The Lagos State Internal Revenue Service (LIRS) recently issued a public notice (the Notice) with respect to taxation of interest benefits accruing to employees on loans granted by employers.
Why tax it?
The Notice aims at addressing arrangements where loans are granted to employees at no interest or interest rates lower than market rates. LIRS posited that such arrangements give rise to a benefit which is taxable in the hands of employees.
Consequently, employers are required to deduct tax on such interest benefits accruing to employees and remit same to LIRS under the pay-as-you-earn (PAYE) scheme.
How it will be calculated
The benefit is calculated as the difference between actual interest rate and adjusted monetary policy rate (MPR) on the outstanding loans granted to employees. The adjusted MPR is currently 11%, which is the prevailing MPR (i.e. 14%) minus 3%.
LIRS cited reliance on Section 3(1)(b) of Personal Income Tax Act (PITA), which imposes tax on all gains or profits from employment including compensations, bonuses, premiums, benefits or other perquisites, as basis for its position.
Other highlights of the Notice include:
• Assessment of tax on the interest benefit to be done by employer in line with the loan repayment plan i.e. assessment to be made monthly where payment is made on monthly basis and annually, where payment is made on annual basis
• Requirement for employers to file a schedule showing information on employee loans and payments terms along with their annual returns
• The directive applies to shareholders, directors and employees of a company and will continue to apply after the relationship with the company has been terminated, until the loan is fully repaid.
It appears LIRS has likened the interest benefits enjoyed by employees to benefit-in-kind, which constitute taxable income.
LIRS has not indicated if the directive will be applied retrospectively or take effect from the date of the Notice. Further clarification on the effective date is therefore expected to be provided by LIRS.
The above notwithstanding, we advise employers and other stakeholders to take note of LIRS’ directive and ensure compliance.