Reports from KPMG indicates the Tax Appeal Tribunal has ruled that the Voluntary Pension Contribution “VPC” is tax deductible. This means those who contribute pension from their salaries, outside of the statutory 8% can withdraw it without having to pay any additional tax.

The Judgement: The Tax Appeal Tribunal (TAT or “the Tribunal”) sitting in Lagos today, Tuesday 18 June 2019, delivered judgment in the case of Nexen Petroleum Nigeria Limited (“Appellant”) and Lagos State Internal Revenue Service (“Respondent”) to the effect that voluntary pension contribution (VPC) is a valid deduction for calculating Pay-As-You-Earn (PAYE) tax on employees’ emoluments.

  • The TAT, in delivering the judgment, noted that VPC is statutorily exempted from PAYE tax by the provisions of Sections 4(3) and 10 of the Pension Reform Act 2014 (as amended) and Section 20(1) of the Personal Income Tax Act 2011 (as amended).
  • Also, the TAT ruled that the Appellant is not under statutory obligation to account for tax payable on the amount of VPC withdrawn by its employees.
  • The responsibility to recover the tax due on such withdrawals is that of the Respondent.

Back story: The Lagos State Government has been at the forefront of challenging the controversial “loophole” exploited by some employees to avoid paying tax. This led to the Pension Commission amending guidelines to VPC in 2017 and further in 2018 with the following key changes;

  • Active or mandatory contributors shall have 50% of their VCs available for withdrawal, provided the VCs are retained in the RSA for a minimum of 2 years before access.
  • This implies that such contributors are entitled to withdraw 50% of their VCs once every two years from the date of last withdrawal.
  • The balance of 50% shall be fixed and will only become available for withdrawal, on the date of retirement of contributors.
  • Income accruing on VCs are taxable, where the withdrawal is made before the end of five (5) years from the date the VC was made. This is in line with Section 10(4) of the Pension Reform Act 2014.

Why the ruling matters: The judgment basically affects employees and employers that have exploited the VPC by withdrawing their contributions early and not paying tax on the withdrawals. By this ruling, these people have been cleared and cannot be told to pay back any taxes thought to have been due by the state inland revenues (particularly Lagos State).

However, going forward VPC has to be in line with the latest guidelines, which forbids you from withdrawing more than once in two years.

Deep dive on VPCPenCom releases guidelines on voluntary contribution under the contributory pension scheme

Pensioners only allowed to withdraw once every 2 years

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