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The Lagos State Internal Revenue Service (LIRS), in a bid to improve tax compliance
and widen the tax net, recently released a series of Public Notices (Notices)
interpreting certain provisions of the Personal Income Tax Act (PITA).
Analyzed below are some of the Notices.

This Notice seeks to give clarifications on the obligation of parties under employees
outsourcing arrangement vis à vis Sections 81 and 82 of the PITA which provide the
legal basis for the PAYE tax scheme by mandating employers to make income tax
deductions from emoluments paid to employees and remit same to appropriate tax
Under a typical outsourcing arrangement, the obligation to deduct tax and remit to the
tax authority lies with the outsourcing firm. However, the Notice emphasizes, pursuant
to Paragraph 2(3) of the Operation of Pay As You Earn Regulations (PAYE
Regulations), that where a person other than the employer manages the staff day to
day, that company or enterprise would be required to provide information of the staff
and also deduct the applicable PAYE.
The effect of this Notice is that the exposure for improper deductions or failure to
deduct is not limited to the outsourcing company. The service recipient also maintains
an obligation to ensure that PAYE is deducted from employee emoluments, where the
service recipient is in charge of the daily management and control of the employees
outsourced. So, where the service recipient manages the staff day to day or, for
example, is responsible for the promotion, discipline and termination of employment,
the tax authority may hold the service recipient accountable for their taxes.

This Notice is consistent with the provisions of applicable laws as well as case law on
the issue. Therefore, where a company has an arrangement with an outsourcing
company, such company should ensure that the arrangement is structured in such a
way that the obligation of the actual employer is not transferred to an unwilling service

LIRS and the Joint Tax Board (JTB) also recently issued Notices regarding tax relief on
Voluntary Pension Contributions (VPC). The LIRS and JTB are concerned that
employees take advantage of the provisions of the Pension Reform Act, 2014 (PRA) to
make additional voluntary contributions, which are tax deductible, from monthly
salary and withdraw same at a later date without complying with the provisions of the
The JTB stressed that making uncapped deductions under the auspice of voluntary
contribution is unlawful under the Labour Act as the total deductions from a worker’s
wages for a month should not exceed one-third of such wages. The JTB stated further
that such transactions would be treated by tax authorities as artificial transactions
under Section 17 of PITA and that any payment made by the Pensions Funds
Administrators (PFAs) to individuals under this arrangement will be considered to fall
outside the tax exemptions granted in the PRA.
The Notice emphasized that payments made by PFAs to individuals who do not fall
under Section 16 of the PRA will not be treated as tax exempt. Section 16 of the PRA
provides that an employee is generally not entitled to make any withdrawal from his
RSA before attaining the age of 50 years except such employee disengages or is
disengaged from employment:

 on the advice of a suitably qualified physician or a properly constituted medical
board certifying that the employee is no longer mentally or physically capable of
carrying out the functions of his office;
 due to total or permanent disability either of the mind or body;
 before the age of 50 years in accordance with the terms and conditions of his
employment; or
 is unable to secure another employment within four months of such

The LIRS, in this Notice, relied on Section 3(1)(b) of the Personal Income Tax Act
(PITA) as the legal basis for taxation of benefits arising from employee loan.
The Notice seeks to compel employers to compute tax on the difference (if any)
between the rate on any employee loan given by the employer and an adjusted
Monetary Policy Rate (MPR), which was stated to be MPR minus 3%. The LIRS sees
such loan difference (if any) as a benefit enjoyed by the employee by virtue of his/her
The Notice further sets out the compliance requirements for the taxation of benefits
arising from employee loans as follows:
Deduction of PAYE: The employer is required to compute tax on the difference
between the rate on such employee loan and the adjusted MPR and remit to the
relevant authority.
Reporting Obligation: Every employer is required to file, alongside their annual
returns, a schedule showing the information on its employee loan and the payment
Applicability: This provision will also apply to directors and employees of a
company and will continue to apply even after the relationship with the company
has been terminated as long as the loan remains unpaid. The principle will also be
applied to significant shareholders.

The legal basis for this Notice is Section 4(3) of PITA which exempts “reasonable
removal expenses” from Personal Income Tax. However, PITA does not define what
constitutes “reasonable removal expense”.
The Notice defines “reasonable removal expenses” as any expense which an employee
incurs to move to a new employment location and the payments made to or on behalf
of an employee taking up employment with a new employer such as relocation
The Notice further sets out the compliance requirements for the tax deduction of the
expense as follows:
 the reimbursement to the employee or payment directly by the employer must be
in respect of removal/relocation expenses actually incurred;
 the expenses must be a reasonable amount;
 the payment of the expenses must be properly documented; and
 relocation must be necessary in the circumstance
The Notice provides that in order to obtain certainty for such removal expenses and
temporary subsistence allowances, corporate and business enterprises may submit
their staff policy and guidelines as well as their per diem rates for pre-approval by the
The interpretation of Section 4(3) of PITA by the LIRS limiting reasonable removal expenses to only actual removal/relocation expenses incurred by the employee is rather more restrictive than the Act provided. It is also worthy of note that Section 4(5) of the PITA provides that “any reference to anything provided for an employee in the section shall be construed to include anything provided for the spouse, family, servant, dependant or guest of that employee by the employer unless the reference is expressly to something
provided for the employee himself”. This provision clearly expands the scope of the definition of reasonable removal expenses and the Notice did not take cognizance
of this.

The recent LIRS’ notices attempt to clarify certain grey areas of the law and provide
novel interpretations to some provisions. It is however important to note that Notices
cannot derogate from the extant provisions of the law.

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