Understanding the Tax Consequences of Remote Work
The world of work has undergone a remarkable evolution, shaped by historical shifts and technological progress. In the pre-internet era, individuals honed their skills from home, working as isolated tradespeople. The Industrial Revolution introduced office spaces and daily commutes, laying the foundation for the infamous 'rat race. 'Then came the disruptive force of COVID-19, locking people indoors but not halting the need for work. Jack Niles' telecommuting seeds from 1973 sprouted to life. Even skeptics among management had to adapt as it became key to business survival during the pandemic.
Remote work surged, with a 200% increase in Nigeria from 2022 to 2023 alone. Remote work prompted a fundamental change, demanding a new work style and reshaping office culture, policies, and values. Some organizations made bold changes, closing offices and reevaluating roles. Enterprises revamped talent strategies to attract top-notch professionals through remote opportunities, leveraging technology to disperse employees globally while efficiently meeting customer needs.
These shifts have not only transformed work but also disrupted established tax schemes worldwide. This article discusses the taxation of employment income in Nigeria and proposes solutions for appropriately taxing employment income in the era of remote work.
Personal Income Tax Act and Employment Income
Section 3 of PITA (as amended), provides that tax shall be payable for each year of assessment on the aggregate amounts, each of which is the income of every taxable person, for the year, from a source inside or outside Nigeria. Further, Subsection 1b of the aforementioned section, provides that “any salary, wage, fee, allowance or other gain or profit from employment including compensations, bonuses, premiums, benefits or other perquisites allowed, given or granted by any person to any temporary or permanent employee other than so much of any sums as or expenses incurred by him in the performance of his duties, and from which it is not intended that the employee should make any profit or gain”. This hints that employment income should ordinarily comprise salary, wages, allowances, overtime pay, pension, annuity, directors’ fees, bonuses, management fees, gratuities, retirement allowances, extra salary, or any emolument of any other kind paid or payable concerning the taxpayer’s employment.
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Pay components for most organizations in Nigeria include amongst other items, basic allowance, housing allowance, transport allowance, utilities, leave allowance, wardrobe allowance, and airtime allowance. These could also include other forms of Benefits-In-Kind (BIK), such as the provision of accommodation, vehicles, club membership subscriptions, and official drivers to employees. With the introduction of remote work, there have been changes in work requirements, for example, water, coffee, internet, and electricity that would be borne by organizations on a good day have been passed to employees. Many employers have swept in to cushion the effect of such changes thereby introducing pay components such as power support, generator allowance, internet subscription, etc.
A question that calls for answers is whether such additional pay components (Such as power support, generator allowance, internet subscription, etc) should be subjected to tax and included in the computation of employee PAYE taxes for the month. Armed with the knowledge that reimbursements paid to an employee, arising from expenses incurred by him in the performance of his duties, will not be liable to tax, some organizations have argued that such components are reimbursement of costs borne by employees in the performance of their duties and should not be taxable, while others opine that these are employee benefits earned in the course of employment and should therefore be subject to tax.
The tax man wants more revenue so it was not surprising to see tax authorities insist during tax audits (especially those relating to 2020) insisting that such payments be included as benefits enjoyed by employees and subjected to PIT.
Section 3(1)(b) of PITA 2011 has made it clear that any expenses incurred by an employee in the performance of his duties, and from which it is not intended that the employee should make any profit or gain should be exempted from tax. Given the foregoing, organizations should maintain necessary supporting documents, in other to justify any “reimbursements” paid to their employees, in the case of an audit.
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PAYE Considerations in Remote Work
The taxation of personal income in Nigeria and by extension, employment income is based on residency. The residency of an employee is determined to know the correct tax authority to receive the PAYE of the employee that has been deducted by the employer. In the past, one would be forgiven to think to assuming that the place of residence of an employee is the place the employer is based.
In recent developments, employers that permit remote work could have employees work from places as distant as Adamawa State while the office of the organization is located in Osun State. The implication of this is that even though the economic value of the organization may be largely generated from Osun State, the PAYE taxes of such employees would be remitted to Adamawa State. The challenge now will be for the organizations to track the residence of their employees as employees could spend varied times in different tax authority jurisdictions.
Conclusion
The emergence of remote work has benefited the business world as it was present during the dreaded times of the infamous COVID-19. It did not stop there as it has become a new normal now and has been a part of developments like the digitalization of tax fillings.
As business changes with the rise of remote work, our team at Stransact stands ready to provide expert guidance on compliance with taxation in this new era. Reach out to us for tailored solutions that align with the modern realities of employment income.