The new employment tax reliefs: Matters arising

The Federal Government of Nigeria, through the apex tax administrative body, the Federal Inland Revenue Service (FIRS), recently published what it called ‘Companies Income Tax Exemption Order 2012’, through which it introduced three new tax exemptions, namely, the Employment Tax Relief, the Work Experience Acquisition Programme Relief, and the Infrastructure Tax Relief. This fits into the sweeping reforms in Nigeria’s tax system that started during the Olusegun Obasanjo era and sustained by subsequent administrations.

Until recently, taxation was hardly an issue of serious concern to both the governments and taxpayers in Nigeria. This is an issue that makes or mars governments in advanced climes. Enormous attention is paid to proposed tax policy in the campaign manifestoes of presidential aspirants. Every John and Joe looks at the tax implication of everything.

However, the situation has been changing for better in Nigeria in the last one decade, credit to the erstwhile boss of the FIRS, Ifueko Omoigui, who spearheaded the reforms and sensitisation. The various tax laws have been undergoing amendments in light of changing realities of our society. The Personal Income Tax (Amendment) Act (PITAM) 2011, the self-assessment regulation, even if it leaves a couple of loopholes, the robust attention given to fiscal framework in the Petroleum Industry Bill, and now the introduction of new tax reliefs, all sit well into the bigger picture of improved tax regulation and administration in Nigeria.

The result of all these activities has been improved revenue to the government as evidenced in the doubling of government revenue from taxation year on year, never mind the fact that there has not been commensurate improvement in the welfare of citizenry. The growing consciousness in taxation in Nigeria has nonetheless been a win-win phenomenon to a reasonable extent. Just as government’s net now captures more revenue in taxation, jobs have also been created for professionals. Many organisations now have dedicated tax desks and units unlike before, many consultants now have their hands full with jobs, just as the tax authorities have needed to absorb more people to cope with the rising tax activities in the country.

By the newly released Companies Income Tax (Exemption of profits) Order 2012, the government obviously seeks to encourage absorption of Nigerian graduates into companies’ workforce as well as promote job security and retention. Paragraph 1 sub-paragraphs 1 and 2 of the Order created the ‘Employment Tax Relief’ thus: “As from the commencement of this Order, any company, with a minimum net employment of ten employees of which sixty percent are employees without any form of previous work experience within three years of graduating from school or any vocation within the assessment period, shall enjoy an exemption of five percent of assessable profits (subject to a maximum of gross salaries paid to the qualifying employees) in the assessment period in which the profits were generated. The Tax Relief granted under paragraph 1 of this paragraph shall be known as Employment Tax Relief.”

The Order further defines ‘employee’ as “only Nigerians actively employed in Nigeria by the company on a full-time basis, who do not hold any other employment and whose employment duties are primarily discharged in Nigeria” and ‘net employment’ as “the difference between incoming and outgoing employees of the company within the assessment period.”

This means that an organisation with, say, fifteen joiners and five leavers in an assessment period (usually twelve months except in case of commencement or winding up), is ordinarily qualified for this relief, provided sixty percent of the ‘net employment’ have no previous work or vocation experience within three years of leaving school. Good intent, but there are a couple of questions that arise here.

There is a possible question of what constitutes ‘graduating from school’. If a new recruit finishes his first degree three years ago but enrols for Masters immediately, finishes Masters programme last year and a company employs him this year, for the purpose of qualification for this relief, which of the ‘graduations’ is applicable? First degree? Second degree?

Although many Nigerian companies are reactive, rather than proactive, to tax planning activities, the ones that consciously seek to benefit from this relief may have their recruitment behaviour affected.

Nevertheless, the intent of this provision is noble. I see banks as the biggest losers in this new tax-saving window. Except for a couple of them, most Nigerian banks have had negative net employment in the last three to four years. Maybe this may mitigate the trend.

Sub-paragraph 3, which created the ‘Work Experience Acquisition Programme Relief’, seeks to achieve job security thus: “Any company with a minimum net employment of five new employees and retains such employees for a minimum of two years from the year of assessment in which the employees were first employed shall enjoy an exemption of five per cent of its assessable profits in the assessment period in which the company qualifies.”

New employee, according to the Order, refers to “any full-time employee (as defined earlier) who is being offered employment by the company for the first time in any capacity.”

This encourages retention of employees and gives the company a reason to recruit more wisely, ensuring only applicants who have very high likelihood of not only being confirmed after six to twelve months but also retained in the medium to long term. I know companies that many Nigerian graduates use only as stepping stones and quit after a couple of years or less.

This Order coming under the framework of the Companies Income Tax Act (CITA) means it is not applicable to companies engaged in ‘petroleum operations’ (upstream companies) who are taxed under the Petroleum Profits Tax Act (PPTA). But with the all but finalised Petroleum Industry Bill (PIB) seeking to repeal the PPTA and subject companies engaged in petroleum exploration and production to CITA too, the passing of PIB may see them also reaping the benefit.

Still, it may not be eureka yet for them, especially the indigenous operators, many of which have understandably preferred to ‘poach’ experienced hands from the IOCs at their growing phase. An indigenous player in the industry hardly has the luxury of time to populate its workforce with new employees who never had previous work experience somewhere and require training. They prefer to recruit experienced hands from within the industry, which may make the tax reliefs elusive.

Yet, in the final analysis, this approach to tackling unemployment and job insecurity may only be capable of taking not more than a drop in the unemployment monster-infested ocean that is Nigerian society; it is nonetheless a step in the right direction. If not for anything, it shows there is a new thinking in government that taxation can be used in ameliorating practically every social and economic malady.

A more impactful approach to solving the unemployment cankerworm will require a potpourri of inter-ministerial measures.

 

Source: BusinessDay