LIRS Appoints Employers To Deduct and Remit CGT On Compensation for Loss of Employment

Sunday, January 06, 2019 07.28PM /By Taiwo Oyedele PwC West Africa Tax Leader and President Impact AfricaFDN

The LIRS has issued aPublic Notice mandating employers to account for and remit CGT on terminationbenefits and any other capital sum paid to disengaging employees.

Filingrequirements

The collecting agentsare required to file, alongside their respective annual returns, a statementshowing all recipients of capital sums paid by the collecting agent in theformat provided by the LIRS. Nil statements are to be filed where applicable.

Effectivedate

The appointment ofcollecting agents for CGT purposes as contained in the Notice is effective from1 January 2019.

Ourcomments

Although the LIRS bythis Notice is merely enforcing the law, the imposition of CGT on compensationfor 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 incomeearners. The LIRS should therefore consider a modification of the notice asstipulated under S.43(1) of the CGT Act to address this issue.

Find belowthe PwC Tax Alert on the development:

Background

In September 2017, theLIRS issued a Public Notice stating its basis for the tax treatment of terminaland termination benefits.

In the notice, LIRS heldthe position that termination benefits are capital in nature and exempt fromPersonal Income Tax (PIT) but subject to Capital Gains Tax (CGT) while terminalbenefits are revenue in nature and subject to PIT.

The LIRS has now issuedanother Public Notice mandating employers to account for and remit withholdingtax on CGT on termination benefits and any other capital sum paid to theemployee.

Legalbasis

The Taxes and Levies(Approved List for Collection) Act includes CGT of individuals as tax collectibleby the relevant state of residence.

Section 6 of the CGT Actdefines disposal of asset to include instances where there is no acquisition ofasset by the person paying the capital sum, and in particular where any capitalsum is derived by way of compensation for any loss of office or employment.

Section 50 of PITAempowers the relevant tax authority to appoint a person by giving notice inwriting to be an agent for collection of tax from another person, and suchtaxes can be collected from money held or payable to that other person.

Section 43(1) of the CGTAct stipulates that the provisions of the Income Tax Acts (which includes PITAin this case) ... shall apply in relation to capital gains tax as they apply inrelation to income tax chargeable under those Acts subject to any necessary modifications.

Filingrequirements

Effectivedate

The appointment ofcollecting agents for CGT purposes as contained in the Notice is effective from1 January 2019.

Takeaway

All payments by anemployer to or on behalf of an employee fall under 3 broad categories for taxpurposes (1) exempt from PIT and/or CGT (2) subject to PIT and (3) subject toCGT.

Incidentally allpayments made to an employee at the end of employment and thereafter will fallunder one of the 3 categories.

While para.26 of the ThirdSchedule 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 wayof compensation for any loss of office or employment is taxable.

The critical questiontherefore is what constitutes “capital sum for the loss of office oremployment?”

In general, we hold theview that any payment to an employee as a result of the termination of hisemployment which the employee has not earned as the termination date qualifiesas compensation for the loss of office or employment.

It is obvious by thisnotice that the LIRS is seeking a practical way of collecting taxes fromindividuals who may ordinarily not render returns and pay the tax due by way ofself-assessment. It is however not clear how non-employer agents will complywith the notice regarding other payments that are liable to CGT.

The imposition of CGT oncompensation for loss of employment may be regressive in the absence of athreshold. This is because the 10% CGT rate will be higher than the effectivePIT rate for very low income earners. The LIRS should therefore consider a modificationof the notice as stipulated under S.43(1) of the CGT Act to address this issue.

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