The Lagos State Internal Revenue Service (LIRS) has issued public notices in various national newspapers since August 2017. The notices are aimed at providing clarity to taxpayers on Lagoa State Internal Revenue interpretations of provisions of the Personal Income Tax Act, as amended (PITA) on specific issues and the level of tax compliance required of every employer and employee in Lagos State.
Our previous post on Lagos State Internal Revenue Service Public Notice on Tax Matters - Part 1, discussed the Taxation on Employee Loan and What constitutes Reasonable Removal Expenses for the purpose of Tax Exemption. click here for part 1: Lagos State Internal Revenue Service Public Notices On Tax Matters – Part 1
You should carefully look into the second part of this article as it discusses the following Tax matters:
3. PAY AS YOU EARN (P.AY.E) ON EMPLOYEE OUTSOURCING ARRANGEMENT
This circular explains employee outsourcing arrangement as workers who are not part of the ultimate employer's workforce or employees who are on secondment through an outsourcing firm or labor broker. In this sense, such employees will be legal employees of the outsourcing firm but economically employed by the ultimate employer.
The employee remains on the payroll of the outsourcing firm. Section 81 and 82 of PITA, paragraph 2(3) of the operation of Pay As You Earn Regulations states that, where a person other than the employer managed staff e.g., administers the legal documentation and payroll of the staff, that Company would be required to provide information of the staff to the tax authorities and also deduct the applicable PAYE.
In a nutshell, the outsourced firm must deduct PAYE and fill returns of the employees. Please note that it is PAYE and Withholding Tax. The standard for calculating employees PAYE must be strictly followed and returns duly filled as at when due.
4. WITHHOLDING TAX ON EMPLOYEE OUTSOURCING ARRANGEMENTS AND OTHER BROKERAGE ARRANGEMENTS.
In this Lagos State Internal Revenue Tax Matter, employee or workers who are not part of the employer’s regular workforce may be hired through an outsourcing firm or labor market.
Legal Basis
Under the Companies Income Tax (rates etc. of Tax Deducted at source (Withholding tax)) regulations, a deduction is required to be made from payments for any activity or service and the deductions shall be regarded as tax due on the payment and not additional cost on the contract.
In the public notice on Withholding Tax, the compliance requirement of the Ultimate employer relates to the deduction of WHT from qualifying payments to the outsourcing firm. The amount liable to WHT is the earned by the outsourcing company on service. However, this would only be the case if the margin is clearly specified on the face of the invoice with clear documentary evidence of the salary cost incurred and evidence that PAYE tax has been properly accounted for.
Disclaimer.
Please know that the information above is subject to review at any time and it is not directed to an individual, a body or an entity. Professionals should be engaged in the Payroll/PAYE Management of your establishment.
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