Tax Appeal Tribunal exempts Voluntary Pension Contribution from PAYE tax

The Tax Appeal Tribunal (TAT) sitting in Lagos on Tuesday, June 18, 2019 delivered judgment in the case of Nexen Petroleum Nigeria Limited (the Appellant) and Lagos State Internal Revenue Service (the Respondent) to the effect that Voluntary Pension Contribution (VPC) is a valid deduction for calculating Pay-As-You-Earn (PAYE) tax on employee’s emoluments.

KPMG’s Tax Dispute Resolution Team provided support to the Appellant in the resolution of the tax appeal.

While delivering judgment in the case of Nexen Petroleum Nigeria Limited and Lagos State Internal Revenue Service (LIRS), the Tax Appeal Tribunal noted that VPC is statutorily exempted from PAYE tax by the provision of Sections 4(3) and 10 of the Pension Reform Act 2014 (as amended) and Section 20(1) of the Personal Income Tax Act 2011 (as amended).

Also, the TAT ruled that the Appellant was not under statutory obligation to account for tax payable on the amount of VPC withdrawn by its employees. The responsibility to recover the tax due on such withdrawals is that of the Respondent.

The Joint Tax Board (JTB) and LIRS had issued separate public notices on their positions on the adverse effect of Voluntary Contributions (VC) on tax revenue.

Section 4(3) of the Pension Reform Act 2014 provides that any employee to whom the Act applies may, in addition to the statutory contributions, make voluntary contributions to his Retirement Savings Account (RSA). Section 10(1) of the Act provides for the tax-deductibility of pension contributions – including Voluntary Contributions (VC).

Section 10(4) of the Act, however, provides that any income earned on VC made and withdrawn within five years would be subject to tax at the point of withdrawal. This is in contrast with Section 7(2) of the Pension Reform Act 2004 which taxed VC withdrawn less than five years after the date of contribution, and not merely the income earned from it.

The notices appeared to have been triggered by the common tax avoidance practice of employees making uncapped VC from their monthly salaries, claiming reliefs on the contributions made, and subsequently withdrawing the VC from their Retirement Savings Account (RSA).

The position of the JTB is that such practice is inconsistent with Section 16 of PRA 2014 and would be treated by tax authorities as an artificial transaction based on the provisions of Section 17 of the Personal Income Tax Act (PITA), as amended.

The LIRS reflected the same view in its notice, but also stated that only withdrawals from Retirement Savings Accounts that fall within the ambit of Section 16 of PRA 2014 would be treated as tax-deductible. The section covers pension withdrawals by employees above 50 years old and those below 50 years old with specified health or employment challenges.

Iheanyi Nwachukwu