BACKGROUND
September 15, 2017, the Chairman of the
Lagos State Board of Internal Revenue issued a public notice to the tax payers
in Lagos to clarify the tax implication of the interest on the loan granted to
employees by their employers.
Lagos State Board of Internal Revenue issued a public notice to the tax payers
in Lagos to clarify the tax implication of the interest on the loan granted to
employees by their employers.
DEFINITION OF EMPLOYEE LOAN
According to the public notice, employee
loans include the loans granted by an employer to its employees for specific
reasons with the expectation that such loans will be repaid in full to the
employer through a pre-agreed deduction from the employer’s salary, with or
without any interest.
loans include the loans granted by an employer to its employees for specific
reasons with the expectation that such loans will be repaid in full to the
employer through a pre-agreed deduction from the employer’s salary, with or
without any interest.
LEGAL BASIS
Section 3 (1)(b) of the Personal Income Tax
Act (PITA) imposes tax on any salary, wage, fee allowance or other gain or
profit from employment including compensation, bonuses, premium, benefits or
other perquisites allowed, given or granted by any person to any temporary or
permanent employee. More often than not, an employer may offer loans to its
employees at an interest rate lower than the market interest rate or a zero
percent interest rate. This arrangement gives rise to a benefit which is
taxable in the hand employees.
Act (PITA) imposes tax on any salary, wage, fee allowance or other gain or
profit from employment including compensation, bonuses, premium, benefits or
other perquisites allowed, given or granted by any person to any temporary or
permanent employee. More often than not, an employer may offer loans to its
employees at an interest rate lower than the market interest rate or a zero
percent interest rate. This arrangement gives rise to a benefit which is
taxable in the hand employees.
EMPLOYERS’ OBLIGATION
It is mandatory that all employers compute
tax on the difference between adjusted Monetary Policy Rate (MPR) and the
interest rate applicable to loan given to its employees and remit this to the
relevant tax authority. Please note that adjusted MPR is MPR (this is currently
at 14%) minus 3%.
tax on the difference between adjusted Monetary Policy Rate (MPR) and the
interest rate applicable to loan given to its employees and remit this to the
relevant tax authority. Please note that adjusted MPR is MPR (this is currently
at 14%) minus 3%.
Employers are required to file, alongside
their annual returns, a schedule showing the information on its employee’s
loans and payment terms.
their annual returns, a schedule showing the information on its employee’s
loans and payment terms.
WHO IS AFFECTED
This provision will 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.
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.
CONCLUSION
In the light of this clarification, it is
expected that employers will comply with the public notice as issued by the
Lagos State Board of Internal Revenue with immediate effect.
expected that employers will comply with the public notice as issued by the
Lagos State Board of Internal Revenue with immediate effect.
For further clarifications do not hesitate
to contact us me.
to contact us me.
THEOPHILUS
OLUFEMI
OLUFEMI
08138214124, 08096257081
9, Military Street, Off King George V Road,
Onikan, Lagos Island, Lagos.
Onikan, Lagos Island, Lagos.