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| Personal Tax | |
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Thursday, November 14, 2019 / 11:19 AM / By Yomi Olugbenro* / Header Image Credit: LIRS
Lagos State Internal Revenue Service (LIRS) has issued a public notice,
appointing employers as its agent, requesting employers to deduct and remit
capital gains tax on payments to employees as compensations for loss of
employment. Let's look at this issue of taxing severance benefits.
Whilst LIRS agrees that compensation for loss of employment are free of
personal income tax, it seek ways to proactively collect capital gains tax as
may be prescribed by Capital Gains Tax Act, by holding employers responsible.
Simply put, withholding tax (WHT) rules which applies under Personal Income
Tax Act (PITA) is now being "imported" into Capital Gains Tax Act (CGTA). LIRS
purportedly rely on its powers to appoint anyone as its collection agents.
This directive is fraught with multiple issues, including
differentiating between termination benefit and terminal benefit, tax treatment
of these different benefits, application of withholding tax on capital gains
and employers' obligation thereon.
Two tax laws are relevant in explaining the issues here - PITA and CGTA.
PITA, which is the primary income tax law which govern employers' PAYE (or WHT)
obligation says compensation for loss of employment is not taxable.
CGTA, on the other hand says "capital sum" derived by way of
compensation for loss of employment is taxable. That is, CGT of 10% rather than
normal PIT. However, CGTA does not contain provision for applying withholding
taxes or "PAYE".
The first issue is to determine whether a given severance benefit
constitute compensation for loss of office or just normal end of service
(terminal) benefits. That is, do terminal benefits and termination benefits
mean the same?
There's no specific definition of compensation for loss of employment
either PITA or CGTA. By general English usage, terminal benefit refer to final
entitlements (often pre-agreed) paid upon expiration of agreed tenure of
service.
Termination benefit refer to compensation for unexpected redundancies
often triggered by a closedown, downsizing, business reorganization etc.
Termination benefits may be seen as compensation for loss of employment.
LIRS issued an initial public notice in 2017 which provides that terminal benefits should be taxed as regular employment income under PITA (part of PAYE) while termination benefits should be taxed as capital gains at 10% (under CGTA).
Let's assume, without conceding, that LIRS's position on the meaning
and applicable tax law for terminal benefit and termination benefit is correct.
There's a major issue with application of WHT and employer's duty on capital
gains.
is a matter of law. It can only be applied in manner prescribed by the
law. Whereas PITA makes specific provision on how PAYE/WHT is applied on income
taxable under PITA, there's no withholding tax rule on gains taxable under
CGTA.
If indeed compensation for loss of employment is considered as capital
sum liable to tax under CGTA, tax can only be applied in manner prescribed
under CGTA. Capital gains tax are paid by taxpayers on self-assessment basis.
Not via WHT rule.
Power to appoint collection agents for tax purposes is contained in
PITA, not CGTA. The rule for adoption of PITA administrative process covered in
section 43 of CGTA, at best, does not clearly relate to WHT practice. It will
be a rule stretched too far.
Employers are likely to resist importation of the provision of
withholding tax rule contained in PITA to CGTA. Individuals earning capital
gains should be called to account for their taxes in manner prescribed by CGTA.
While I agree with the provision of CGTA that "capital sum" paid as "compensation for loss of employments" constitutes capital gains against which
the provison of CGTA should apply, CGTA does not indicate employer's obligation
as withholding tax agents for CGT.
The dilemma faced by tax authorities is the enormity of the
administrative burden of chasing millions of individual taxpayers in collecting
due taxes. So they look for a convenient way out. But no one wants a burden
unless legally imposed.
Governments should rather focus on revamping tax laws in Nigeria to
close identified lapses and bring our laws to modern realities. Our laws are
laden with rules that have lost touch with emerging realities. That's a big
issue needing solution.
Attempts at refurbishing a 1967 law via public notices and expecting
same to fit into modern realities of twenty-first century will only generate
legal tussles that will multiply disputed tax cases. We must pay attention to
real issues.
The greatest challenge facing the country is paucity of revenue but we
are not addressing it with the vigor required. Both the executive and
legislature should be working hard on regulatory intervention to address our
challenges.
We cannot resolve our current low tax penetration challenge unless the
law is fixed. We need new set of laws that will consolidate existing taxes,
introduce modern rules, be wide-covering and administratively covenant.
I must therefore express my admiration for LIRS on how it tries to stay
innovative and find ways of tackling evasion. But it's important to allow
taxpayers enjoy benefits of ambiguous rules. Government should rather
make/amend laws to curb abuses.
About The Author
*Yomi Olugbenro is the West Africa Tax Leader at Deloitte.
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