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Sunday, January 06, 2019 07.28PM /
By Taiwo Oyedele PwC West Africa Tax Leader and President Impact Africa
FDN
The LIRS has issued a
Public Notice mandating employers to account for and remit CGT on termination
benefits and any other capital sum paid to disengaging employees.
Filing
requirements
The collecting agents
are required to file, alongside their respective annual returns, a statement
showing all recipients of capital sums paid by the collecting agent in the
format provided by the LIRS. Nil statements are to be filed where applicable.
Effective
date
The appointment of
collecting agents for CGT purposes as contained in the Notice is effective from
1 January 2019.
Our
comments
Although the LIRS by
this Notice is merely enforcing the law, the imposition of CGT on compensation
for loss of employment may be regressive in the absence of a threshold.
This is because the 10%
CGT rate will be higher than the effective PIT rate for very low income
earners. The LIRS should therefore consider a modification of the notice as
stipulated under S.43(1) of the CGT Act to address this issue.
Find below
the PwC Tax Alert on the development:
Background
In September 2017, the
LIRS issued a Public Notice stating its basis for the tax treatment of terminal
and termination benefits.
In the notice, LIRS held
the position that termination benefits are capital in nature and exempt from
Personal Income Tax (PIT) but subject to Capital Gains Tax (CGT) while terminal
benefits are revenue in nature and subject to PIT.
The LIRS has now issued
another Public Notice mandating employers to account for and remit withholding
tax on CGT on termination benefits and any other capital sum paid to the
employee.
Legal basis
Filing
requirements
The collecting agents
are required to file, alongside their respective annual returns, a statement
showing all recipients of capital sums paid by the collecting agent in the
format provided by the LIRS. Nil statements are to be filed where applicable.
Effective
date
The appointment of
collecting agents for CGT purposes as contained in the Notice is effective from
1 January 2019.
Takeaway
All payments by an
employer to or on behalf of an employee fall under 3 broad categories for tax
purposes (1) exempt from PIT and/or CGT (2) subject to PIT and (3) subject to
CGT.
Incidentally all
payments made to an employee at the end of employment and thereafter will fall
under one of the 3 categories.
While para.26 of the Third
Schedule to PITA exempts any compensation for loss of employment from PIT,
section 6 of the CGT Act clearly provides that any capital sum derived by way
of compensation for any loss of office or employment is taxable.
The critical question
therefore is what constitutes “capital sum for the loss of office or
employment?”
In general, we hold the
view that any payment to an employee as a result of the termination of his
employment which the employee has not earned as the termination date qualifies
as compensation for the loss of office or employment.
It is obvious by this
notice that the LIRS is seeking a practical way of collecting taxes from
individuals who may ordinarily not render returns and pay the tax due by way of
self-assessment. It is however not clear how non-employer agents will comply
with the notice regarding other payments that are liable to CGT.
The imposition of CGT on
compensation for loss of employment may be regressive in the absence of a
threshold. This is because the 10% CGT rate will be higher than the effective
PIT rate for very low income earners. The LIRS should therefore consider a modification
of the notice as stipulated under S.43(1) of the CGT Act to address this issue.
About
the Author
Taiwo Oyedele is
the PwC West Africa Tax Leader and President Impact Africa Foundation. Follow
him on twitter @taiwoyedele
For
a deeper discussion, please contact:
·
Ade Ogunsanya +234 1 271 1700 Ext 53001 / ade.ogunsanya@pwc.com
·
Kenneth Erikume +234 1 271 1700 Ext 50004
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