The Lagos State Internal Revenue Service (LIRS) issued a notice (the Notice) signed by the Executive Chairman, appointing payers of capital sums inclusive of employers as collecting agents for the purpose of deducting and remitting Capital Gains Tax (CGT) due on the respective capital sums paid including but not limited to compensation for loss of employment. The Notice is effective 1 January 2019.
Based on the Notice, every collecting agent is required to file, together with their respective annual returns, a statement showing all recipients of capital sums using the specific format prescribed in the Notice. Statements reflecting no payments should also be filed, if applicable.
In September 2017, the LIRS issued a public notice (the Previous Notice), indicating that the tax treatment for termination and “terminal” benefits should be clearly distinguished. It held that terminal benefits are retirement benefits which are revenue in nature and should be subject to Personal Income Tax (PIT) while termination benefits are redundancy payments which are capital in nature, which therefore should be exempt from PIT but subject to CGT.
On 6 January 2019, the LIRS issued the current Notice with an effective date of 1 January 2019, mandating employers responsible for the payment of termination benefits to deduct and remit the applicable CGT on termination benefits and any other capital sum payable to the employee. In addition, every collecting agent is required to file with their respective annual returns, a statement showing all recipients of capital sums in the format prescribed in the Notice. Statements reflecting no payments must also be filed, where applicable.
The Capital Gains Tax Act (CGTA) provides the regulatory framework for the taxation of capital gains on the disposal of chargeable assets in Nigeria. Section 6(1) (a-e) defines instances which constitute a disposal of assets with one such instance being capital sums derived by way of compensation for loss of office or employment. Under the CGTA, every person (except persons specifically exempted by the CGTA) who has received a capital sum as consideration or for a disposal of assets is required to include such capital sum in their annual tax returns and remit to the relevant tax authority.
Nonetheless, Section 43 of the same CGTA provides that the provisions of the Personal Income Tax Act (PITA) referenced in the Schedule to the Act shall apply in relation to CGT as they apply to income tax chargeable under those acts. One of the referenced sections under the Schedule is Section 50 of the PITA, which empowers the relevant taxation authority to appoint a person, by giving a notice in writing, to be an agent for the purpose of the collection of taxes due from another person.
Further, PART II of the Schedule in the Taxes and Levies (Approved List for Collection) Act includes CGT on the disposal of chargeable assets by individuals as taxes collectible by the relevant State Internal Revenue Service (SIRS). In effect, the relevant SIRS may issue notices in writing clarifying the process of collecting CGT due on chargeable gains derived from the payment of compensation for loss of office.
Given the low compliance rate with respect to the self-assessment and payment of CGT by individuals to the relevant SIRS, it is clear that the LIRS is establishing a practical way to improve the collection of these taxes and prevent taxpayers who would most likely not file individual returns, from holding on to the total capital sum received. CGT is normally assessed under the self-assessment regime.
However, the LIRS, by relying on Section 50 of the PITA, has introduced a withholding tax mechanism on CGT payable on capital sums received from compensation for loss of employment thereby placing the responsibility of deduction on the employers making the payment. It’s noteworthy that the CGTA does not provide for collection of CGT via the withholding mechanism.
While the Notice may have clarified and placed the responsibility of collecting CGT on compensation for loss of employment on employers, it is unclear how the LIRS intends to address CGT on other capital sums received on the disposal of chargeable assets given the requirements to compute as required in Sections 11 and 12 of the CGTA. It’s also noteworthy that neither the CGTA nor PITA provide a definition for compensation for loss of employment.
The Notice is effective 1 January 2019, implying that employers should not be held responsible for CGT on termination benefits paid to employees for prior periods. However, with the statutory annual employer’s income tax returns deadline for the year 2018 approaching, it is unclear whether the LIRS will request CGT statements at the point of filing and by implication hold employers accountable for CGT unpaid by ex-employees for prior periods.
EYG no. 012819-18Gbl
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