PAYE Presentation1 ppt 2012

UPDATE ON THE AMENDED PAYE

2012

Agenda

1. What is PAYE?

2. What are the basic features of the old PAYE?

3. What is the effective date of the new PAYE?

4. What is the gazzetted date of the new PAYE?

5. What are the basic features of the new PAYE?

6. Definition of Gross Income

7. Definition/Make-up of Allowances

8. Applicable Tax Rate

9. Other benefits available in PITA (Tax Planning)

10. Implication of the New PITA

What is PAYE?A Pay as you earn tax (PAYE) is a withholding tax on income payments to employees. Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns.

Every employer is required to file a return with the RTA (Relevant Tax Authorities) of all emoluments paid to its employees, not later than 31st January of every year in respect of all employees in its employment in the preceding year.

FIRS is responsible for the PAYE of the following:

Persons employed in the Nigerian Army, the Nigerian Navy, the Nigerian Air force, the Nigerian Police Force other than in a civilian capacity

•Officers of the Nigerian Foreign Service

•Residents of the Federal Capital Territory

•Person resident outside Nigeria who derives income or profit from Nigeria.

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Basic Features of The Old PAYE

• Tax free allowances such as Leave allowance, housing allowance, etc. were enjoyed during the Old PITA regime.

• The statutory reliefs relevant to the Old Paye remained constant at:

• 1) Personal Allowance- 20% of Earned Income + N5,000

• 2) Additional Disabled person allowance- higher of N3,000 or 20% of Earned Income

• 3) Children Allowance : N2,500 per child (max of 4)

• 4) Dependent Relative Allowance: N2,000 (max of 2)

• 5) Leave Allowance- 10% of Total Basic Salary, P.A

• 6) Housing Allowance - Maximum allowance pegged @ NGN150,000, P.A

• 7) Entertainment Allowance - Maximum allowance pegged @ NGN6,000, P.A


Basic Features of Old PAYE Cont’d

• Transport Allowance - Maximum allowance pegged @ NGN20,000, P.A

• 9) Utility Allowance - Maximum allowance pegged @ NGN10,000, P.A

• 10) Meal Allowance - Maximum allowance pegged @ NGN5,000, P.A

• 11) Actual Life insurance premium

• The Applicable Tax rates in the Old PITA were:

1. First N30,000 at 5% (N1,500)

• Next N30,000 at 10% (N3,000)

• Next N50,000 at 15% (N7,500)

• Next N50,000 at 20% (N10,000)

• Above N160,000 at 25%

• Minimum Tax – 0.5% of Annual Emolument

•


Effective Date Of New PAYE

The effective date of commencement of the PITAM is 14 June 2011, based on the Federal Republic of Nigeria Official Gazette No.115, Vol.98. This date is the same as the date of assent of the Act by the President.

Gazzetted Date

The Personal Income Tax (Amendment) Act 2011 was officially gazetted on Tuesday 31 January 2012 .


Basic Features of the New PITA

• Introduction of a consolidated tax free allowance of N200,000 or 1% of gross income, whichever is higher, plus 20% of the gross income. Gross emolument (or income) is defined to include benefits in kind, gratuities, superannuation and any other incomes derived solely by reason of employment.

• Principal place of residence 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.

• Change in income tax table: The PITAM replaces the Sixth Schedule of the PITA with a new Schedule as follows:

• FirstN300,000taxedat7%

• Next N300,000taxedat11%



• Next N1,600,000taxedat21%

• Above N3,200,000taxedat24%


Basic Features of the New PITA Cont’d

* Increase in minimum tax rate from 0.5% to 1% of gross income

* Benefit in kind now specifically included in gross emolument and by implication taxable income

* Temporary staff now specifically liable to tax. This will include casual workers, interns and other contract staff.

* Reimbursements and expense claims still applicable as the relevant provision of the law was not deleted by the amendments. Also it cannot be argued that reimbursements (by their nature) are included in consolidated allowances. This means that employees will continue to enjoy tax free cost of passage, medical and dental expenses etc.

* Conditions for exemption from personal income tax for any employment wholly or partly performed in Nigeria 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 non-resident 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.

* Appeal against unresolved assessments to be handled by the Tax Appeal Tribunal.

•·



* Interest on WHT default to be at the Central Bank of Nigeria Monetary Policy Rate (MPR).

* Interest on default in payment of tax due to be at bank base lending rate to be imposed on an annual basis from the date when the tax becomes due until it is paid. This means simple interest will now be charged as against the current practice of a flat rate (one-off) interest.

* Filing of annual returns now 31 January (previously 31 March).

* 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 redefined 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.



• Tax exemption for individuals on interest income on debt instruments including corporate bonds.

• Individual tax clearance certificates (TCC) to be demanded for change of ownership of vehicles and application for land title transfer or perfection

Gross Income

Gross income’ is not defined by PITAM.Rather ‘gross emoluments', which is not used anywhere in the Act, is defined as “wages, salaries, allowances (including benefits in kind (BIKs)), gratuities, super annuation and any other incomes derived solely by reason of employment”. Assuming that ‘gross income’ includes, at least, ‘gross emoluments’, the definition is more robust than that of ‘earned income’ under PITA, and therefore provides a larger base for the claim of CRA by taxpayers.

Implications of the new PITAMatters arising from the implementation of the New PITA include:

Commencement – Based on the amendments as gazetted in January 2012, the commencement date is 14 June 2011 which is the date the bill was signed into law by the President. A number of challenges will arise from applying the new changes in retrospect including re-computation of pay-as-you-earn (PAYE) tax liabilities for 2011 for all staff. In particular employers need to consider impact of over or underpaid taxes in respect of disengaged employees. The new amendments also require employers to file a return of emoluments paid to employees by 31 January in respect of the previous year.


Implications of the new PITA Cont’d

• Old tax free allowances and consolidated relief allowance: Previously, tax free allowances include Housing of N150,000, Transport of N20,000, Personal allowance of N5,000 plus 20% of earned income, leave allowance at 10% of basic pay, Utility of N10,000, Meal of N5,000, Entertainment of N6,000, Children allowance not exceeding N10,000, Dependant relative of N4,000. The fixed components of these allowances add up to N210,000. However under the new PITA the old tax free allowances have

• been replaced with a consolidated relief allowance of 20% of gross income plus higher of 1% of gross income or N200,000. However the relevant subsections of Section 33 on children and dependant relative allowances were not removed. This means that these allowances will continue to apply although the insignificant amount involved may not sufficiently justify the related administrative work



• Principal place of residence: Where a staff has more than one place of resident for any year, the principal place of residence, where applicable, will be the location of the branch office or operational site where such individual works provided there is a minimum of 50 workers at such branch or site. Some of the grey areas include the definition of a worker and what happens where the threshold is reached temporarily? Employers will have to reconsider the state of residence of their employees and decide whether to re-file taxes to the appropriate state tax authorities in retrospect.

• Taxation of expatriates: An expatriate is now liable to tax in Nigeria if his employment costs are recharged to a Nigerian company or borne by a „fixed base‟ in Nigeria; or he is in Nigeria for an aggregate of 183 days in any 12-month period (including leave and temporary absence); or where he is not liable to tax in another country which has a double tax agreement with Nigeria. Employers will have to carry out a review of the retrospective application of the law to expatriate staff bearing in mind their terms of employment, secondment arrangements and recharges even for expatriates who never performed their employment duties in Nigeria.



• Interest: Under the old PITA, interest may be imposed on tax defaults but there was no prescription on how the interest should be applied. Historically tax authorities apply the interest at a flat rate on a one-off basis. The new amendments now explicitly require interest to be calculated on an annual basis. This means simple interest method whereby interest on tax due for a period is multiplied by the number of years outstanding. Where the period contains less than a whole year, then the interest must be prorated on a monthly or daily basis from the date the tax becomes due until it is paid.

• Limitations of powers of the states: The word “imposed” in the charging section has been replaced with the word “collect”. This implies that no state government or tax authority may impose tax on the income of any individual by limiting their powers to collection of taxes rather than imposition.



• E-communication: Section 57 of PITA has been amended by adding electronic mail and courier service to the existing means of delivering assessment notices. The new law did not state whether taxpayers may also correspond with tax authorities via email including objection to assessments. The expectation is that this will be the case – if it is good for the taxman then it must be good for the taxpayer.

• Withholding (WHT) refund: There is an amendment to Section 73 to create a refund mechanism for excess WHT remittances with respect to dividend, interest, rent and directors‟ fees to be made within 90 days or use as credit to offset future tax liabilities payable. Given that WHT on dividend is final tax, and WHT is either final tax on interest or not at all applicable while rent and director fees are liable to further tax with a remote possibility that the effective tax rate for landlords and directors will be less than the WHT suffered. It does appear therefore that this amendment is a cure for an ailment that does not exist. Refunds for excess WHT on business profit and PAYE would have been more relevant and desirable.



• Taxation of President etc.: the “official emoluments” of the President, Vice President, Governors and Deputy Governors are no longer tax exempt. This implies that the income of these officials (including allowances and benefits in kind) are now fully taxable. If properly implemented in line with the law as applicable to other individuals, the President, Vice President, Governors and Deputy Governors could technically become bankrupt as their personal income tax liabilities will most likely exceed the cash component of their emoluments.

• Gratuity and pension - Gratuity and pension are part of an individual's “gross emolument” but the amendments now specifically classify gratuity and pension under the Pension Reform Act as deductions allowed. This does not mean that contributions to a gratuity or pension scheme on behalf of the employee by the employer should be included in gross emolument for the purpose of computing consolidated relief allowance. Such treatment will be wrong since the contributions have not been received or otherwise enjoyed by the employee and they do not constitute deductions from his emolument as envisaged under the new Schedule 6 of the amended PITA.



• Reimbursements – amounts allowed are now limited to expenses incurred in performance of duties and from which it is not intended that the employee should make any gain or profit. Employers must consider what qualifies as expenses incurred in performing employment duties as distinct from activities which are the personal responsibilities of the employee. Cost of passage, medical reimbursement etc. may no longer qualify.

• Itinerant workers – an itinerant worker is now defined as an individual who works during a year of assessment (other than as a member of the armed forces) for wages, salaries or livelihood in more than one state for a minimum of twenty (20) days in at least three (3) months of every assessment year. This poses a challenge in terms of implementation as to the split of tax between the states. Also will itinerant workers be able to obtain TCCs from all states where they file and pay taxes?

• Powers of the Minister - it is expected that the Minister for Finance will issue guidelines on the grey areas as soon as possible. The amendments empower the Minister to make regulations generally on the recommendations of the Joint Tax Board (JTB) for giving full effect to the provisions of the Act. Contrary to general belief, this does not include powers to amend the law - for instance the effective date cannot be changed by the Minister, the JTB or any tax authority.



• National Tax Policy – Overall the amended PITA will reduce tax for the middle class with a marginal increase on the rich. Although the taxable income bands have been increased and the top tax rate reduced marginally from 25% to 24% the minimum tax rate has also been increased from 0.5% to 1% of gross income. Unfortunately this means about 100% increase in tax for the poorest of the poor. This in a way contradicts the National Tax Policy objective of reducing direct taxation including personal income tax.


Gross annual income

Tax implicatio

n

Comments

N345,000 Higher taxes 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

N441,500 Indifferent 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)

N441,500 - N12,150,000 Lower taxes Individuals in this gross income bracket will see a reduction in their 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:

o No other allowances are granted under the amended PITA other than the consolidated allowance and personal relief.

o Individuals comply with all statutory deductions and contributions including NHF and pension.

o 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.

Analyses of implications The amendments will mean different things to different people, possibly with some unintended consequences. Many may have to pay more while some will pay less and a few will be indifferent. Below is the analysis of the annual gross income bands and the implications for different categories of income earners:

PAYE Presentation1 ppt 2012

Economy & Finance

Transcript of PAYE Presentation1 ppt 2012