Thursday,August 16, 2018/09:45AM/Deloitte

Nigeria operates a federal system ofgovernment. Governing bodies at the centre differ from governing bodies in thesub-units (states). This dichotomy also impacts tax administration, with theFederal Inland Revenue Service (FIRS) overseeing taxation of companies,non-resident individuals etc., and State Boards of Internal Revenue (SBIRs)administering taxation of individuals resident within its territory.

This tax administration dichotomysometimes degenerates into controversies on the authority with taxing rights insome situations – e.g. income of workers exercising their employment duties onoffshore oil-drilling platforms on Nigeria's territorial waters.

Territorial waters generally mean thewaters under the sovereign jurisdiction of a nation. Internationally and basedon the Territorial Waters Act (TWA), Nigeria's territorial waters (in terms ofownership, control, and proprietary right to land) include every part of theopen sea, not exceeding 12 nautical miles from the coast of Nigeria. Thisjurisdiction is under the exclusive purview of the Federal Government (FG) andonly Federal laws are applicable there.

Personal Income Tax Act (PITA), which isa federal legislation applies within Nigeria's territorial waters. Generally,section 2(2) of PITA, provides that personal income tax (PIT) be paid to theState where an individual taxpayer resides. Therefore, it becomes imperative toascertain the relevant “State” with taxing rights on territorial watersconsidering it is under the control of Federal Government. There appears to beno direct legislation at this point to ascertain the relevant State. However,we can draw an analogy from the provision of Allocation of Revenue (Abolitionof Dichotomy in the Principle of Derivation) Act 2004 (ARDPDA), which providesthat “the two-hundred-meter water depth Isobaths. contiguous to a State of theFederation shall be deemed to be a part of that State,” when determiningresources from the states in accordance with Nigeria's constitution.

Although ARDPDA was enacted for anotherpurpose, it can safely be assumed that for PITA administration purposes, aState includes territorial waters close to it. This however does not solve thepotential issue on taxing rights where the “territorial water” spans more thanone State or the employee has more than one place of residence.

Inthis regard, PITA provides that where an individual has more than one place ofresidence in different states, PIT is payable to the State where he has hisprincipal place of residence by 1 January of the year or soon thereafter. TheFirst Schedule of PITA provides tiebreaker rules in determining an individual'sprincipal place of residence. Relevant rules are evaluated below vis-a-visprobable scenarios:

1.      One Stateof residence

Wherethe territorial water is deemed to be within one State and an offshore workermaintains actual residence in the same State, there is no need to refer to thetiebreaker rules.

 

2.     More thanone place of residence in different states

Offshoreworker who works on offshore oil drilling platforms deemed to be located in oneState and his home in a different State triggers the tie-breaker rule. In thisregard, the rule stipulates the principal place of residence of such a personto be the place where the offshore platform exists provided he has at least 49other co-workers. This comes with inherent issues described below:

Controversyaround State control over territorial waters:

Territorialwaters where the offshore platform exists are within the exclusive jurisdictionof the FG. FIRS, being the tax authority of the FG, is not empowered under PITAto collect taxes on income from territorial waters. Neither does the tax lawempower SBIRs to collect same. Ÿ Controversy around State control overterritorial waters: However, the analogy of the provision of ARDPDA describedabove may be useful in determining the relevant State boundaries for PITcollection purposes.

Spreadof platform across two states:

Workingacross multiple places during the year: Issues get more complicated where therelevant platform on the territorial waters spreads across 2 “states”. Each ofthe states may lay claim to taxing rights, thus leading to potential doubletaxation. In this regard, another tiebreaker rule could be used – (actualresidence closest to his place of work). Alternatively, contiguous states couldagree on modalities to apportion the income. In this instance, taxpayers andemployers are obliged to keep appropriate documentation. Where an employeeworks across multiple rigs or offices, the employee may be treated as anitinerant worker (i.e. worker carrying out employment in different states forat least 20 days in 3 months within an assessment year). Section 3 of PITAempowers SBIRs to impose and collect tax from an itinerant worker whereverhe/she is found during the year.

Inrecognition of possible double taxation, PITA provides that credit is given againstany tax paid to other tax authorities for the same year of assessment on anitinerant worker. This also requires collaboration by the states and properrecord keeping by the taxpayer

Lessthan 50 workers on the platform:

Wherethe offshore worker has more than one place of residence in different statesand works with less than 49 co-workers on Nigeria territorial waters, hisprincipal place of residence is determined by principal place of residenceclosest to where he normally works. In view of the inherent issue with taxingrights, it is common practice for the tax authorities of littoral states todemand PIT (under the Pay-As-You-Earn scheme) from employers of offshoreworkers, on the basis of some geographic determination that allocates a portionof the territorial waters to their States –possibly ARDPDA.

Onthe potential multiple taxation of income, possible resolution will emanatefrom automation, collaboration and information dissemination by each SBIR.SBIRs are encouraged to automate their processes (similar to FIRS' automationof corporate income taxes) to enable taxpayers retrieve their records of taxpayment (across all states) when needed. There may be light at the end of thetunnel with the recent communique by the Joint Tax Board, urging all SBIRs toautomate their processes.

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