LIRS’ Public Notices on PAYE and WHT on Employee Outsourcing and Other Labour Brokerage Arrangements

In addition to its Public Notices which we have previously discussed in our newsletters, the Lagos State Internal Revenue Service (LIRS) has also recently issued two separate Public Notices on the personal income tax implications and administration of employee outsourcing arrangements and other labour brokerage arrangements. These Public Notices are available for download below:

  1. Pay-As-You-Earn (PAYE) on Employee Outsourcing Arrangements
  2. Withholding Tax (WHT) on Employee Outsourcing Arrangements and Other Labour Brokerage Arrangements

According to the LIRS, “in an employee outsourcing arrangement, workers who are not part of the ultimate employer’s regular work force are employed through an outsourcing firm or labour broker.” e.g. expatriates in an oil company, security personnel, cleaners and other general office duties personnel.

In its economic substance, such workers are deemed to be employed by the ultimate employer while in its legal form, they are employees of the outsourcing firm. It is usually the duty of the outsourcing firm (in practice) to carry out all such administrative functions as it relates to these employees while the ultimate employer pays the outsourcing firm a fee which covers both the service rendered and the employee salaries. The employees’ salaries are then paid to them by the outsourcing firm.

LIRS posits the following in the two Public Notices:

  1. Under an employee outsourcing arrangement, both the outsourcing firm and the ultimate employer have distinct but joint obligations with regards to PAYE and WHT. They should collaborate to ensure that all PAYE and WHT obligations are discharged. 
  • The outsourcing firm would henceforth be held liable for deduction of the PAYE on the employees’ incomes and filing of the annual tax returns, as long as they are on its payroll, and the legal documentations pertaining to their employments are administered by it. Hitherto now, LIRS had adopted the position that the ultimate employer was liable for the PAYE deductions and filings. We believe that this new proclamation will make compliance in practice much easier.
  • The outsourcing firm would not be held solely liable for non-compliance with the PAYE obligations. The ultimate employer is also required to ensure that the PAYE deductions and remittances are made. This can be achieved in practice by asking the right and necessary questions or even demanding that copies of the PAYE remittance receipts and filings for these employees be sent in for sighting. 
  • Further, LIRS still maintains, albeit the pronouncement in ‘2’ above, that the ‘employer’ being referred to in Sections 81 and 82 of PITA is the ‘ultimate employer’ (as defined in the Notice), since they ultimately control and direct the employees’ time and services, and so should not be totally absolved of the PAYE obligations. The ultimate employer is therefore required to ensure that the PAYE obligations for these employees are appropriately discharged by the outsourcing firm. 
  • Incomes of employees under an outsourcing arrangement are subject only to PAYE and not WHT. 
  • The management or outsourcing ‘fee’ (as distinct from the outsourced employees’ salaries) payable to the outsourcing company on the outsourcing or labour brokerage service provided, is subject to WHT and not PAYE. 
  • The ultimate employer is mandated, under the relevant income tax laws, to withhold tax from the ‘fee’ element of the invoice while making payments on the outsourcing company’s invoices.
  • While sending invoices to the ultimate employer, the outsourcing company should state separately, the outsourcing or management ‘fee’ portion and the ‘employee salary’ portion of the total invoice, to enable WHT deduction only on the ‘fee’ portion. Failure to separate the components of the bill would lead WHT deduction on the full invoice value. * Please note that the Value Added Tax (VAT) component of the invoice must also be stated separately.
  • The outsourcing company must be able to provide justification for the ‘employee salary’ portion of the invoice by keeping appropriate records. It must also be able to account for full PAYE payment by all affected employees. In case of failure to provide verifiable records with regards to these, LIRS posits that it would demand for WHT deduction (where the tax is payable to Lagos State) on the full invoice value.