June 25, 2019
On 18 June 2019, the Tax Appeal Tribunal (TAT or Tribunal) held that the Lagos State Internal Revenue Service (LIRS) could not hold employers accountable for taxes arising from withdrawals of Voluntary Pension Contribution (VPC) of their employees. This decision was reached in the case between Nexen Petroleum Nigeria Limited (Nexen or the Company) v Lagos State Internal Revenue Service (LIRS). According to the Tribunal, VPCs are tax-exempt under the law except when withdrawn within five years from the date of contribution. The Court further held that employers are not under any obligation to monitor the withdrawal of VPCs within the period and thus should not be accountable for any taxes arising therefrom.
In 2018, the LIRS issued additional notices of assessment to Nexen following a tax audit of the Company’s 2013 and 2014 Years of Assessment (YOAs). Nexen objected to the additional assessment notices and upon receipt of a Notice of Refusal to Amend (NORA) from the LIRS, the Company instituted an action at the TAT.
The crux of the issues before the TAT was whether Nexen was liable to remit tax arising from the operations of its employees’ VPCs to the LIRS.
Nexen contended that pension contributions are tax exempt under the law and it had discharged its statutory duty to the LIRS by deducting, remitting and filing PAYE tax returns of its employees. Nexen further argued that the responsibility to recover any additional income tax from its employees should automatically revert to the LIRS. On the other hand, the LIRS posited that as long as the employees’ VPCs arise from part of the emolument of the employees, the obligation to deduct and remit taxes arising from the VPCs withdrawn remains with the employer.
The TAT, however, ruled in favour of Nexen that the Company is a statutory agent of the LIRS with the obligation to deduct, remit and file PAYE returns of its employees. Thus, the Tribunal stated that Nexen had fulfilled all its statutory obligations and was not under any additional obligations to account for its employees’ further dealings with their VPCs. In addition, the Tribunal held that the responsibility to deduct any further tax on the income of employees no longer lies with Nexen after the initial deduction and remittance from the employees’ emolument.
The Tribunal, in interpreting Section 10(4) of the Pension Reform Act (PRA) and Section 20(1) of Personal Income Tax Act (PITA) stated that VPCs are exempt from tax. However, this exemption does not apply where such VPCs are withdrawn within five years from the date of contribution.
This ruling implies that the LIRS cannot hold employers accountable for any taxes arising from subsequent VPC withdrawals of their employees.
In 2017, the LIRS had communicated in its Circular on “Tax Relief on Voluntary Pension Contribution”, that it would rely on Section 81(2) of the PITA to recover such taxes on VPCs from employers. However, there have been some concerns as to the legality of this approach. Until the Federal High Court reaches a contrary decision, it would be unlawful for the LIRS to assess employers for VPCs withdrawn within 5 years. Instead, the LIRS would be expected to assess the employees in Nigeria. This decision is also in line with the provisions of Section 10(4) of the PRA that VPCs are to be entirely exempt from tax at the point of withdrawal, except such withdrawal is made within five years from the date of contribution.