The Tax Appeal Tribunal (“TAT”), on 18 June 2019, delivered a ruling on the exemption of voluntary pension contribution (VC) of employees from PAYE tax in Nexen Petroleum Nigeria Limited(“Appellant”) and Lagos State Internal Revenue Service (“Respondent”). Two major issues were;
- Whether VC is exempt from Personal Income Tax (PIT)?
- Who should recover taxes on Voluntary Pension Contribution?
Before we proceed, it is good to have an overview of voluntary pension contribution (VC) in Nigeria. VC is an extra contribution by an employee together with the mandatory contribution (MC) into the Retirement Savings Account (RSA) of an employee. Unlike MC, the rate for VC is not fixed, and an employee can choose the amount to contribute for any period of time. Hence, eligible persons who want to make VC shall notify their employers in writing of intentions to make VC and the amount to be deducted from their emoluments. Furthermore, VC reduces the monthly net pay, taxable income, and PAYE tax of an employee. It is therefore usual for most employees to plan their tax affairs with VC. Nevertheless, “premature” withdrawal from VC will be taxable where funds are withdrawn before the end of five (5) years from the date of contribution in line with Section 10(4) of the Pension Reform Act 2014.
In the judgment, TAT ruled that VC is exempted from PAYE tax based on the provisions of Section 20(1) of the Personal Income Tax (Amendment) Act 2011 and Sections 4(3) and 10 of the Pension Reform Act 2014. The Appellant is therefore not obliged to account for tax payable on VC made by its employees. Instead, the Respondent is responsible for recovering the tax due on VC withdrawals. TAT ruling is not final and conclusive as further appeal goes to the Federal High Court.
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