• Friday, March 29, 2024
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Lagos moves to increase job losers’ woes with tax on termination benefits

tax

Lagos State government is at it again. This time, the state’s Internal Revenue Service (LIRS) is making efforts to increase the woes of people who lose their jobs by taxing their termination benefits.

The LIRS has issued a public notice mandating employers of labour to account for and remit Capital Gains Tax (CGT) on termination benefits and any other capital sum paid to disengaging employees.

Already, the appointment of collecting agents for the CGT purposes as contained in the notice became effective from January 1, 2019.

The LIRS had in September 2017 issued a public notice maintaining its basis for the tax treatment of terminal and termination benefits.

In Nigeria, Capital Gains Tax is 10 percent and it accrues on an actual year basis to all gains accruing to a taxpayer (individual or company) from the sale or lease or other transfer of proprietary rights.

Nigeria’s unemployment rate increased from 18.8 percent in the third quarter (Q3) of 2017 to 23.1 percent in Q3 of 2018, according to the National Bureau of Statistics (NBS).

“The imposition of CGT on compensation for loss of employment may be regressive in the absence of a threshold. This is because the 10 percent CGT rate will be higher than the effective Personal Income Tax (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,” said Taiwo Oyedele, PwC West Africa tax leader.

Oyedele said any payment to an employee as a result of the termination of his employment which the employee has not earned as at 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,” he added.

Lasbery Nwaeze, an associate at Lagos-based full service law firm, Blackfriars, had looked at exemptions and reliefs relating to Capital Gains Tax in Nigeria.

By virtue of section 26 of the Capital Gains Tax Act applicable in Nigeria, some capital gains are exempted from taxation, he noted. This includes sums obtained by way of compensation or damages for any wrong or injury suffered by an individual.

In his overview of the capital gains tax act (tax legislation), Abdul-Wahhab Ibrahim, a director/partner at PML Advisory, noted that that the Capital Gains Tax Act contains comprehensive guidelines on how Capital Gains should be taxed. It also included the terms, conditions, and clauses attached to their taxation and is made up of 47 sections, with subsections embedded in them, he noted.

“LIRS in the notice (September 2017) 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,” said Oyedele of PwC West Africa.

“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,” Oyedele said.

Iheanyi Nwachukwu