www.pwc.com/ng September 2017 Compensation for loss of employment is taxable says LIRS

Paragraph 26 of the Third Gratuities Schedule to the Personal Income All gratuity payments under the Tax Act (PITA), 2011 as amended Pension Reform Act or a scheme exempts “any compensation for approved by the National Pension loss of employment” from tax Commission are tax deductible under the PITA. The law however while those paid outside such fails to define what constitutes schemes are conditionally taxable loss of employment. as provided under Para. 18 of the Third Schedule i.e. subject to The Lagos State Internal Based on the foregoing, the LIRS applicable minimum periods of Revenue Service (LIRS) has has issued a public notice to service and prescribed maximum issued a public notice guide taxpayers in this regard. amounts (N1,000 per annum or distinguishing between total gratuity of N100,000 as the terminal and termination Highlights of the notice case may be). benefits, their respective tax treatments and compliance Termination vs Terminal Benefit Reporting Obligations obligations. Compensation for loss of office Employers are required to can either be a terminal benefit or provide a breakdown of severance a termination benefit. payments and notify the LIRS of For a deeper discussion, please any payment for loss of contact any member of our team Termination benefit is a employment stating the below or your usual contact with redundancy lump sum accruable recipients to enable the LIRS PwC Nigeria: on premature termination of determine the correct tax employment or contract. This treatment. Individuals who Taiwo Oyedele benefit may not be fully tied to receive termination payments are +2341 2711700 Ext 50004 the employment duties to disclose the income and remit [email protected] performed. applicable CGT to the LIRS.

Ade Ogunsanya Terminal benefit is a retirement Takeaway +2341 2711700 Ext 52003 or resignation lump sum payment [email protected] such as gratuity and pension The tax treatment of terminal and usually based on predefined termination benefits has long Oluwatobi Fadeyibi terms and satisfactory been a grey area both in law and 2341 2711700 performance of employment in practice. Legislative provisions [email protected] duties. and rules designed to address the issue are at best dated or badly Termination benefits are capital drafted adding to the avoidable in nature while terminal benefits complications. Overview are revenue in nature. While the proper interpretation Many employers consider all Compliance Requirements of the various terms and payments to an employee upon Compensation for loss of taxability of the applicable disengagement as compensation employment will qualify for benefits is still up for debate, it is for loss of employment which is exemption under PITA if the helpful to understand the exempt from tax. In actual fact, amount paid is not pre-agreed. position of the LIRS as this such payments often include However such payments are reduces uncertainty and makes it remuneration and employment liable to capital gains tax (CGT) easier for both employers and benefits such as terminal salary, under section (6)(1a) of the CGT employees to plan. Hopefully this payments in lieu of notice, Act. The LIRS holds the view that triggers a process that will gratuities, accrued leave benefits all pre-agreed payments are ultimately lead to a more etc. taxable under the PITA. definitive legislative change or case law.

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