Taxation of Expatriates in Nigeria: An Incentive or Disincentive to Foreign Investment in Nigeria

Introduction

It is a common practice for both Nigerian and Foreign companies to engage the services of expatriates. Companies who want to expand internationally employ expatriates for the following reasons:

Shortage of talent: According to the Global Talent Competitiveness Index 2023 rankings ¹ published by INSEAD, in collaboration
with Descartes Institute for the Future and Human Capital Leadership Institute (HCLI), Nigeria ranked 104 out of 134 countries in terms of global competitiveness of talent. Using expatriate employees broadens the pool of qualified hires for international expansion.
To save time and money: It takes time and money to train qualified local candidates and provide them with the know-how and cultural orientation they need to start working right away. Many organizations will prefer moving a high-performing employee to a new location to expedite the expansion process. It will also reduce the time to market.
Uniformity: Expatriates help maintain workplace uniformity across markets by bringing existing office culture and procedures to a new overseas location.

TAXATION OF EXPATRIATES IN NIGERIA
Taxes are compulsory contributions imposed by a local, state, or federal government on people or businesses. Taxes are imposed to fund government operations, such as public infrastructure and services like roads and schools and as a way to manage negative externalities.
The taxation of expatriates in Nigeria is governed by the Personal Income Tax Act (PITA). ² There is no special legislation for the taxation of expatriates in Nigeria. Expatriates and Nigerians are subject to the same tax obligation on their personal income.
The income of an expatriate is deemed to be derived from Nigeria if
(a) the duties of the employment are wholly or partly performed in Nigeria, ³
Or
(b) the employer is in Nigeria or has a fixed base in Nigeria unless the duties of the employment are wholly performed, and the remuneration paid, in a country other than Nigeria except during a temporary visit to or leave in Nigeria. ⁴

The income derived from employment duties wholly or partly performed in Nigeria is taxable except if the following conditions are jointly met:
(i) the duties are performed on behalf of an employer who is in a country other than Nigeria and the remuneration of the employee is not borne by a fixed base in Nigeria ⁵
(ii) the employee is not in Nigeria for a period or periods amounting to 183 days or more in any twelve month period commencing in a calendar year and ending either within that same year or the following year (inclusive annual leave or temporary period of absence) ⁶ ; and
(iii) the remuneration of the employee is liable to tax in that other Country with which Nigeria has a double tax avoidance treaty ⁷ ;

EXPATRIATE EMPLOYMENT LEVY (EEL)
On 27th February 2024, the President of the Federal Republic of Nigeria launched the Expatriate Employment Levy (EEL) which has since been suspended to allow for further consultation with stakeholders. It imposes a mandatory annual levy of $15,000 for a director and $10,000 for other employees on organisations employing expatriate workers. The Levy was launched with the following aims ⁸ :

a. To encourage companies to prioritize hiring local talent
b. To manage and monitor the number of expatriates being employed in different sectors, ensuring that their presence aligns with the country’s economic and developmental goals.
c. To incentivize companies to invest in training and developing local talent rather than relying on expatriate workers due to the cost implications of the levy.
d. To enhance the skill set of the local workforce through skill transfer, potentially improving the overall productivity and competitiveness of Nigerian workers.

The levy was suspended after public outcry on its counterintuitive nature. The imposition of a new levy on companies employing expatriates appeared to be inconsistent with the goal of the government to promote Foreign Direct Investment (FDI) at a time when the country is in dire need of it. Attracting Foreign Direct Investment has been a major policy goal because of the numerous predicted development advantages. An increase in foreign investment portends economic growth, human capital development,
technology transfer and exchange rate stability.

TAXATION OF EXPATRIATES AS AN INCENTIVE OR DISINCENTIVE TO FOREIGN INVESTMENT IN NIGERIA
The famous quote by American statesman Benjamin Franklin that nothing is as certain as death and taxes still holds up today. Every nation has a tax system in place to finance governmental operations as well as public or established national demands.
When making investment selections, investors frequently highlight how unimportant the tax system is in comparison to other factors. ⁹ Businesses start by assessing a nation’s fundamental institutional and economic conditions. Although developing economies are attractive to foreign investors due to the low labour cost, large-scale investment is hampered by a number of factors, including political instability, lack of human resources, inadequate raw materials and the lack of a clear legal framework for a market economy. These drawbacks cannot be solved by tax incentives alone.
There is strong evidence that multinational investors’ judgments about where to locate their operations are influenced by the respective taxation of highly skilled expatriates. This is because the standard contract structure for placements abroad presumes that the employer would cover all gross labour costs, including personal income taxes and other related expenses. ¹⁰
To encourage foreign investment, countries like Sweden, Netherlands and Finland have a special tax regime for expatriates. This special tax regime aims to lower costs for companies that hire expatriates while also attracting highly skilled workers. In the Netherlands, there’s a special tax regime called the “30% ruling” that allows specially skilled expatriates to have 30% of their gross
income for the first 20 months, 20% for the next 20 months and 10% for the remaining 20 months paid out without being subject to income tax. ¹¹ Additionally, clear laws that remain stable over time are necessary to meet the expectation of investors that they can predict the tax implications of their actions. Where the tax laws are unclear and revised frequently, it will raise the perceived risk of starting large, capital-intensive projects and investors will find it challenging to plan ahead. ¹² Investors desire consistent interpretation and enforcement of tax laws. The administration of the law is just as important as the law itself.

CONCLUSION
Tax incentive programs are generally only available temporarily, and they are rarely sufficient to subdue a negative political or economic climate. Although taxes are only one aspect of a very complex decision, tax policies impact the incentives to engage in foreign investment as well as the financing of the investment, since the tax systems of both the home and the host country influence the final profit on foreign direct investment. ¹³

References

1 INSEAD (2023): The Global Talent Competitiveness Index 2023: What a Difference Ten Years Make What to
Expect for the Next Decade Fontainebleau, France
2 Personal Income Tax Act, 2011 CAP. P8, Laws of the Federation
3 Section 10(1)(a) of the PITA
4 Section 10(1)(b) of the PITA
5 Section 10(1)(a)(i) of the PITA
6 Section 10(1)(a)(ii) of the PITA
7 Section 10(1)(a)(iii) of the PITA
8 Expatriate Employment Levy (EEL) Nigeria, https://eel.interior.gov.ng/welcome
9 OECD, Tax Expenditures: A Review of the Issues and Country Practices (1984); OECD, Tax Expenditures:
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(ZEW), Frankfurt a.M. und Mannheim
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12 Tax Law Design and Drafting (volume 2; International Monetary Fund: 1998; Victor Thuronyi, ed.) Chapter
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