Countries, including Nigeria, are struggling with emerging tax problems as remote work is gaining momentum, contributing to tax evasion by many workers.
It is generally believed that you live where your workplace is, but today many are moving to remote work, and tax authorities have inadequate structures to combat this trend, which could contribute to loss of revenue for governments.
Section 2 of the Personal Income Tax Act (PIT) under Nigerian law states that the collection of personal income tax will be determined based on the area of residence where that individual is considered a resident.
According to the tax document PricewaterhouseCoopers, the main basis for taxation under the Personal Income Tax Act is the place of residence.
It states that a person is considered a resident if he or she is physically in Nigeria for at least 183 days (including leave and temporary absence) for any 12-month period or acts as a diplomat or diplomatic agent of Nigeria abroad.
Experts say the growing shift of small and large businesses to remote work could reduce tax revenues and contribute to tax evasion if Nigerian and other tax authorities do not develop strategies to include remote labor taxation.
In their view, an inadequate tax system to include telecommuting could contribute to double taxation and cause revenue leakage, especially in PIT administration.
But the problem is not just in Nigeria. “This is a problem we are working on now because it is global, and not just for Nigeria,” said Taiwo Oydele, head of PwC Nigeria’s tax company in West Africa.
“Our laws, of course, will need to be adjusted to take into account these changes. Many state tax laws are written by them, ”said Ikemesit Effiong, head of research at SBM Intelligence.
Data on domestic revenues from 36 states and the federal metropolitan area show that PAYE contributed 488.1 billion to N488.1 billion in the first half of 2021, followed by revenues from ministries, departments and agencies to N173. 6 billion and the least was the road tax with a contribution of N16.8 billion.
PAYE revenue increased 16.7 percent year-over-year to N488.1 billion in the first half of 2021.
Without a holistic strategy for taxing remote workers, analysts say state governments like Lagos, as many people increasingly go online, will suffer revenue losses.
“But this presents additional complications, as different states may rewrite their laws in different ways, which will lead to many laws,” Effeng said.
Illustrating how remote work can contribute to income loss, Andersen in Nigeria, an independent tax and business consulting firm, wrote in a recent note about an employee of XYZ Ltd, a Kano-based company who decided to work remotely from Ima, where he is now lives.
“The consequence of this arrangement, which was born with the advent of the COVID-19 pandemic, is that, although the company’s economic activities could have been largely carried out in Kano, PAYE Femi taxes will be transferred to Ima State. where the employee resides. “- said Oladeha Adeyemi, senior manager of the commercial practice group in Andersen, Nigeria.
Adeemi said the main challenge for organizations due to remote work would be the additional burden of tracking employees ’residences to ensure that their PAYE taxes are transferred to the appropriate state tax authorities.
The COVID-19 pandemic has forced many companies, both locally and internationally, to move to telecommuting. According to the company, the volume of job searches using the “Remote Job” filter on Linkedln’s professional network site has grown by about 60 percent since the pandemic began in March 2020.
Analysts say important government revenue agencies are paying close attention to the trend.
“Nigerian income [agency] is likely to pay more attention to the proceeds from these arrangements, especially in foreign currency, which could lead to potentially significant revenues to prevent tax value spills, ”analysts at LeLaw Barristers & Solicitors said in a recent note.
Adeemi advised the tax authorities to make a full review of existing tax legislation, rather than make cosmetic changes to the Finance Act as they have done for the past three years.
“They need to sit down and know that these are unconventional times, and we need to look critically at this and say what the latest trends are, how people are earning and what to shift attention to, or still considering residence or business economies.” he said.
According to Effeng, the only way to rectify this situation is to amend the legislation.