On 21 August 2017, the Joint Tax Board (JTB) and the Lagos State Internal Revenue Service (LIRS) issued separate public notices, cautioning the general public (particularly employers and employees), to desist from exploitation of the Voluntary Pension Contribution Scheme for tax avoidance purposes. That is, the practice of contributing greater parts of employees’ remunerations (over and above the statutory 8% of monthly emoluments) voluntarily, into their Retirement Savings Accounts (RSA) for the purpose of reducing the taxes payable on such remunerations, based on the legal tax exemptions granted on the pension contributions.
You may access the public notices of the JTBand LIRShere.
In these public notices, both tax bodies made references to certain provisions of the Personal Income Tax Act (PITA) and the Pension Reform Act, 2014, [“the PRA” or “the Act” (which guides the administration of the Pension Scheme (“the Scheme”) in Nigeria)] as the legal bases for the penal actions they (and other personal income tax authorities nationwide) intend to take against ‘culprits’ in order to address this abuse of the Scheme.
The legal references made by the JTB and LIRS respectively in their public notices, as bases for penalizing offenders and recouping the tax leakages, are however greatly weakened by certain provisions of the PRA, making it almost impossible for the tax authorities to win any legal case against perceived offenders. Some of these legal references and the counteracting provisions of the PRA are highlighted below:
- References to Section 17, and paragraph 8 of the fourth schedule to PITA
Section 10(1) of the PRA states that “Notwithstanding the provisions of any other law,contributions to the scheme under the Act, shall form part of the tax deductible expenses in the computation of tax payable by an employer or employee under the relevant income tax law”. The provisions of section 17 and paragraph 8 of the fourth schedule to PITA can be categorized as ‘any other law’ and so are now being expressly overridden by this provision of the PRA.
- Reference to Section 16 of the PRA on restrictions as to time of withdrawal from the Scheme
Section 16 of the PRA on restrictions to the allowable times or periods of making cash withdrawals from the Scheme is also countered by the provision of Section 10 (4) of the PRA, which pre-allows for withdrawal of the voluntary pension contributions even within 5 years of such contribution. Our interpretation, and those of the Pension Fund Administrators (PFAs) whom we have contacted on this subject is that the restrictions of section 16 of the PRA on allowable periods of withdrawals from the Scheme apply onlyto the statutory or obligatory portion of the contributions and not to the voluntary part.
- Reference to taxability of the voluntary contributions if cash withdrawals are made earlier than the prescribed timelines
Contrary to popular views that voluntary pension contributions are only exempt from tax if withdrawn after 5 years of contribution, section 10(4) actually onlymakes reference to ‘incomes’ earned (returns or interest) on the voluntary contributions. Therefore, onlythe investment income portion of the voluntary contribution is taxable even if the contributions are withdrawn before 5 years from the date of contributions.
- Reference to the Labour Act
The reference to the provisions of the Labour Act by the JTB, as to the limitations on allowable maximum monthly deductions from wages does not hold water as the Labour Act only covers employees engaged under a contract of manual labour or clerical work in the private and public sector. It does not cover all those employees exercising administrative, executive, technical or professional functions as public officers or otherwise.
- Indication by LIRS that employers would be assessed to additional tax, interest and penalty on taxes resulting from abuse of the voluntary contributions
Further to the legal provision that withdrawals from the voluntary contributions (not being incomes accruing on the fund) are not taxable even if withdrawn within 5 years, employers also have no part whatsoever in the process of withdrawal of funds from the voluntary contributions. Individual contributors to the Scheme only need to apply to their PFAs (who in turn get approvals from the National Pension Commission) to be paid their voluntary contributions. Since the employers are not involved in the voluntary contribution withdrawal process, no penalty or additional tax burden should be levied on them in this regard.
The Federal Government, in its bid to encourage unrestricted contributions into the national pension fund, issued the PRA in 2014 and made certain provisions in the Act, which may unknowingly have given room and even legal backing to uncontrolled tax avoidance practices through the Scheme.
Since the curtailment of tax leakages/ enhancement of tax revenue is currently paramount in government’s economic agenda, serious consideration should be given to possible amendment of certain provisions of the PRA, in order to summarily address the obvious loopholes. This, in our opinion, would be a more thorough and effective approach than the issuance of public notices.
The PFAs whom we contacted on the subject are also awaiting further directives and practical guidance from the National Pension Commission towards addressing the issue of abuse of the voluntary pension contribution scheme, as it is not clear to them how government intends to recoup the additional taxes (if any) at the point of withdrawal of the contributions.
One new noteworthy compliance requirement as contained in LIRS’ public notice however, which bears the potential of exposing abusers of the Scheme, is that on an annual basis, individuals claiming tax relief on their voluntary pension contributions, must submit alongside their income tax returns, a copy of their Retirement Savings Accounts (RSA) statements for the relevant tax year and any other period requested by the LIRS.