Annual Income Tax Returns by Employers and Employees

The Minister of Finance and Coordinating Minister for the Economy was recently quoted as saying that 75% of potential taxpayers are not in the tax net. She noted further that about 65% of registered taxpayers are not fully compliant. The simple inference that could be made from this scary revelation is that the level of tax compliance in the country is currently below 10%. This is a huge compliance gap that must be addressed.

To be tax compliant, a taxpayer must ensure that his/her taxes are paid and accounted for as and when due. This means taxes are paid as and when due and that relevant returns are submitted to the tax authorities in prescribed forms and formats. Going by the news emanating from many State Boards of Internal Revenue, the level of compliance with the requirements for filing of personal income tax returns as prescribed by the Personal Income Tax Act (PITA) remain low across the country.

According to Section 41 of PITA, all taxable persons are required, without notice or demand, to file a return of their income in the prescribed form and containing specific information in relation to their income and taxes thereon with the tax authority of their State of residence. The return should contain income earned from every sources in the year preceding the year of assessment computed in line with the provision of PITA. This return is commonly referred to as “Form A” by many State Boards of Internal Revenue Services and expected to be filed not later than 31st of March of each year. This return is expected to be filed by all individuals including those who are self-employed and submit their tax returns by way of direct assessments as well as those who are in paid employments under the Pay-As-You- Earn (PAYE) scheme.

Employers are also required by the provisions of Section 81 of PITA to file annual returns of all emoluments paid to their employees and taxes deducted and remitted to the relevant tax authorities. The employer's annual return is due not later than 31st January of every year and covers the income and taxes paid in the preceding year.

Prior to the amendments to PITA in 2011, there was no clear separation between the returns required from the employer and the employees as only one set of return was then applicable. The responsibilities of the two parties were also not clearly laid out. However, the Personal Income Tax (Amendment) Act 2011 (PITAM) introduced the changes that laid out the employers' responsibility with filing of annual returns and the attendant penalties for noncompliance.

Where an employer fails to file the required annual employer's return on the due date, a penalty of N500, 000 shall be imposed upon conviction if such employer is a body corporate and N50, 000 in the case of an individual.
For some employees in paid employment, it appears the requirements for individual tax return is not yet being fully complied with. Many employees under the PAYE scheme believe that they are covered by employer's annual return and that only self-employed individuals are required to file individual tax returns.

Unfortunately, there is no provision of PITA that supports this notion. The only category of individuals that are exempted from filing income tax returns are those whose only source of income in any year of assessment is employment in which they earn N30,000 (thirty thousand Naira) or less from that source. All other individuals are expected to file annual income tax returns in line with the provisions of Section of 41 of PITA.

Although no penalty was specifically indicated for failure to comply with the provisions of Section 41 of PITA, the penalties specified in Section 94 of PITA would be applicable. This section contains the penalty for contravention or failure to comply with any of the provisions of PITA or any rule or regulation made thereunder for which no other penalty is specifically provided. For such offences and contravention, a penalty of N5, 000 (five thousand Naira) is applicable upon conviction. In addition, where the offence is failure to file return (as required by Section 41 of PITA), a further penalty of N100 (one hundred Naira) for every day during which the failure continues shall be imposed including terms of imprisonment for six months.

The above penalty may seem immaterial, but for an employer with high number of employees, the amount could be significant especially with the daily penalties. While this penalties are imposed on the taxpayers directly, it won't be surprising if the Tax Authority seek to gain access to those under the PAYE scheme through their respective employers. For many companies, the distraction that such may cause to their business is enough to raise concerns.

As the Nation battles with the reality of decreasing revenue from oil, due to the global oil price decline, it will be expedient that increased attention is focused on raising the level of tax compliance. There are countries, developed and developing, with no oil or any major natural resources, whose main source of sustenance are tax, tourism and similar income.

Nigeria can no longer continue to treat non-compliance with kid gloves. With information available from the National Bureau of Statistics and similar agencies at the State level as well as databases from the Corporate Affairs Commission, Financial Institutions etc., it should no longer be such an unattainable target to seek to bring more taxpayers into the tax net. State Governments should embark on development of electronic database management system for tax and taxpayers and reform of their tax administration system. The reward will make the exercise worth all the troubles and investments.

With the anticipated increasing compliance monitoring exercise by the Tax Authorities, employers are advised to take appropriate steps to address their tax compliance obligations and ensure that their employees do same to avoid potential penalty exposure. All efforts should be geared towards eliminating avoidable costs (both real costs and opportunity costs) that may reduce business competitiveness.