Revisiting the Lagos Internal Revenue Services’ Public Notice in the Light of The Finance Act 2020
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INTRODUCTION
The Finance Act 2020 has brought about sweeping changes to our tax laws. More than ever, it has addressed the lacunae in our tax regime which the State Revenue Services has sought to bridge by gazetting public notices to accommodate the uncertainty of the situation. Where the Court has held that an aspect of the law is voidable, the Finance Act 2020, in its wave of amendments, has struck out that law, in response to the forthright thinking of the Court. A prominent example is the decision of the Tax Appeal Tribunal delivered in the case of Nigerian Breweries Plc (The Appellant) vs Abia State Board of Internal Revenue (The Respondent).
BACKGROUND OF THE CASE
Section 3 of the Personal Income Tax (Amendment) Act 2011 (hereinafter referred to as the Act) does not list “Gratuities” as a “chargeable income.” This is a sequel to the amendment of the Personal Income Tax Decree 104 of 1993 by the Finance (Miscellaneous Taxation Provisions) (No. 3) Decree of 1996 which did away with gratuities as a list of chargeable income in the 1993 version of the Personal Income Tax Act. However, Paragraph 18 of the Third Schedule of the Act which provides for Income Exempted (From Taxation) retained a proviso that ran contrary to the philosophy of deleting gratuities as an income chargeable. It is reproduced below:
“Gratuities payable to an employee in the private sector in respect of services rendered by him under a contract of service with his employer and described as gratuities either in the contract or some other documents issued by or on behalf of the employer in connection with such contractor:
Provided that
B- Where the total gratuity payable exceeds the amount of N100, 000, the amount of any excess shall not be so exempt but shall be deemed to be income of the employee on the last day of his employment including any terminal lease arising therefrom.”
The import of the above- stated section is that gratuities exceeding the sum of a Hundred Thousand Naira (N100, 000) would not be exempted from taxation. This constituted the background to the conflict in Nigerian Breweries Plc (The Appellant) vs Abia State Board of Internal Revenue (The Respondent). The Respondent imposed additional tax liabilities on the Respondent after a tax audit for the 2014 and 2015 financial years. The Respondent subjected gratuities paid by the Appellant to its retired employees to tax. While the Appellant argued that gratuities could not be taxed, in furtherance of its non-inclusion in Section 3 of the Act, the Respondent contended that gratuities paid to the retired employees are regarded as income on the last day of employment and taxable where it exceeds a hundred thousand naira (N100, 000). The Tax Appeal Tribunal found in favour of the Appellant and held that gratuities are wholly exempted under Personal Income Tax Act as it has been deleted from Section 3. The Tax Appeal Tribunal further stated that a provision of a schedule to the Act could not override the plain words of the Act.
THE AMENDMENT BY THE FINANCE ACT 2020.
The Finance Act affirmed the judgment in the considered case by deleting the entire proviso in paragraph 18 of the Third Schedule of the Personal Income Tax (Amendment) Act 2011. The primacy of this amendment is underscored by the extinct version of the Act which stated in Paragraph 18 of the Third Schedule that gratuities exceeding a hundred thousand naira (N100,000) are not exempt from taxation while providing in Paragraph 26 that:
“Any compensation for loss of employment is exempted from taxation.”
This puts one at a loss when trying to contemplate the uncertainty brought about by the contradicting sections especially when recourse is had to the fact that gratuity could also qualify as compensation for loss of employment. The amendment of the Finance Act is reproduced hereunder:
“The third schedule to PITA is amended in paragraph 18 by deleting the proviso to the paragraph.”
THE LAGOS STATE INTERNAL REVENUE SERVICES’ PUBLIC NOTICE
The amendment of the Personal Income Tax Act by the Finance Act has also impacted in a positive way the Lagos Internal Revenue Service’s Public Notice on Exemption of Compensation for Loss of Employment. The Public Notice states that its legality is derived from Paragraph 26 of the Third Schedule to the Personal Income Tax Act and Section 6 of the Capital Gains Tax Act. A perusal of the compliance requirement of the notice would not leave anyone in doubt as to the novelty effected by the Finance Act. It is instructive to note the definition of compensation for loss of employment as provided by the notice:
Where an employee is made redundant and gets a settlement, which may include the statutory redundancy lump sum, and a further sum negotiated by the employee or the trade union with the employer. This is the termination benefit.
Where an employee is retired and is paid a lump sum by his employer. This is a terminal benefit.
Where an employee had a fixed term contract and it is ended early, and the employee gets paid a lump sum in compensation. This is a termination benefit.
According to the notice, compensation for loss of employment could result in the provision of termination benefit or terminal benefit. Now, there is a thin line in the meaning of compensation for loss of employment, and gratuity. The notice defines terminal benefit to include when an employee is retired and is paid a lump sum by his employer. It shares the same connotation with gratuity which also means “an amount of money given to a retiring employee.” Even if a reasonable man should provide a gloss for that fact, the public notice purports to tax compensation for loss of employment under the Capital Gains Tax but its compliance requirement imposes a tax on the compensation for loss of employment under the Personal Income Tax Act.
The compliance requirement is reproduced hereunder:
Tax relief will be only be granted for PAYE if the amount was never pre-agreed before the disengagement process began. However in such cases, capital gain tax will be applicable on such sums as they are capital in nature and payable to LIRS
Pre-agreed amounts are generated from employment and subject to PAYE.
Gratuity payments are deductible for PAYE purposes if they are paid under an approved pension scheme in line with Section 5 of the Pension Reforms Act (PRA) 2014. If paid outside the PRA, the gratuity payments would be taxable if the conditions under Paragraph 18 of the 3rd Schedule is triggered i.e.
The service period is not up to 10 years;
Any amount in excess of N100, 000; and
Where the service is not up to five years (or an aggregate of 63 consecutive months in the case of a service that is not continuous), the exemption allowed is N1,000 per annum for such period or aggregate period of employment. Any excess calculated does not qualify for the exemption.
Presently, there appears to be no basis for tax relief under PAYE or the charging of tax on pre-agreed amounts because the Finance Act, in amending the Personal Income Tax Act, dispensed with the payment of tax on gratuity. Similarly, the payment of gratuity beyond the scope of the Pension Reforms Act 2014 which would necessitate the triggering of conditions under Paragraph 18 of the Third Schedule of the Personal Income Tax Act is now unknown to law.
THE POSITION OF THE LAW UNDER THE CAPITAL GAINS TAX ACT
The Lagos Internal Revenue Service’s Public Notice on Exemption of Compensation for Loss of Employment appears to have been rendered less effectual by the Finance Act, however, compensation for loss of employment under the Capital Gains Tax remains a veritable prospect of tax assessment.
Section 6 (a) defines gains chargeable to Tax, to include:
“Where the capital sum is derived by way of compensation for any loss of office or employment
Section 36 (2) of the Capital Gain Tax states that:
“Sum obtained by way of compensation for loss of office shall not, however, be chargeable gains except where the amount of such compensation or damage exceeds N10, 000 (Ten Thousand Naira) in any year of assessment.”
The Finance Act 2020 amended that Section 36 (2) by substituting N10, 000 (Ten Thousand Naira) for N10, 000,000 (Ten Million Naira) and deleting the phrase, “in any year of assessment. That notwithstanding, this succinctly means that money paid as compensation for loss of employment would be taxable under the Capital Gain Tax Act if it exceeds the sum of Ten Million Naira.
CONCLUSION
The Finance Act gave statutory backing to the Tax Appeal Tribunal’s decision in Nigerian Breweries vs Abia State Board of Internal Revenue. While it is trite that gratuities are not subject to tax under the Personal Income Tax Act, one might question the rationale for subjecting compensation for loss of employment in the excess of ten million naira to tax under the Capital Gains Tax Act. Nevertheless, the progress recorded is underscored by the fact that State Revenue Services will no longer exploit Paragraph 18 of the Third Schedule to the Personal Income Tax Act to impose tax, arbitrarily.
This is a publication of Jurislaw and serves as a general information only. It should not be construed as a legal advice under any circumstance. For more information kindly reach us at contact@jurislawng.com
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