Tax rules trail growing shift to remote work

Countries, including Nigeria, are grappling with emerging tax issues as remote work is gaining momentum, fuelling tax evasion by many workers.

Typically, it is believed that where you reside is where your workplace is located, but today, many are shifting to remote work and tax authorities have inadequate structures to deal with this trend that could foster revenue losses for governments.

Section 2 of the Personal Income Tax (PIT) Act under the 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.

According to a PricewaterhouseCoopers tax document, the principal basis of liability to tax under the PIT Act is residency.

It states that a person is considered resident if one is physically in Nigeria for at least 183 days (including leave and temporary absence) in any 12-month period or serves as a diplomat or diplomatic agent of Nigeria abroad.

Experts say the growing shift towards remote work by small and large businesses could erode tax revenues and foster evasion unless tax authorities in Nigeria and other places develop strategies to incorporate taxing remote work.

According to them, an inadequate tax system for incorporating remote work could foster double taxation and cause revenue leakages, especially in the administration of PIT.

But the problem is not just limited to Nigeria. “It is a problem that we are currently working on because it is a global one, not only for Nigeria as well,” said Taiwo Oyedele, West Africa tax leader at PwC Nigeria.

According to data obtained from the National Bureau of Statistics, Pay As You Earn (PAYE) contributes the most to state governments’ tax revenues.

“Our laws may certainly have to be adjusted to account for those changes. A lot of the states’ tax laws are written by them,” said Ikemesit Effiong, head of research at SBM Intelligence.

The Internally Generated Revenue data collated from the 36 states and the Federal Capital Territory show that PAYE contributed N488.1 billion in the first half of 2021, followed by revenue from ministries, departments and agencies which amounted to N173. 6billion and the least was road tax, with a contribution of N16.8 billion.

PAYE revenue increased year-on-year by 16.7 percent to N488.1 billion in the first half of 2021.

Without a cohesive strategy on taxing remote workers, analysts say state governments, like that of Lagos, were many people are increasing shifting online, would suffer revenue losses.

“But this present additional complication as different states might rewrite their laws differently causing multiplicity of laws,” Effiong said.

Illustrating how remote work could foster revenue loss, Andersen in Nigeria, an independent tax and business advisory firm, in a recent note, wrote about an employee of XYZ Ltd, a company based in Kano state, who chooses to work remotely from Imo State, where he currently lives.

“The implication of this arrangement birthed by the advent of the COVID-19 pandemic is that, even though economic activities of the company may have been largely generated in Kano State, the PAYE taxes of Femi would be remitted to Imo State where the employee resides,” Oladejo Adeyemi, a senior manager at the commercial practice group at Andersen in Nigeria said.

Adeyemi said the major challenge for organisations in relation to remote work would be the additional burden of tracking the residence of employees, in order to ensure that their PAYE taxes are remitted to the appropriate state tax authorities.

The COVID-19 pandemic has forced a lot of companies both locally and internationally to embrace remote work. The volume of job searches using the ‘Remote Work’ filter on professional networking site Linkedln rose by about 60 percent since the pandemic started in March 2020, according to the company’s data.

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Analysts say it important government revenue agencies pay keen attention to this emerging trend.

“The Nigerian revenue [agency] is likely to pay closer attention to income from these arrangements, especially those in foreign currency which could translate into potential significant revenue, in order to prevent tax value leakage,” said analysts at LeLaw Barristers & Solicitors in a recent note.

Adeyemi recommended that tax agencies should do a complete overview of the existing tax laws rather than a cosmetic change through the Finance Act as they have done in the last three years.

“They need to sit down and know that these are unconventional times and we have to look at it critically and say what the recent trends are, how people are earning income and what the focus shift should be on, either still based on residence or economic activities,” he said.

According to Effiong, the only way that this situation can be ameliorated is by legislative amendment.