In today’s business world, attraction and retention of talents have become the most singular important success factor. Serious organisations compete against each other as employer of choice by offering compensation packages that present them as having the best of benefits and perks for talents. For many job-seekers, the most important factor in considering a job offer is salary. For others, job security, organizational reputation, conducive and/or flexible working conditions are equally important.
One of the ways by which organisations demonstrate their people-centricity value is in the area of benefits and perks provided to their employees. This is on the backdrop of the understanding that emolument provided to employees comprises cash and non-cash benefits. The non-cash benefits, those perks and other benefits, are usually referred to as Benefits-in-Kinds (BIK). BIK generally includes all form of benefits offered to employees outside cash incentives. This includes the provision of assets (such as cars and household equipment), accommodation, paid vacation, utilities, etc.
While BIK may be offered to every level of staff in an organisation, it is customary that senior levels in an organisation are the more common beneficiaries of high-value perks. While lower level employees will typically prefer cash (and monetized) benefits, senior employees enjoy perks in the form of official car, company provided accommodation, company provided furniture, club subscription, free interest loan, and other asset-based employment benefits in addition to cash incentives.
Section 3(1)(b) of the Personal Income Tax (Amendment) Act 2011 (PITA), defines chargeable income as “any salary, wage, fee, allowance, or other gain or profit from employment including compensations, bonuses, premiums, benefits, or other perquisites allowed , given or granted by any person to any temporary or permanent employee…”. The implication of this provision is that every form of employment benefits, whether cash or BIK, are taxable.
The fact that BIK are taxable is reinforced by the provisions of Section 33 (2) of PITA which defines gross emolument as , “ wages, salaries, allowances (including benefits in kind), gratuities, superannuation and other incomes derived solely by reason of employment.
Based on the provisions of PITA, any BIK provided by the employer to the employee is taxable. But, how are BIK valued for tax purpose?
The value at which BIK is subject to tax depends on the nature of the benefits and the manner of their provision. Generally, where an employer incurs any expense in the provision of any benefit or perquisite to an employee, the employee is deemed to have enjoyed taxable benefits.
Where an employee is provided with assets which continue to belong to an employer for his own (employee) benefit, the employee shall be deemed to be in receipt of annual benefits of an amount equal to 5% of the cost of the asset for tax purposes. In the case, where the cost of the asset cannot be ascertained, 5% of the market value at the time of the acquisition as determined by the relevant tax authority will constitute the taxable benefit to the employee.
There are practical challenges in situations where the assets serve dual purposes – partly for private purposes and partly for official usage. In this case, the value of the benefits is apportioned based on the ratio of usage. The process of apportionment may become highly subjective and tax authorities exercise their discretion.
For other benefits such as payment of rent for the employee or hire of assets, the employee is treated as being in receipt of the amount paid to the landlord or the hirer and consequently taxable. However, in the case of living accommodation, the employee shall be deemed as being in receipt of emoluments equal to the annual value of the premises as determined for the purpose of local rates under any law governing assessment of local rates or as determined by the relevant tax authority.
The practical challenge with determining annual value of premises for company owned houses provided as living accommodation for the employee is the lack of official rates from the government. The discretion given to the relevant tax authority to determine the annual value of the premises may not serve the interest of taxpayers. It puts taxpayer at the mercies of tax authorities on the valuation of benefits.
Where the employer incurs annual expense for providing utilities and other benefits, the employee would be deemed to be in receipt of the amount of the annual expense. Issues may also arise where an employer provides its employees with its products or services at zero or discounted price. Should such be regarded as taxable BIK or will that be seen as normal business promotional expense?
Another challenge with the provision of BIK is in the determination of other statutory deductions which are typically based on the cash allowances (even though, some of the BIK could have been offered in place of certain cash allowances). For instance, where an employee is provided accommodation and official car, how is the pension contribution (which is a function of the basic salary, transport and housing allowances) determined in this situation?
Pension Reform Act 2004 (“PRA” of “Act”) did not specify the inclusion of BIK for housing and transport in determining the employees’ pension. The practical challenge here is how (if required) to arrive at a fair value for monthly housing and transport allowance equivalent for determining the pension contribution, which will be equitable to both the employer and employees. In practice, pension contribution is only calculated on basic salary and cash allowances for housing and transport.
There is also the perennial problem of persuading the tax authorities where taxpayer presents copies of contracts/letters of employment of their expatriates, that the contracts/letters of employment disclose wholly the entitlement of the expatriates in Nigeria. This often protracts closure of tax audit exercises where this becomes an issue.
In order to ensure that the position of employees are clearly determinable and to avoid unfavorable discretions by tax authorities, employers should clearly define the elements of employee remuneration which constitute BIK and apply appropriate tax treatment to ensure that it does not become unduly exposed to additional tax liability as a result thereof in the event of an audit exercise by the State tax authorities.
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