“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.” Introduction 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:
1.Treatment
of savings element on insurance premiums
2.Valuation of
accommodation provided by employers 3.Exemption of
compensation for loss of employment 4.Taxation of employee
loan 5.Taxation of share/stock
options 6.Pay-as-you-earn on
employee outsourcing arrangements 7.Withholding tax on
employee outsourcing arrangements and other labour brokerage arrangements 8.Taxation of
non-nationals with a temporary work permit 9.Tax relief on voluntary
pension contributions 10.Allowable interest
deductions 11.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. Conclusion 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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