I have been Overtaxed! Can't you see it?

I really didn’t know what to expect from him! I was about starting the weekly senior management meeting of the firm when his call came through. His name is Mr James Bagbo, the Group Managing Director and Executive Chairman of the Bagbo Group, one of the most successful and biggest indigenous conglomerate. ‘Good morning sir’ I started calmly in my usual characteristic manner. ‘Sam, I need you here in my office right away!’ he started, with a seemly angry and frustrated tone. ‘I don’t understand what is going on in this country any longer!!!’ he continued quickly before I could gathered myself together. ‘I contribute so much to this economy and should not be treated this way. Sam, I create employment, pay more than enough in taxes, levies and licenses! I even contribute towards social and infrastructural development of this nation. So I don’t understand… I don’t, at all….’ He soliloquized more than speaking to me. ‘Alright sir, I will be there shortly, I’m leaving the office now’. I managed to say after getting myself a bit.  My mind wandered around what could have made Mr Bagbo so angry this morning, to the extent of bashing out at me like that. I was shocked, angry and amused at the same time. I wanted to respond, but my consulting instinct, which I had developed over the years, acted otherwise. I had known him for a while and we have developed a very strong bond and client relationship.    

‘Whatever it is must be very important’ I mumbled within me as I stepped into his office complex. A five story building, housing the corporate headquarters of Bagbo Group. The high Chinese walls and gates undermined its beauty. From the entrance, to the parking lot, there stood an unusual artistic interplay of nature and engineering at its peak. The modern marble floors that terraced the stairs (he actually told me that it was German concrete floor polishing), the calisthenic arrangement of the Italian leather furniture and fittings, and the ornamental adornment of the corridors are but a tip of the iceberg.  His office was a presidential taste. A full 20’’ by 12‘’ floor space with interlocking PVC and direct mount ceiling grid, with a sun like chandelier and crystal clear lightening from the LED panel that paraded the ceiling. The full set of Italian leather sofa at the reception corner of the office can’t go without notice. His table was the usual executive type, with his light weight, thin Mac Book lying lazily thereon (a friend later told me that the going price of the laptop was $1,000!).

‘Thank you for coming, Sam’. He said, as I moved closer to his table. ‘and thank you for making time out from your management meeting’ He quickly added before I could respond to his earlier comment. ‘You are welcome, Sir’ I managed to respond, making space for myself on the visitors seat. ‘I know the issue must be very critical to you, and must have made you angry’ I quickly added.

‘Can you imagine!?’ He reverberated suddenly from his tea table where he wanted to take a cup of coffee. ’Can you imagine, Sam?’ He continued, dropping the tea cup in his hand to reach for a document from his shelf. ‘This is highly preposterous, ridiculous and unfair’ He continued. My mind was racing fast, trying to catch up with the melodrama as well as the humongous grammar coming out of him with every sentence spoken. ‘This is counter-productive and a disincentive to the natural entrepreneurial spirit of the diligent Nigerian’ he voiced out again holding some papers that look like letters in his hand. ‘Check it yourself, Sam. Check it…’ he said, as he passed the papers on to me. I hastily collected the papers from him, not knowing what the content would be. My eyes quickly scanned through the letters, top to bottom. It was an assessment from the Lagos Internal Revenue Service served on him and his company for payment of outstanding PAYE taxes. A whooping figure of N50m is been demanded from the company for 2015 financial year as outstanding liability.

After reading through, I looked at him slowly, expecting him to start up a conversation. He was still panting heavily, looking like a rat whose balls were strapped between a mouse trap. ‘I have been overtaxed, Sam! .Can’t you see it?’ he voiced out strongly again. ‘How can they say am owing this sum? How could they have attributed this salary to me?! Where is this coming from?!! I cannot pay this oo!! You have to do something about this!!!’ He reiterated out with strong gesticulations with his right hand’. ‘Okay Sir.’ I said in a starting mood. ‘I would look into this and right every wrong sir’. I repeated giving him some comfort. Mr Bagbo is one of my most amiable client. I have handled the corporate tax of his group for many years but had never been involved with his personal income taxes. Throughout my years of handling his company, he has been very open and has driven the company to 100 percent compliance. Thus, I was not afraid of assisting him in getting this right with the LIRS demand notice.

My initial review of the assessment showed that something was not adding up. Additional N50m tax liability after paying approximately N100m in PAYE taxes to the state for the same year does not add up. A closer look at the detailed computations attached showed that a total salaries and remuneration of N750m was attributed to the company as being paid for the year with about N150m attributed to Mr Bagbo for the same period. This looks awkward, considering the fact that the turnover of the company for the same period was N1.6bn and total number of staff in employment for the period was 90. No company would normally pay close to fifty percent of its turnover as remuneration.

Further investigations revealed that the assessment was based on the best of judgment (also known as deemed income basis) of what the staff of Bagbo Group could be earning. This assessment normally reflects the industrial average remuneration amount of senior management level of relevant sector, adjusted for inflation and other macroeconomic factor. It is premised on the provisions of sections 54(2)(3), 81 and 82 of the Personal Income Tax Act Cap P8 LFN 2004 (as amended). The LIRS usually invoke this section where no information has been made available to it or has reasons to believe that the assessee company has not fully disclosed the relevant information. And in the general principle of tax laws, the onus of proof of the correct amount of remunerations and taxes lies with the taxpayers. Thus he (the taxpayer) is required to make available, all information that would prove the correct amount of remuneration paid during the period.

Information usually requested includes, the audited financial statements, staff payroll (fully reconciled to figures in the financial statements, evidence of remittance of reliefs claimed (pension, NHF, Mortgage interest, Life Assurance, NHIS etc), evidence of PAYE tax remittance, employment and resignation/discharge letters (for those who worked for less than twelve months), third party evidence of salaries/remuneration payments (bank instructions, payment schedule certified by the paying bank), and in certain circumstance, evidence of residence in a particular state.  The items listed are the commonest request made on taxpayers by tax authority, albeit not exhaustive.

I went back to Mr Bagbo to achieve two things. First, to discuss my findings with him based on the information provided to me by his staff. Secondly, to find out his true remuneration from his company. ‘I don’t understand you, Sam’ the man started, removing his eye glasses. ‘I own my company, I source for the client, manage it and then you question me about my remuneration? He concluded, putting out his two hands towards me. ‘Not exactly sir’, I explained, racking my brain on how best to explain this to him. ‘Let’s start this way sir’ I quickly continued. ‘Who is responsible for all the benefits attached to your office? I asked, looking straight into his eyes. ‘Don’t be ridiculous, Sam’. He responded, looking startled by my question. ‘I am fully responsible!’ he shouted, almost banging his table.’I own this company 100 percent, I started it from the scratch, and I am the brain box behind its success!!!’ he further explained, now standing up to his feet, making all effort to make me understand the foolishness of my questions. ‘I didn’t mean it that way’ I replied him. ‘I was trying to know if these benefits were funded in your personal capacity or the company bears the costs and these expenses, the car, the cooks, the drivers, the gardeners among others’ I quickly chipped in. ‘Of course, the company bears it all, Sam’ He responded with a sense of pride and fulfilment, his eyes blooming with excitement . ‘That is the essence of forming the company. The essence of becoming an entrepreneur’. He continued. ‘In fact, the school fees of my two sons in Universities of Leicester and Readings are paid directly from the company’s account.  ‘ Whao, Whao, Whao,’ I said, laying back to my seat. ‘There is a little problem there Sir.’ I started, as professionally as much as I can. ’All these personal expenses would be attributed to you as part of your remuneration and you will be assessed to tax on the total amount. Except for the assets which would be taxed at 5% of the cost of purchase, all other benefits are fully taxable in your hands as additional remuneration’. I managed to conclude. ‘Really? Sam!’ he started in response. ‘Which kind of tax do we practice in this country for God’s sake? So I cannot take any benefit from my sweat again, without these politician coming after me!!’  He started his soliloquy again. ’Okay, go do your calculations and let me know what my position is. I trust your judgement’ He said reluctantly. ‘That doesn’t mean your true liability would be exactly as this Sir’ I added, comfortingly. ‘But wait’. He responded suddenly. ’Also include what I can do to ensure am not too exposed like this again!’ He said with a final note. ‘No problem Sir’ I replied him. My revised computations estimated the additional tax liability of N20m as against N50m. An amount Mr Bagbo was happy with and promptly remitted.

It is important that employers and employees alike understands these three important issues relating to employment remunerations. First, both cash and non-cash remunerations are liable to tax. There is therefore a risk of under assessment to tax where employee remuneration involves significant non-cash benefits. Second, any under assessment of employees would be demanded from the employer irrespective of the contractual arrangement between the two parties. Lastly, the onus of proof, that correct and full amount of tax has been paid on employees’ remuneration lies with the employer. Where the employer has fully proven his case and tax authority rejects its position, the employer can take its case up to the tax appeal tribunal through a notice of appeal.                

Employers are also advised to carry out an end of the year review/health check to assess the level of compliance, before the books are closed for the financial year. This will assist in identifying any lapses or oversight as well as ascertain the amount of tax liability outstanding. In carrying out a typical check, you can make use my PAYE calculator, designed for such purpose, to test the correctness of such computation. You input your payroll/remunerations details, and it correctly calculates your net pay, statutory deductions (pension, NHF etc), PAYE and net amount receivable. It is easy to use and can be downloaded on your computer here. However, it can only be used to process a single employee’s data at a time. Let me know how useful you find the calculator.

Before I conclude, I also want to invite you to a one-day training on the taxation of real estate and property business on Wednesday, 21st September, 2016 at Civic Centre Victoria Island, Lagos. The training would expose you to the tax principles and planning skills required to successfully navigate the real estate sector. More information on the training can be found here.

Lastly, I have always advocated that the best form of tax planning is compliance, all others are secondary. No matter how many times it is tossed, the truth remains the same. In the words of Learned Hand, ‘…nobody owes any public duty to pay more than the law demands…’ You are only required to pay the correct amount of tax on your income, nothing more or less.

Until next time, enjoy your weekend and stay compliant.

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