After a mega musical concert, probably one of the biggest concerts in Africa, a top-rated musician bought himself a very expensive Bentley Bentayga 2018. The Lagos Internal Revenue Service (“LIRS”) must have recognised this success and promptly issued him a demand notice containing his tax liability as calculated by the LIRS. In response, the musician whose family is well known to be from a state outside Lagos, got his lawyers to respond to the taxman claiming he is an indigene and resident of Osun State and he regularly pays his tax to that state. According to the LIRS however, this was not enough because the Personal Income Tax Act (“PITA”) makes individuals assessable to tax on the basis of residence.
Akindele an IT guru, lives in Ota, Ogun State and works with a fintech company in Yaba, Lagos State. His employer has always been remitting his tax (Pay As You Earn) to the LIRS. However, a few weeks ago, during the tax awareness event organised by the Ogun State Internal Revenue Service to sensitize its residents, the Ogun State tax officials saw Akindele and asked where he works and if he regularly pays his taxes. Akindele boastfully informed the tax officials that he pays as and when due. He informed them his taxes were always deducted from source by his employer and remitted to the LIRS, since he worked in Lagos State.
Alarmed by this revelation, the Ogun State tax officials informed Akindele that because he lives in Ogun State, his employer ought to have paid his taxes to the Ogun State Government and not the Lagos State Government. Akindele disagrees with the Ogun State tax officials and has sought legal advice as to which of these two states is entitled to deduct his tax.
The problem highlighted above is not peculiar to Akindele and the popular musician. It is a major problem faced by people who live in one state but work in another state in Nigeria. In this article, we examine the relevant tax legislation and sheds light on the position of the law relating to the issue.
Imposition of Tax
Section 1 of the Personal Income Tax Act Cap P8 Laws of the Federation, 2004 (“PITA”) imposes a tax on the income of individuals, communities, families or income arising or due to a trustee or an estate. Tax is payable for each year of assessment on the total income of every individual, with certain exceptions, or corporation sole or body of individuals who are deemed to be resident for that year in the relevant state under the provisions of the PITA. Section 2(2) of the PITA is to the effect that as it relates to individuals, tax for any year of assessment may be imposed only by the state in which the individual is deemed to be resident for that year under the provisions of the First Schedule to PITA. The Section provides that: “In the case of an individual, other than an itinerant worker and persons covered under subsection (1)(b) of this section, tax for any year of assessment may be collected only by the State in which the individual is deemed to be resident for that year under the provisions of the First Schedule to this Act and in the case of persons referred to in subsection (1)(b) of this section, tax shall be impose by the Federal Board of Inland Revenue.”
Theories of Tax Jurisdiction
For a proper grasp of determination of residence under the PITA, it is essential to first understand the theories of tax jurisdiction so as to be able to properly situate why it is important to determine residence for tax purposes. There are two theories of tax jurisdiction, to wit: Source Jurisdiction and Residence Jurisdiction. These will be discussed briefly below.
Source jurisdiction occurs when income is taxed under the tax law of a country because of a nexus or link between that country and the activities that generated or produced the income. It is a general practice that all countries imposing income tax exercise jurisdiction over income arising or having its source in their country.
A country may also impose tax on income because of a nexus between the country and the person earning it. A jurisdictional claim over income based on a nexus between the country making that claim and the person subject to tax is called “residence jurisdiction”. It is the global income or worldwide income of persons who are subject to residence jurisdiction that is being taxed without reference to the source of such income.
Determination of Residence
By the combined reading of Section 2 (2) of the PITA and the provisions of the First Schedule to the Act, 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 determining the residence of an individual for the purposes of imposition of a tax on his income, the PITA has divided the incomes of an individual into three (3) categories, for easy determination. These will be looked at in the subsequent paragraphs.
With regard to an individual whose only source of earned income is his pension, and who had a place of residence or principal place of residence, he will be deemed to be resident for that year in the territory in which that place or principal place of residence is. Paragraph 1 of the First Schedule to the PITA defines “Place of Residence” to mean: “in relation in relation to an individual to mean a place available for his domestic use in Nigeria on a relevant day, and does not include any hotel, rest-house or other place at which he is temporarily lodging unless no permanent place is available for his use on that day.” Hence, the residence of that person, for the purpose of taxation, will be where that individual has a place of residence or principal place of residence during the year in question. It is the state or the territory where the place of residence or the principal place of residence – whichever is applicable – that will be the taxing authority of the individual’s income. Thus, Paragraph 5(1) of the First Schedule to the PITA provides that:
An individual whose only source of earned income arising in Nigeria on the 1st day of January in a year of assessment was a pension, and who had a place or principal place of residence on that day shall be deemed to be resident for that year in the territory in which that place or principal place of residence was situated on that day.
Other Earned Income
As regards earned income of an individual, Paragraph 6 of the First Schedule makes provisions for the state that will be responsible for taxing and collecting the tax payable on the earned income of an individual. There is however two (2) provisos to that paragraph. Paragraph 6 to the Schedule provides that:
An individual (other than a corporation sole or body of individuals) who has a source of earned income in Nigeria for a year of assessment, other than an employment or a pension, shall be deemed to be resident for that year in the territory in which he had a place or principal place of residence on the 1st day of January in that year.
Provided that –
- if the source of the income is first acquired by the individual during the year of assessment, and he had no place of residence on the first day of that year, he shall be deemed to be resident for that year in the territory where he first establishes a place of residence during that year; and
- in any other case, the individual shall be deemed to be resident for that year in any territory from which any part or the whole of his earned income arising in Nigeria is derived, if the income is derived from more than one territory.
Essentially, this paragraph provides for a situation where, if at the time of acquiring the income the taxpayer does not have a place of residence, he will be deemed to be resident for that year of assessment in the territory where he first establishes a place of residence.
Paragraph 6 also envisages instances where it is very difficult to determine a taxpayer’s place of residence or principal place of residence or where income is derived from more than one territory. In such instances, the individual will be deemed to be resident in any territory from which any part or the whole of his earned income is derived in Nigeria.
With regard to an individual with an unearned income, the place or principal place of residence is determined by identifying where the individual’s place or principal place of residence is located on the 1st day of January of the year when he earned such unearned income. Thus, Paragraph 7 of the First Schedule provides, shorn of the proviso, as follows:
An individual (other than a corporation sole or body of individuals) who has no source of earned income in Nigeria for a year of assessment but who has one or more source of unearned income in Nigeria for that year shall be deemed to be resident for that year in the territory in which he has a place or principal place of residence on the 1st of January of that year.
In light of the above, it is clear that for the purpose of determining the residence of an individual for tax purposes, it is not where the place of work of the concerned individual is that will determine the state that will collect tax. Rather, it is the place of residence or the principal place of residence as of 1st of January of the tax year that will determine which state will collect the tax.
In the scenarios above, I need not ask which state between Lagos and Ogun will be responsible for collecting Akindele’s taxes. This equally also applies to the musician. We urge the relevant state internal revenue agencies to do a lot of tax awareness for employers and taxpayers in general so as to sensitize them on this issue. This will go a long way in increasing the revenue of those states that share boundaries. This even becomes more important as the Lagos - Ibadan railway and Iju-Abeokuta railway constructions will make it easier for people to live in Abeokuta or Ibadan and work in Lagos.
Dimeji Sarumi is a Senior Associate with The New Practice
 B.J. Arnold & M.J. Mclntyre, International Tax Primer, (Netherlands: Kluwer Law International, 1995) p.19
 “Earned income” is defined in Paragraph 1 of the First Schedule to PITA as; “in relation to an individual, means income derived by him from a trade, business, profession, vocation or employment carried on or exercised by him and a pension derived by him in respect of a previous employment.”
 “Principal place of residence” in relation to an individual with two or more places of residence on a relevant day, not being both within any one territory means –
- In the case of an individual with no source of income other than a pension in Nigeria, that place of those places in which he usually resides;
- In the case of an individual who has a source of earned income other than a pension in Nigeria, that place of those places which on a relevant day is nearest to his usual place of work;
- In the case of an individual who has a source or sources of unearned income in Nigeria, that place of those places in which he usually resides.