The Lagos State Internal Revenue Service (LIRS) issued a Public Notice on 6 January 2019 appointing employers and other payers of capital sums as “collecting agents” for the purpose of deducting and remitting Capital Gains Tax (CGT) due on capital payments.
The Public Notice, which is further to an earlier LIRS’ publication on “exemption of compensation for loss of employment”, was issued pursuant to Sections 43 and 50 of the CGT Act and Personal Income Tax (PIT) Act, respectively. The Public Notice is effective from 1 January 2019.
The Public Notice requires employers to withhold and remit CGT on “capital sums” paid to employees as “compensation for loss of employment”. A capital sum in the context of the CGT Act refers to any money or money’s worth that is paid to taxpayers in respect of qualifying transactions that fall within the meaning of “disposal of assets”. Such transactions include compensation for loss of office or employment, payment for surrender or forfeiture of rights, etc.
The Public Notice also requires appointed agents to file alongside their annual returns, a statement of the recipients of capital sum in a prescribed format and “nil” returns where applicable.
The LIRS’ position is that CGT applies to any “compensation for loss of employment” that was not pre-agreed with the employee (i.e., non-contractual), and that pre-agreed amounts (i.e., contractual) are liable to tax under the PIT Act (PITA), even though there is no provision to this effect in the two legislation.
Historically, the CGT Act 1990 exempted compensation for loss of office below ₦10,000 from CGT. However, while the 1996 Budget pronouncement removed the ₦10,000 cap, it was only the PITA that was amended to exempt “compensation for loss of employment” from tax. To the extent that the CGT Act remains unchanged since then, any capital sum paid by an employer to an employee as compensation for loss of office in excess of ₦10,000, is taxable under the CGT Act. It is obvious that the exempted amount of ₦10,000 is long overdue for review as it is practically valueless compared to the purchasing power of the same amount in 1990.
The LIRS enjoins employers to segregate compensation for loss of employment to their employees into “tax exempt”, “subject to PAYE” and “subject to CGT” for the purpose of their correct tax treatment. However, if compensation for loss of employment is aligned with the LIRS’ distinction between pre-agreed amounts (revenue payment subject to PAYE tax) and amounts that were not pre-agreed (capital sum subject to CGT), the tax treatment can either be “tax exempt” or “subject to CGT”. In other words, there should be no third category that is subject to PAYE tax, unless the LIRS has terminal salary payable to an employee in mind, which has nothing to do with compensation for loss of employment.
In terms of administration of CGT with respect to individuals, while the tax will be easier to collect where employers make payments of a capital nature to their employees, there will be practical challenges in other instances. This is especially as CGT is not on gross selling price, and should not be deducted as if it were withholding tax (WHT). The CGT Act imposes CGT on chargeable gains determined after deduction of the allowable expenditure specified in the Act from the capital sum received on chargeable assets.
For instance, where a company is paying a capital sum to an individual, e.g., in a land transaction, deducting CGT will be challenging, as the tax will need to be deducted at 10% of the net chargeable gains on the asset. Thus, the seller of the asset would need to provide information to the collecting agent paying the capital sum for the purpose of determining and deducting the CGT due on the transaction. It seems that the Lagos State Government in realization of this has in a way factored CGT into the composition of fees payable for Governor’s consent in land transactions. However, with LIRS’ new requirement for CGT to be withheld by collecting agents, the continued inclusion of ”deemed CGT” in Governor’s consent fees would need to be reviewed to avoid double taxation.
The CGT on individuals becomes even impracticable where the capital transaction is between two individuals, as there is no assurance that any tax deducted at source from payment by an individual to another individual will end up in the government treasury. This is the risk associated with the broad category of persons designated as LIRS’ collecting agents, unlike the definition of ”person” in the WHT Regulations. Thus, making “other members of the public” CGT collecting agents for the government may not generate the anticipated result that the LIRS is aiming at.
We are not yet in the ideal and desirable world of voluntary tax compliance, and the Public Notice highlighting the statutory provision empowering the tax authority to appoint any person as its tax collecting agent in respect of CGT is unlikely to get us there soon.
Please click here to download a copy of the Public Notice.
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