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 remitcapital gains tax on payments to employees as compensations for loss ofemployment. Let's look at this issue of taxing severance benefits.

Whilst LIRS agrees that compensation for loss of employment are free ofpersonal income tax, it seek ways to proactively collect capital gains tax asmay be prescribed by Capital Gains Tax Act, by holding employers responsible.

Simply put, withholding tax (WHT) rules which applies under Personal IncomeTax Act (PITA) is now being "imported" into Capital Gains Tax Act (CGTA). LIRSpurportedly rely on its powers to appoint anyone as its collection agents.

This directive is fraught with multiple issues, includingdifferentiating between termination benefit and terminal benefit, tax treatmentof these different benefits, application of withholding tax on capital gainsand 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 ofcompensation for loss of employment is taxable. That is, CGT of 10% rather thannormal PIT. However, CGTA does not contain provision for applying withholdingtaxes or "PAYE".

The first issue is to determine whether a given severance benefitconstitute compensation for loss of office or just normal end of service(terminal) benefits. That is, do terminal benefits and termination benefitsmean the same?

There's no specific definition of compensation for loss of employmenteither PITA or CGTA. By general English usage, terminal benefit refer to finalentitlements (often pre-agreed) paid upon expiration of agreed tenure ofservice.

Termination benefit refer to compensation for unexpected redundanciesoften 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 thatterminal benefits should be taxed as regular employment income under PITA (partof 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 meaningand 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 capitalgains.

is a matter of law. It can only be applied in manner prescribed by thelaw. Whereas PITA makes specific provision on how PAYE/WHT is applied on incometaxable under PITA, there's no withholding tax rule on gains taxable underCGTA.

If indeed compensation for loss of employment is considered as capitalsum liable to tax under CGTA, tax can only be applied in manner prescribedunder 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 inPITA, not CGTA. The rule for adoption of PITA administrative process covered insection 43 of CGTA, at best, does not clearly relate to WHT practice. It willbe a rule stretched too far.

Employers are likely to resist importation of the provision ofwithholding tax rule contained in PITA to CGTA. Individuals earning capitalgains 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 whichthe provison of CGTA should apply, CGTA does not indicate employer's obligationas withholding tax agents for CGT.

The dilemma faced by tax authorities is the enormity of theadministrative burden of chasing millions of individual taxpayers in collectingdue taxes. So they look for a convenient way out. But no one wants a burdenunless legally imposed.

Governments should rather focus on revamping tax laws in Nigeria toclose identified lapses and bring our laws to modern realities. Our laws areladen with rules that have lost touch with emerging realities. That's a bigissue needing solution.

Attempts at refurbishing a 1967 law via public notices and expectingsame to fit into modern realities of twenty-first century will only generatelegal tussles that will multiply disputed tax cases. We must pay attention toreal issues.

The greatest challenge facing the country is paucity of revenue but weare not addressing it with the vigor required. Both the executive andlegislature should be working hard on regulatory intervention to address ourchallenges.

We cannot resolve our current low tax penetration challenge unless thelaw 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 stayinnovative and find ways of tackling evasion. But it's important to allowtaxpayers enjoy benefits of ambiguous rules. Government should rathermake/amend laws to curb abuses.

About The Author

*Yomi Olugbenro is the West Africa Tax Leader at Deloitte.

Related News

1. LIRS Launches Enterprise Tax Administration System
2. Nigerian Business Owners Groan Under Poor Infrastructure; Ask For Tax Breaks
3. Benefits of Filing for a Tax Extension
4. LIRS Extends The Deadline For Filing 2018 PAYE Returns
5. LIRS Appoints Employers To Deduct and Remit CGT On Compensation for Loss of Employment
6. Capital Gains Tax On Payments To Employees For Loss Of Employment – Initial Thoughts
7. Appointment Of Payers Of Capital Sum Inclusive Of Employers As Collecting Agents
8. Individuals Working on the Nigerian Offshore Oil-drilling Platforms – Who Gets the Tax?
9. Tax Planning: Is there any Legal and Moral Benefit?
10. LIRS Issues Clarification on the Taxation of Interest Benefit on Loans granted to Employees
11. Taxation of entertainers and sportsmen in Nigeria: What, how and where?