Lagos for example, what is the legal implication of switching over to Ogun State? Do the Ogun residents have a discretion in the matter or are they bound by duty to pay the said taxes to the Ogun State Government? What happens in terms of remittances in the case of a company located in Lagos but having some of its members of staff resident in Lagos and some resident in Ogun State? Will Ogun State Internal Revenue Service send demand notices for Pay-As-You-Earn (PAYE) to companies in Lagos having Ogun residents as workers? Other questions are: does Ogun State Internal Revenue Service have a database containing the names of its residents and the outfits employing them in Lagos? Or Is the announcement directed to workers in the informal sector only? In his view a Lagos based legal practitioner, Chukwuemeka Eze said by virtue of section 2 (2) of the Personal Income Tax Act, Cap. P8, Laws of the Federation of Nigeria, 2004 (‘PITA’), it is evident that tax for any year of assessment may be imposed only by the State in which the individual is deemed to be resident for that year, maintaining that, no tax can be assessed on any individual whose residence in a state cannot be proved, stressing that the rules of determination of residence are detailed out in the First Schedule to the Personal Income Tax Act. Eze, who is also a member of the Chartered Institute of Taxation of Nigeria (CITN) further explained that where an individual has more than one source of income; his residence is determined by reference to the first of rules applicable to his circumstances in the order in which they are considered as stated hereinafter. ‘Place of residence’ in relation to an individual means a place available for his domestic use in Nigeria on a relevant day and does not include any hotel, rest house or other place at which he is temporarily lodging unless no more permanent place is available for his use on that day. Also speaking on the issue, Ayodele Otitoju, an Executive Member of CITN, pointed out that personal income tax is meant to be paid to the government of the state where one resides. He explained that whilst this may not have been complied with in some parts of the country, the Personal Income Tax Act stipulates that tax must be paid in the state of residence. He stated further that the only circumstance that may affect this is if such a person resides in a particular state which is not his state of residence for more than 183 days. Under this circumstance, Otitoju noted, the person is obligated to pay his personal income tax to the state where he works if he will have to live there for more than 183 days in a year. He also stressed that for individuals working in corporate organisations where tax is deducted at source, the taxes should be sent to the state where each worker is resident and not jointly to the state where the company is resident. For companies, he noted that taxes ought to be paid in the state where the head office is sited; adding that for such companies that have branches across states, the tax should be paid to the Federal Inland Revenue Service. However, he said such companies can decide to or not to pay taxes in the states where they have branches. As the debate continues, one state that has began to enjoy the benefits derivable from the law is Ogun State. The state has recently succeeded in getting Lagos State Government to remit 20 percent of taxes paid by Lagos workers who reside in Ogun State to the state. The decision by the Lagos State Government to remit 20 percent of taxes collected from residents in Ogun State who earn their living in Lagos may have marked a new phase in the assessment of Personal Income Tax (PIT) in the country. This debate over the Residency Rule of PITA is not limited to the two states as job opportunities in one state forces many to leave their families in search of greener pastures in other states.