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Residency Rule: Now that Lagos has set the pace states are kicking

The decision by the Lagos State Government to remit 20 percent of taxes collected from residents in Ogun State who earn their living in Lagos…

The decision by the Lagos State Government to remit 20 percent of taxes collected from residents in Ogun State who earn their living in Lagos may have marked a new phase in the assessment of Personal Income Tax (PIT) in the country.

The development came on the heels of renewed drive by state governments to bolster their internally generated revenue to enable them to finance projects that will improve the living standards of the citizens.

The Lagos gesture didn’t come on a platter of gold. The PIT question had stewed both states in age-long controversy which left observers wondering whether they still had affinity.

Recently, the governor of Ogun State, Senator Ibikunle Amosun said his state loses about N1.5 billion every month as a result of wrongful remittance of taxes payable by people resident in the state but working for employers based in other states across the nation.

According to him, the state had begun to put in place measures to ensure that employees’ PIT deductions due to the state are remitted to the state’s coffers.

At an Organised Private Sector interactive session with Ogun State last year on Residency Rule of the PIT Act (PITA), residents of Ogun State cried out against the overbearing remittance of their taxes to Lagos State. They said they were at the crossroads as tax officials in their places of residence were on their neck to fulfil tax obligation.

It’s not only in Ogun

This debate over the Residency Rule of PITA is not limited to the two states as job opportunities in one state forces many to leave their families in search of greener pastures in other states.

Apart from Lagos, the Federal Capital Territory (FCT) is popular with this scenario. It collects PIT from workers who live in its adjoining states of Nassarawa and Niger for example.

Administration of Residency Rule

The administration of the Residency Rule has not been easy especially with regards to individuals who live in one state but work in another with attendant unresolved controversies. In his paper entitled “An Overview of the Personal Income Tax Act-Focus on Residency Rule” delivered at the Organised Private Sector interactive session with Ogun State government on Residency Rule of PITA, Dr. Abiola Sanni, a tax professional and lecturer at the University of Lagos said the Residency Rule has been a feature of PIT law administration since 1961.

He said the rule obligates a taxpayer under PITA to pay tax to the Relevant Tax Authorities (RTA) of the territory where he/she resides. He said RTA, depending on the facts of each case, may be the FIRS or a SBIR in accordance with the rules in the First Schedule, PITA.

According to him, the rule is meant to tackle real problems. It is to ensure that a taxpayer pays tax as and when due to RTA to avoid double taxation and conflict of jurisdiction among tax authorities in respect of income of taxpayers.

On how residence is determined in Nigeria, Director Legal Service, Ogun State Internal Revenue Service, Temidayo Sokunbi cited 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.  Residence is accordingly about personal presence at some place of abode with 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.”

Sanni explained that PITA is the statute that regulates the taxation of income of individuals, families, communities, estate and trustees in Nigeria. Section 3 (1) of the PITA imposes tax on the aggregate income from various sources including those from:  any trade, business or profession or vocation; any salary, wage, fee, allowance or other gain or profit from employment and passive investments.

According to Sokunbi, section 82 of PITA 1993 as amended stipulates that an employer is obliged to deduct and remit taxes from the emoluments of employees to the tax authority of the place of residence of each employee.

Sanni traced the evolution of PIT in Nigeria to include: Land Revenue Proclamation Law of 1904, Native Revenue Ordinance of 1917, Non-Natives (Protectorates) Ordinance, 1931Colony Taxation Ordinance No. 4 1937, Non-Native Income Tax (Protectorate) Ordinance No. I, 1937, Native Direct Taxation (Colony) Ordinance No. 41, 1937, Income Tax Ordinance No. 3 of 1940 and Direct Taxation Ordinance No. 14 of 1940.

Others are Income Tax Ordinance in 1943, Louis Chick Commission, 1954 Constitution – Federal (Companies) – Regions (individuals) Finance Law of Easter Region No. 4 1956, Income Tax Law in 1957 of Western Region, Personal Tax Law, 1962 of Northern Region, Manifestation of incidents of Double Taxation, PIT Decree No 104, 1993  and PIT (Amendment) Bill, 2011.

The Lagos State initiative

The decision by Governor Babatunde Fashola to give 20 percent of the revenue collected from residents of Ogun State who work in Lagos to Ogun State Government was seen as a noble move to untie some of the knotty issues surrounding the administration of residency rule of PITA.

Sokunbi said at a forum recently that “States that are congruent to metropolitan areas in neighbouring states lose income tax from persons that reside in their states to the states where these people work. Example, Ogun State loses income tax to Lagos State on persons that reside in Ogun State but work in Lagos State.

“This affects Ogun State. In effect, Ogun State does not have enough resources to maintain or create infrastructures required by workers that reside in Ogun State but work in other states and for the overall development of Ogun State,” he expressed.

Accolades for Fashola

A tax professional and former president of the Chartered Institute of Taxation of Nigeria (CITN), Mr Kamardeen Adigun told our correspondent that the governor’s action is in tandem with residency rule of PITA.

“I think the governor with this action has demonstrated that he respects the law. He allows the rule of law to take pre-eminence over emotions. The governor did well by obeying the law,” he expressed.

According to him, PITA is a federal law, and therefore the Lagos State Government’s gesture can be replicated across the country. He however said in some cases, the development may be entangled in litigation.

The Director-General of the Lagos Chambers of Commerce and Industry, Muda Yussuf, told Sunday Trust that that the governor’s action “is a move in the right direction.”

Will Lagos be short-changed in the deal?

Both Adigun and Yussuf believed that Lagos cannot be cheated in the tax remittance arrangement with its neighbouring state, Ogun. According to Yussuf, the question of cheating does not arise because the action was propelled by the law. Adigun said if the Lagos State Government feels short-changed under the arrangement, it can propose amendment to the law.

Making the residency rule work

Sanni is of the opinion that astute tax administrators can make it work if they are determined and well focused. According to him, in doing so, attention should be paid to many practical issues which may make the rule work. He enjoined states to establish Joint Tax Study Groups to consider and make recommendations.

In Nasarawa, it is case of neglect

In Nasarawa State, previous administrations overlooked what the present government under Governor Umaru Tanko Al-Makura considers a “gold mine”. According to the governor’s Head, Economic Team, Professor Muhammad Mainoma, government has already put up some machinery to get income taxes from workers residing in the state, including the ones working in the FCT.

Mainona acknowledged that a large size of FCT workforce is residing in the Greater Karu area of Nasarawa State which adjoins Abuja. He expressed concerns that “income taxes from them is never remitted to the state by their employers.” According to him, previous governments neglected this source of revenue, insisting however that government of Al-Makura will not relent until it begins to take the remittance of this tax, as well as demand for the remittance of previous years’ since the state’s creation. He said unlike Ogun State Government, Nasarawa State Government does not intend to negotiate for percentage; rather, it will take “100 percent of the income tax.”

He said the Residency Rule provides that “it is where you stay that you pay your income tax” stressing that Nasarawa State will soon write FCTA to demand the remittance of the revenue. He said the state is having difficulties in identifying the workforce residing in Nasarawa, but as soon as a planned census exercise captures the data, the state will swing into action.

Mainoma added that already, the state is collaborating with the Nigerian Employers Consultative Assembly (NECA) to begin an awareness exercise to enlighten the public about Residency Rule.

Dearth of data holds back Niger

Until last year, Niger State Government was adamant about matters bordering on the payment of taxes by the FCT workforce living in the state. But now, the state government has taken up the matter through the office of the Accountant General of the Federation for ensuring that all taxes that ought to be paid to the state are paid into its coffers.

According to the Permanent Secretary of Niger State Internal Revenue Board, Alhaji Bala Moni, when the state government realized that a better part of the revenue accruing to it is not coming into its purse, it took up the matter with all the attention it deserved.

He added that the struggle for ensuring those living in the state but working in Abuja do not only pay their taxes to the state government but also regularly, noting that a larger population of the people working in Abuja is residing in Tafa and Suleja local government areas of the state.

The Permanent Secretary stressed that if the state government is to provide more amenities, their taxes must be paid to state government, hence the commencement of consultation with the federal government.

Moni stated that if all arrangements go as planned, by the end of the first quarter of this year, the state will be able to capture what people working in Abuja but residing in Niger state pay.

The Permanent Secretary said even those working in the private sector will soon be captured in the new drive of revenue generation, so as to ensure that all those that enjoy the facilities provided by the state pay their taxes to the state.

He said the board has not been able to compute comprehensive data on the number of people who pay taxes as well as the amount that is realized, saying the inability to have the data is owing to the fact that the exercise had just begun. “Maybe, by the end of the year, we will be able to have a well computed data,” he hoped.