Lagos State Internal Revenue Service’s Public Notices on Taxation – Examining the Impact on Taxpayer


Friday, October 6, 2017 3:20PM / Deloitte 

“The notices issued by LIRS are intended to provide clarity to taxpayers on the seeming ambiguities in the tax laws and consequently increase their earnings potential from PIT. The notices also impose additional compliance requirements on tax payers.”

The Lagos State Internal Revenue Service (LIRS) has issued eleven (11) public notices in various national newspapers since August 2017. The notices are aimed at providing clarity to taxpayers on LIRS’ interpretations of provisions of the Personal Income Tax Act, as amended (PITA) on specific issues and the level of tax compliance required of every employer and employee in Lagos State. 

We provide below an analysis of LIRS’ position on the issues covered in the following Notices issued:

Treatment of savings element on insurance premiums

2.      Valuation of accommodation provided by employers

Exemption of compensation for loss of employment

Taxation of employee loan

Taxation of share/stock options

Pay-as-you-earn on employee outsourcing arrangements

Withholding tax on employee outsourcing arrangements and other labour brokerage arrangements

Taxation of non-nationals with a temporary work permit

Tax relief on voluntary pension contributions

Allowable interest deductions

What constitutes reasonable removal expenses 

Treatment of savings element on insurance premium
Section 33(4)(d) allows as a deduction, the annual amount of any premium paid by an individual in respect of insurance on his life or that of his spouse, premium paid for a contract for a deferred annuity on his own life or that of his spouse for the purpose of ascertaining the personal income tax (PIT). LIRS posited that the tax relief is only granted in respect of insurance premiums paid during the year preceding the relevant year of assessment (YOA). The premium excludes any saving scheme element which may sometimes form part of the life insurance premium or contract. 

Also, LIRS clarifies that tax relief will not be granted in respect of other savings schemes whereby policy holders have control over the funds and payments are made after some pre-agreed terms. However, only life insurance policy that includes a cover for the death of the insured or the spouse or does not include or anticipate a payment to the insured before the age of 50 will qualify for a tax relief under Section 33(4)(d). In view of the above, every individual taxpayer is required to disclose the details of life insurance and include a life insurance certificate along with the annual tax returns. The life insurance certificate is expected to specify the portion of the premium that relates to death policy and savings element. 

Valuation of accommodation provided by employers
 Section 5(1) of PITA provides that “where any premises in Nigeria are made available to the occupier by reason of his or his wife holding an office or employment and the occupier pays no rent for the premises or the rent which the occupier pays for the premises is less than the annual value of the premises, the employee shall be treated as being in receipt of emoluments at an annual rate equal to the annual value of the premises s…reduced by the annual amount of rent which the occupier pays for the premises” 

Thus, LIRS, in its notice, considers an “employer provided accommodation” to constitute a taxable benefit to the employee where – (i) the accommodation is available to the employee on a permanent basis (i.e. more than 90 days), (ii) the employee does not have a personal primary accommodation in addition to the accommodation provided by the employer, (iii) employer pays rent on behalf of the employee, or (iv) the accommodation is necessitated by any circumstance other than business related reasons.

Further, LIRS posited that where the annual value of the accommodation is not available, this would be determined in line with Section 5(3)(b) of PITA. The section provides that the annual value would be as determined by the relevant tax authority. Thus, taxable benefit in the hands of employee will be – (i) the total rent paid for leased accommodation, (ii) the commercial value of comparable properties in similar location for accommodation owned by an employer or (iii) the amount paid by the employer for the hotel room where an employee has occupied hotel accommodation for more than 90 days.

Therefore, every employer is required to disclose details of accommodation provided to employees and include the name of landlord, location of the property, the rent paid and any other details as may be required by LIRS. It is expected that the employer’s tax returns (Form H1) will be updated to accommodate disclosure requirement.

Exemption of compensation for loss of employment
LIRS used the notice to clarify payments for compensation for loss of employment that qualify for tax exemption under Paragraph 26 of the Third Schedule to PITA. The notice states that compensation for loss of office is either a termination benefit or a terminal benefit. It defines termination benefit as payment made to an employee who is made redundant or to an individual whose fixed term contract is ended early, while terminal benefit is lump sum payment made to an employee who retires. The latter is considered to be taxable but subject to some reliefs under PITA.  

LIRS further provides guidance on the components of compensation for loss of employment that qualify for tax relief. Below are the highlights: 
·         Tax relief will only be granted if the amount paid was not preagreed prior to commencement of the disengagement process. However, capital gains tax (CGT) will apply in line with Section 6(1)(a) of the Capital Gains Tax Act, Cap C1 LFN, 2007 (CGTA)

Pre-agreed amounts would be subject to PIT as they are an outcome of employment Gratuity payments made under an approved pension scheme are tax deductible for PIT purposes

Gratuity payments made outside the Pension Reform Act, 2014 (PRA) become taxable where the conditions set out under Paragraph 18 of the Third Schedule to PITA are triggered – (i) the period of service is not up to 10 years; (ii) total gratuity payable exceeds 100,000; and (iii) where the period of service does not amount to five years or an aggregate of 63 months. 

Taxation of interest on employee loans 
The notice is aimed at addressing arrangements where loans are granted to employees at no interest, or at interest rates that are lower than market rates. LIRS posited that such arrangements give rise to a benefit which is taxable in the hands of employees. The benefit would be calculated as the difference between the actual interest rate on the outstanding loans granted to employees and adjusted monetary policy rate (MPR) of 11% (i.e. prevailing MPR minus 3%).  

LIRS cited Section 3(1)(b) of PITA, which imposes tax on all gains or profits from employment including compensations, bonuses, premiums, benefits or other perquisites, as basis for its position in the notice. The provision will apply to directors, employees and significant shareholders of a company, and it will also continue to apply to the aforementioned individuals even after the relationship with the company has been terminated as long as the loan provided remains unpaid.

The only exemption will be for employee loans with interest above the adjusted MPR or at commercial rates.

Taxation of employees share/stock options
In its public notice, LIRS sought to address the varying treatments of the share-based payments by employers for tax purposes. LIRS’ position is that share scheme arrangements give rise to a benefit in-kind which is taxable in the hands of employees. As such, the difference between market price of the shares and the exercise price (if any) is deemed to be a taxable benefit in the hands of the employees.  

Where the share granted is of a listed entity, the market value of the shares will be the price of the stock as traded on the exchange, while for non-listed entity, the market value of the share will be the net asset per share.

Also, any dividend or phantom dividend received by employees before the shares vest will be treated as employment income and taxed at applicable pay-as-you-earn (PAYE) tax rates rather than withholding tax.

PAYE on employee outsourcing arrangements
LIRS, in the notice, adopted an “official position” for definition of “employer” in view of the absence of a specific definition of the term in PITA. An employer is defined as economic employer (i.e. the ultimate employer) under whom the employees perform services and receive primary direction and control. According to LIRS, Paragraph 2(3) of the Operation of PAYE Regulations provides that “where a person other than the employer manages the staff e.g. administers the legal documentation and payroll of the staff, that company or enterprise would be required to provide information of the staff to the tax authorities and also deduct the applicable PAYE”. Hence, the outsourcing firm has the obligation to deduct PAYE and file returns for employee emoluments. The employees will be taxed under PAYE scheme and not withholding taxes as long as the individuals are deemed to be employees in providing services to the ultimate employer. 

The above notwithstanding, LIRS reserves the power to request the ultimate employer to ensure that PAYE tax due on the emoluments of the employees is deducted and remitted by the outsourcing firm. The ultimate employer and outsourcing firm shall be absolved from further tax obligations where full PAYE tax can be substantiated for the various employees.

Withholding tax (WHT) on employee outsourcing arrangements and other labour brokerage arrangements
The notice is aimed at enforcing deduction of WHT on employee outsourcing arrangements and other types of labour brokerage arrangements. LIRS posited that the difference between the contract sum and the payroll cost to the hiring company, being the margin on the contract is liable to WHT. An outsourcing firm may only benefit from this treatment provided the margin is clearly stated on the invoice, otherwise, the total contract will be subjected to WHT.  

Further, the outsourcing firm must provide third party documents to back up the salary cost incurred and that PAYE tax has been fully remitted for the employees, otherwise LIRS reserves the right to demand for the full WHT on the full contract sum. 

Taxation of non-nationals with a temporary work permit
A non-national employee who is liable to tax in a country with whom Nigeria has a double tax treaty (DTA) will become liable to tax in Nigeria after 183 days or once he/she becomes taxable in Nigeria in accordance with the DTA. Where the non-national employee is not liable to tax in a country with whom Nigeria has a DTA, such employee becomes liable to tax in Nigeria from the first day of arrival into Nigeria. 

Further, a non-national independent contractor will be subject to tax in Nigeria where he/she has a fixed base in Nigeria from where business is carried out, is involved in a contract that includes components of installation or construction work in Nigeria, or if he/she has a warehouse from which deliveries are made to customers. 

Where the non-national independent contractor is resident of a country with whom Nigeria has a DTA, tax relief will be granted in line with the provisions of the DTA.

Tax relief on voluntary pension contributions
 The notice refers to the following conditions for making withdrawals from a retirement saving account (RSA) as stated under Section 16 of the PRA:

An employee shall not be allowed to make withdrawal from his RSA before attaining the age of 50 years

Where the employee retires, disengages on the advice that the employee is no longer capable of carrying out the function of his office, due to total or permanent disability before the age of 50 years in accordance with the terms of his engagement

An employee who disengages or is disengaged from employment before the age of 50 years is unable to secure another employment within four (4) months, may make withdrawals from the RSA. 

In order to confirm that the conditions for making withdrawal have been met by holders of RSA, LIRS indicated that it would periodically audit withdrawals of voluntary pension contributions (VPC) in line with the provisions of Section 17 of PITA. Thus, any tax exemption claimed on any withdrawal that is not in line with the relevant conditions would be disallowed for PIT purposes. 

Further, LIRS intends to apply penalty and interest on any unpaid tax on VPC withdrawn in line with Paragraph 8 of the Fourth Schedule to PITA. LIRS stated that it is willing to defend its position with each taxpayer or employer through the available judicial process.

Allowable interest deductions on owner occupied residential houses
According to LIRS, a taxpayer would only benefit from the relief granted under Section 20(1)(b) of PITA on the first mortgage application but restricted to the property occupied by such taxpayer. Hence, where the first mortgage application is for multiple properties, the relief is restricted to the property occupied by the taxpayer.  

However, where the first application is for one mortgage loan used to develop more than one house or flat, the interest deduction is applied pro-rata based on proportion of the property occupied by the taxpayer. 

Further, where the taxpayer lives in more than one property and submits multiple applications, tax relief will be available on the property with the lowest mortgage value at the beginning of the tax period.

The notice requires taxpayers to provide evidence of occupation of property for at least one year period and this will be validated by LIRS at the end of the year. Also, taxpayers are required to have declared the property as owner occupied in the “Claims for Allowances and Relief (Form A)”.

While occupation of the property is a prerequisite to be granted the relief, LIRS is flexible to consider interest incurred at development phase on a case by case basis.

What constitutes reasonable removal expenses?
 “Reasonable removal expense” is defined, in the notice by LIRS, as any expense which an employee incurs to move to a new employment location and the payment made by the employer towards the expenses which results in no net overall benefit to the employee. It is also any payments made to or on behalf of an employee taking up employment with a new employer such as relocation allowance.  

The notice states that a removal expense must meet the following criteria to qualify as tax deductible expense:

The reimbursement or payment to the employee is in respect of relocation/ removal expense actually incurred

The expense is of a reasonable amount

The payment of expenses must be properly documented

Changing accommodation must be necessary in the given circumstance  

The removal expense is considered to be a reasonable amount where it is not more than the amount incurred by the employee in relocating. A company must substantiate the expenses by keeping documents or details of name and address of the employee, date and reason for the relocation/removal, distance (km) involved and receipts of the actual expenses.

Further, any amount paid to the employee as temporary subsistence allowance which covers expenses already incurred by the employer shall be taxed as it would amount to duplication. LIRS advises employers to submit their staff policy and guidelines for its pre-approval in order to have certainty with respect to the tax deductibility of the removal expenses and temporary subsistence allowances.

The notices issued by LIRS are intended to provide clarity to taxpayers on the seeming ambiguities in the tax laws and consequently increase their earnings potential from PIT. The notices also impose additional compliance requirements on taxpayers. 

In view of the above, there is a need to carry out a detailed review of the notices in order to determine the impact on your organisation and your employees. Also, plans should be put in place to ensure that documentation required to be submitted along with the annual employee and employer tax returns are collated in preparation for the exercise.

We are available to provide our perspectives on each of the issues raised vis-à-vis the additional obligations imposed in the notices and assist your organisation through the process of complying should this be required.

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