May 31, 2022
George (not real name) has just gotten a demand notice from the Lagos State Internal Revenue Service (LIRS), stating that he had under-declared his taxable income/assets and had paid less taxes than he should have. The LIRS demand notice does not make sense to him because his Personal Income Tax (PIT) was deducted at source by his employer, which is a major telecommunications service provider. His fashion store in Lagos Island has also been constantly visited by tax officials and he has ensured that all taxes are paid when due because he does not want any ‘government wahala’. Hence, his reaction to the demand notice was, “so where did this notice come from?” He immediately called his tax consultant and arranged a meeting. After presenting relevant documents, including his bank account statements to the consultant, the tax consultant asked: “did the tax people see this?” “Yes”, George answered. “Then I guess the problem is with this ₦3.2m that is in your business account”, the Consultant pointed out. “It does not appear to be part of what you calculated to pay the taxes”. George replied, “But it was a gift. My friends gave me some money for my birthday and I put some in the business. Gifts are not part of taxable income, or are they?”
The above scenario may appear very familiar and/or plausible, hence, the article will focus on George’s problem.
Nigerians are known around the world to be generous and philanthropic and thus, it is common in Nigeria for persons to advance gifts in money or money’s worth or grant friends, family members or close associates special treats, favours, rewards or support. When Nigerians advance gifts to others, both the donor and the receiver or donee hardly ever consider the tax implications of such generosity and gestures.
In other jurisdictions, the implications of such gifting are typically front burner issues, so much that the potential implications are duly considered before the gifting arrangements are concluded. For instance, specialised gift tax exists in some developed nations and there may be special deductions that will accrue to the donor by reason of the gifts awarded. In Nigeria however, hardly would anyone be concerned about the tax implication of the gift given or received.
This article therefore, discusses the meaning of gifts under Nigerian law, highlights the provisions of the Personal Income Tax Act (PITA or “the Act”) with respect to gifts and then analyses the tax impact of gifts received in Nigeria and the practice in some other jurisdictions.
The PITA (as amended) is the enabling law for the taxation of personal income earned by individuals, whether in paid employment or as business proprietors or self-employed. The Act contains elaborate provisions regarding what constitutes income, what income is taxable, what portion of a taxpayer’s income is taxable and what portion is exempt from taxation. Notwithstanding the detailed provisions of the PITA and the recent amendments through the Finance Acts, 2019, 2020 and 2021, there exists some grey areas in the law. One of such areas has again come to fore with public discourse on whether gifts received by individuals constitute taxable income to such individuals or not. In particular, the recent developments where various groups and individuals have overtly come forward to buy political party nomination forms running into millions of Naira on behalf of aspirants (some of which were publicly accepted by such individuals), has again brought this issue into focus.
The Nigerian tax legislation does not have an express definition of gift, likewise, the tax legislations in several other jurisdictions do not define gifts. Hence, recourse will be made to judicial and regulatory definitions or descriptions of gifts. According to Black’s Law Dictionary, a gift is a voluntary conveyance of land, or transfer of goods, from one person to another, made gratuitously, and not upon any consideration of blood or money. A judicial definition of gifts was made in the case of Gordon vs. Barr, as the voluntary transfer of personal property without consideration. In the case of Hays’ Adm’rs vs. Patrick, gifts were also defined as a parting by an owner with property without pecuniary consideration. The United States Internal Revenue Service defines gifts as any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.
From the above definitions, it should be noted that there must be a voluntary transfer from the giver to the receiver for an item to qualify as a gift. The second ingredient is that there must be no consideration for a transfer to constitute a gift.