How an Employer of Record Protects Businesses From Tax Implications?

Expanding into a new market can be frustrating as it requires a business to navigate the country’s complex tax and regulatory measures. In the process, the company can lose focus on growth and expansion. Because the HR team will be saddled with learning about the tax implications of that country, reporting requirements to file taxes, and employment laws regarding the company and employees. An employer of record can help minimize tax implications in Nigeria and sustain business growth and expansion.

Read further to find out how an employer of record provides solutions to tax responsibilities.

Is direct employment feasible?

Direct employment in Nigeria is straightforward for businesses registered under the Corporate Affairs Commission (CAC). However, such companies must still align with the Employment Act, pay taxes, and fulfill other obligations.

To employ legally in Nigeria, foreign companies have to register with the appropriate authorities and comply with tax laws, just as elsewhere their legal footprints are present. Without establishing a legal subsidiary in the country, the company can be at risk of inducing a permanent establishment.

In such a case, the employer will be liable to pay employees’ salaries, corporate taxation, and withhold taxes such as personal income and payroll tax.

Permanent establishment occurs when authorities deem a company to have a long-term presence in a country. In such cases, the company must register its name and have a legal entity in the country.

Tax implications and the need to comply

Navigating the regulatory environment in Nigeria can present challenges to resident and non-resident companies. Hence, companies must have full knowledge of the regulatory laws to maintain compliance.

Types of tax implications in Nigeria

Before intending to explore Nigeria’s workforce, it’s vital to know the types of taxes the country operates under. This will prevent encountering legal pitfalls that may affect the company’s reputation.

Company income tax

When a non-resident company has a legal entity in Nigeria, it will be subject to taxes on income made only in Nigeria. The corporate income tax (CIT) rate is fixed at 30% of profit after tax adjustment.

Companies are required to remit CIT  after assessing the preceding year’s income. Failing to pay tax returns within the time limits attracts fines and penalties. 

Personal Income tax

Resident individuals are liable to income tax on their global income. This means income earned in other countries, including Nigeria, will be subject to income tax.

Non-residents who spend a substantial amount of time in the country (183 days or more within 12 months) become liable to pay personal income tax. Employers are responsible for deducting and filing personal taxes from the salaries of their employees. Which is benchmarked at 24% of total income.

Employers remit the personal tax of workers within ten days timeframe of payment of salaries. In addition, employers remit 10% for social security contributions while employees remit 5% every month.

Value-added tax

The standard value-added tax in Nigeria is 7.5%. VAT is the consumption tax placed on goods and services that an individual or a company pays for when making a purchase.

International companies operating in Nigeria must register for VAT and place charges for the tax on all taxable supplies.

Foreign companies treat VAT as a withheld deduction and remit it to the tax authorities by a resident customer.

Employer of record solutions to tax implications

An employer of record acts as the legal employer for a company with no legal entity in a particular jurisdiction. The EOR employs and leases out workers to the client.

Though an EOR manages the employees-related tasks: payroll processing, deductions, filing, and payments of taxes, the client company controls the daily operations of the employee.

Most importantly, an EOR offers tax implication solutions to employers by assuming responsibility for all taxes. They not only take up human resources functions but also ensure that a foreign employer complies with the financial and tax regulatory laws of the country.

Permanent establishment risk solution

Engaging an employee in another country can trigger a permanent establishment when the role shifts from a temporary position to a more permanent position.

In such cases, an employer becomes subject to corporate and personal income taxation, and penalties and may have to establish a physical entity.

Hiring an employer of record to administer employment on your behalf will ensure your operations in the country are safe and compliant to prevent permanent establishment risk.

Tax liabilities solution 

An employer of record is registered under the tax authorities as the employer of labor. Thus an EOR relieves the client of everything concerning the filing of taxes, deductions, and payment of taxes.

The EOR does this by withholding taxes (such as personal income tax, payroll tax deductions, and social security contributions) from the workers’ salaries each month. 

Payroll processing solution

An EOR processes companies’ worker’s payroll consistent with the legal requirements of a country. This saves the corporation time and money in hiring an HR team in that country. 

The cost of an employer of record for tax implications solution in Nigeria

In Nigeria, hiring an employer of record is cheaper than setting up a legal entity. The cost of setting up a legal entity can run into hundreds of thousands or millions of dollars. A company must have a minimum share capital before registering the business with Nigerian authorities.

Also, an expatriate quota must be acquired before employing foreign workers. Leveraging an employer of record reduces the cost of employment, setting up a physical presence, hiring an HR team, and complying with tax obligations.

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