Remote work is the practice of employees doing their jobs from a location other than a central office operated by the employer hence the remote taxation.
Such locations could include an employee’s home, a co-working or other shared space, a private office, or any other place outside of the traditional corporate office building.
Remote working from foreign jurisdictions has become increasingly popular during the Covid-19 pandemic. Despite the lockdown rules being relaxed in most jurisdictions, it appears that employers should not expect the workplace to return to the way it was before the pandemic.
For example, a growing number of Nigerians are taking up roles in foreign companies outside Nigeria that offer significantly higher pay than their Nigerian counterparts. The dwindling value of the naira makes it more attractive to earn in foreign currency.
Remote Taxation: Understanding Tax Jurisdiction
Jurisdiction is the power, right, or authority to interpret and apply tax laws or decisions.
Taxing Jurisdiction means the federal, state, local, or foreign government that collects tax, interest, or penalties, however, designated, on any Member’s share of the income or gain attributable to the Company.
There are two theories of tax jurisdiction: Source Jurisdiction and Residence Jurisdiction. These will be discussed briefly below.
Under a source jurisdiction, income may be taxed under the tax law of a country because of a nexus between the country and the activities that generate the income, with no reference to the residence of the taxpayer.
Under a residence jurisdiction, income may be taxed under the tax law of a country because of a nexus between the country and the person earning the income, irrespective of the place where the income is earned.
Most countries or jurisdictions adopt both the residence and source concepts in the tax system. In case the same income is taxed by a residence jurisdiction and a source jurisdiction.
The source jurisdiction shall take precedence over the residence jurisdiction. In any bilateral double tax agreement, the tax right is allocated to the source country.
Determination of Residency for Tax Purposes
Section 2 of the Personal Income Tax (PIT) Act under Nigerian law states that the collection of a tax imposed on an individual’s income will be determined by looking at the territory of residence where the individual concerned is deemed to be resident.
In personal taxation, the determination of residence is vital, to identify the relevant tax authority of a taxpayer. The First Schedule of PITA provides details for the determination of residence.
An individual is regarded as a resident in Nigeria in an assessment year if he:
1. Is domiciled in Nigeria;
2. Sojourns in Nigeria for a period or periods in all amounting to 183 days or more in 12 months;
3. Serve as a diplomat or diplomatic agent of Nigeria in a country other than Nigeria.
A non-resident individual is a person who is not domiciled in Nigeria or who stays in Nigeria for less than 183 days in 12 months but derives income or profit from Nigeria.
A non-resident individual becomes liable to tax in Nigeria from the day he commences to carry on trade, business, vocation or profession in Nigeria. In the case of employment income, he is liable to tax in Nigeria when he becomes a resident.
Residence and Nationality
Residence should not be confused with nationality. The Nigerian tax laws attach importance to the residence and not nationality. Therefore, whether you are a citizen of Nigeria or a citizen of another country, the same standards apply to you as far as you are resident in Nigeria.
The same condition will also apply to an individual who is not resident in Nigeria whether he is a Nigerian or a foreign national.
It is also important to note that in United Bank for Africa Plc V. Odimayo (2005) 2 NWLR (Pt 909) 21 at 38 E-F, the Court of Appeal said, “One is said to reside if he lives, dwells, lodges or abides at a designated place.
The residence is accordingly about personal presence at some place of abode with the purpose to remain for some undetermined period. One can be said to reside in a place without necessarily staying permanently there.
Residence conveys the fact of abode and the intention of remaining. It means more than the physical presence.”
Taxation of Remote Employees in Nigeria
Income chargeable to tax is the aggregate amount, each of which is the income of every taxable person, for the year, from a source inside or outside Nigeria, including:
Gain or profit from any trade, business, profession or vocation for whatever period such trade, business, profession or vocation may have been carried on or exercised.
Any salary, wage, fee, allowance or gain or profit from employment including compensation, bonuses, premiums, benefits or other perquisites allowed, given or granted by any entity to an employee, other than those specifically stated as non-taxable.
Section 6A of PITA states that;
“an individual, executor or trustees outside of Nigeria who carries on a trade or business that comprises furnishing of technical, management, consultancy or professional services to a resident person in Nigeria, the gains or profits of such trade or business shall be deemed to be derived from and taxable in Nigeria to the extent that the individual, executor or trustee has a significant economic presence in Nigeria.
Provided that the withholding tax applicable to income under this Act shall be the final tax on the income of a non-resident recipient who does not otherwise fall within the scope of section 6 of this Act”.
Consequently, a non-resident individual who renders services stated in the above provision, to a person resident in Nigeria, shall be liable to pay tax in Nigeria and the person making payment to such non-resident shall deduct tax at the appropriate rate and remit the same to the Service.
The tax withheld from such payment shall be the final tax on such transaction by the non-resident.
Section 10 (1) (a) PITA states essentially that gain or profit from any employment, the duties of which are wholly or partly performed in Nigeria, shall be deemed to be derived from Nigeria unless –
(i) the duties are performed by a non-resident individual;
(ii) the employee is not in Nigeria for a period of up to 183 days in twelve months; and
(iii) the remuneration of the employee is liable to tax in the source country under its DTA with Nigeria. All these conditions must co-exist for the income to be deemed to be derived from outside Nigeria.
Again, section 10 (3) PITA provides that: “The gain or profit from any employment exercised in Nigeria shall be deemed to be derived from Nigeria whether the gains or profits from the employment are received in Nigeria or not.”
Remote Employees and Permanent Establishment
Companies must be careful not to trigger permanent establishment when employing workers remotely across borders.
Please be informed that the temporary presence of an employee at a home (i.e. residential) office in a jurisdiction other than the jurisdiction where they are employed should not typically cause permanent establishment risk for the employer.
Such arrangements do not have a level of permanence, and any business activities carried on are not done so continuously.
The OECD guidance concludes that employees temporarily working from their home office, due to COVID-19 restrictions, should not create new permanent establishments for their employer under the fixed place of business test, as this type of activity lacks a sufficient degree of permanency or continuity, and the employer has no control over it.
The focus here is on the exceptional and temporary nature of this situation.
The permanent establishment risk increases, however, when the offshore working model ceases to be temporary.
In other words, when an employee working remotely outside of their country of employment changes from a temporary to a more permanent arrangement, a permanent establishment may be triggered in the remote-work location. In such cases, the employer may face potential double taxation, penalties and interest.
The updated report from January 2021 offers a glimpse into the OECD’s views on the tax treatment applicable once the travel restrictions and public health recommendations are lifted.
According to the OECD, if an employee continues to work from home long-term, their home office may be considered to have a certain degree of permanence, but this change is not sufficient in determining whether or not a fixed place of business exists.
The facts and circumstances of each work arrangement would need to be analyzed to determine, not only if the home office is used continuously, but also if it is at the disposal of the employer.
The risk would also vary depending on who decided to implement the remote working structure. The OECD refers to an example from their Commentary where a cross-border employee works mostly from their home office in a jurisdiction different than the one in which their employer’s office is located.
In this scenario, the individual’s home office is not considered to be at the disposal of their employer, as the latter did not require its use for business activities.
In cases where employees will continue to work from their home jurisdiction after COVID-19, the OECD states that it would be more likely for the individual to be considered to meet the “habitual” criteria.
The report further refers to the Commentaries, where the OECD recommends that the facts and circumstances of each case should be considered, including the involvement of the individual in contracting activities and the specifics of the contracts concluded.
The basis for the imposition and collection of tax in Nigeria is two-fold: residence and source. The Source basis of taxation grants taxing right to the tax authority of the country or jurisdiction where the income is derived from; while the Residence basis ascribes taxing right to the country of residence of the person with taxable income. In Nigeria under the Personal Income Tax Act (PITA), the residence and source basis are also applicable. ‘
Per section (1) (b) (iv) PITA, a non-resident is liable to tax on any income or profit derived from Nigeria (source basis), and under section 2 (1) (a) PITA, a Nigerian resident is subject to tax on his/her total income.
Finance Act 2020 introduces the Significant Economic Presence (SEP) rules to the taxation of non-resident individuals, executors or trustees carrying on a trade or business comprising Technical, Professional Management or Consultancy (TPMC) services to persons resident in Nigeria.
The Minister of Finance may by order define what constitutes SEP for this purpose. With SEP, Foreign persons earning business profits from Nigeria are taxed once a fixed base/taxable presence is created subject to existing treaties. This may lead to double taxation on the profits even for treaty beneficiaries.
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Olatunji is the founder Taxmobile.Online and Managing Partner/CEO of AOA Professional Services. Prior to this,Olatunji worked as Director,Tax & Regulatory Services at Nolands Nigeria Professional Services, Senior Manager -Tax,Regulatory & Advisory Services at Saffron Professional Services.
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