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
• 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

• 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.

We explain
It appears LIRS has likened the interest
benefits enjoyed by employees to benefit-in-kind, which constitute taxable

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