Effective from 1 January, 2019 the LIRS has appointed employers of Labour as its agents to deduct and remit Capital Gains Tax on loss of employment payments they made to employees as termination benefits. This public notice came on the heels of three other public notices issued by the LIRS in 2017. This brief from the Chartered Institute of Personnel Management (CIPM) examines the emerging trend in taxation laws and regimes in Lagos state since 2017 especially as it relates to employee compensation. It provides likely prognosis for organizations, the employee and HR Leaders/ managers. This brief also serve as a signpost for what to likely expect from other state Internal Revenue Services in 2019 as sub national governments at the state level desperately explore previously uncharted tax laws loopholes and strategies to raise their internally generated revenue base to address their burgeoning recurrent and capital budget requirements.

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LIRS Appoints Employers to Deduct and Remit Capital Gains
Tax (CGT) on Compensation for Loss of Employment
Lagos State Changing Taxation Landscape and Impact on Employee
Compensation
Effective from 1 January, 2019 the LIRS has appointed employers of Labour as its agents
to deduct and remit Capital Gains Tax on loss of employment payments they made to
employees as termination benefits. This public notice came on the heels of three other
public notices issued by the LIRS in 2017.
In September 2017, the Lagos State Inland Revenue Services (LIRS) released three
different public notices on tax regimes that will impact on the compensation of employees
who are resident in Lagos State. The public notices revolved around existing extant tax
provisions under the Pay As You Earn (PAYE) Act, Personal Income Tax Act (PITA)
and Capital Gains Tax (CGT) Act. The three notices targeted the following components
of employee compensation that hitherto attracted tax exemption respectively;
1. Taxation of Loans given to Employees below market interest rate
2. Taxation of Shares given to employees by employers
3. Taxation of compensation due to loss of employment payments disbursed
as terminal benefit or termination benefit
1. Taxation of Loans to Employees below Market interest Rate
The first notice was with respect to taxation of interest benefits accruing to employees on
loans granted by employers. The Notice targeted loans granted to employees at no
interest or interest rates lower than market rates. According to the LIRS such loans
constitute benefits to the employee and as such should be taxed.
Consequently, all employers were required by the notice to deduct tax on such interest
benefits accruing to employees and remit same to LIRS under the Pay-As-You-Earn
(PAYE) scheme. Citing 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, the LIRS also indicated

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that 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%.
2. Taxation of Share-based Compensation to Employees
The second public notice addressed the taxation of share-based payments to employees.
The Notice defined share/stock options “as an agreement that gives employees the right
to a company’s shares based on prices agreed on the initiation date (grant date).
However, the employees must wait for an agreed period (known as the vesting period)
before they can exercise the right”, and provides guidelines on the taxation of share-
based compensation for employees and investment income of individuals who are
shareholders.
According to the LIRS, shares/stocks granted by employer to employees at a price lower
than the market value or free shares constitute a benefit in kind which is taxable in the
hands of employees. The premise of this public notice was Section 3(1)(b) of the Personal
Income Tax Act (PITA), which imposes tax on all gains or profits from employment
including compensations, bonuses, premiums, benefits or other perquisites.
Consequently, employers are obligated to deduct Pay-As-You-Earn (PAYE) tax on such
benefits.
3. Taxation of compensation due to loss of employment (terminal benefits or
termination benefits payments)
The third Notice provided clarification on payments that qualified for tax exemption as
“compensation for loss of employment” under Paragraph 26 of the third schedule of the
Personal Income Tax Act (PITA). The Notice stated that compensation for loss of office
is either a termination benefit or a terminal benefit and LIRS defined both benefits as
follows:
• Termination benefit is payment made to an employee who is made redundant or
to an individual whose fixed term contract is ended early
• Terminal benefit is lump sum payment made to an employee who retires

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For the avoidance of doubt, the LIRS provided further guidance on the components
of compensation for loss of employment that qualified for tax exemption as
follows:
• Tax relief will only be granted for Pay-As-You-Earn (PAYE) tax purposes if the
amount paid was not pre-agreed prior to the commencement of the disengagement
process. However, Capital Gains Tax (CGT) is applicable in line with Section
6(1)(a) of the Capital Gains Tax Act.
• Pre-agreed amounts would be subject to PAYE tax as they are an outcome of
employment.
• Gratuity payments made under an approved pension scheme are tax deductible
for PAYE purposes.
• Gratuity payments made outside the Pension Reform Act (PRA) become taxable
where the conditions set out under Paragraph 18 of the Third Schedule of PITA
are triggered i.e. the period of service is not up to 10 years; total gratuity payable
exceeds ₦100,000; where the period of service does not amount to five years or
an aggregate of 63 months.
Consequently, employers are required to show each pay component of the compensation
for loss of employment and the corresponding payments in their tax returns to enable
LIRS determine the correct tax treatment.
The New Public Notice in 2019 Appointed Employers as Collection and Remittance
agents for CGT on Termination Benefits
By the new public notice from LIRS in 2019, employers now have an obligation to also
deduct the CGT and remit to the state government for employees who are residents of
Lagos state who have received termination benefits as a result of the loss of employment.
The 2017 public notice on taxation of compensation due to loss of employment (terminal
benefits or termination benefits payments) established that termination benefits are
capital in nature though exempt from Personal Income Tax (PIT) but are subject to Capital
Gains Tax (CGT) while terminal benefits are revenue in nature and subject to PIT. Either

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way, both terminal benefits and termination benefits now attract tax deductions for
employees who are resident in Lagos.
Requirements for Collection and Remittance
The collecting agents in this case employers are required to file alongside their respective
annual returns, a statement showing all recipients of capital sums paid by the collecting
agent in the format provided by the LIRS.
Implications for Organizations
• The public notices since 2017 now places a compliance obligation on
organizations to deduct taxes from loans and share options given to employees.
• Employers rather than the recipients of the termination benefits have now been
appointed as accountable agents of government to deduct and remit CGT on
termination benefits to the Lagos State Government. Failure to comply with this
may create an exposure for many organizations in the face of a tax audit.
• The imposition of deductible Capital Gains Tax on termination benefits may impact
the cost of termination or loss of employment especially in “trade union negotiated
loss of employment payments” as employers will have to factor the tax deductions
into the gross payments made to the employee.
• Most organizations may need to retain the services of professional tax consultants
or hire competent tax managers to effectively manage the emerging dynamic tax
challenges that have become synonymous with the business operating
environment in Lagos and across many other states of the federation.
Implications for Employees
• The new public notice appointing employers as CGT deduction and remittance
agents for the government with respect to termination benefits only applies to
employees who benefited from a termination benefit and are resident in Lagos
state. Until other states of the federation enact such tax regimes, employees who
are legally non-resident in Lagos state may be exempt from this tax obligation.

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• For severance or termination type benefit the tax deductions must be factored into
negotiations or computations. When they are not employees may have to plan for
a termination benefit payment net of CGT tax.
• Due to the imposition of a flat 10% CGT rate and lack of a moderated regime, low
income earners may have to pay more on termination benefits under the CGT tax
regime than they would have under the PITA. There is therefore an imperative for
a reformative review of the CGT policy in this regard.
Imperatives For HR
1. There is need for all HR professionals to have a sound understanding of the prevailing
tax regime that impacts on employee compensation in their states of operational
jurisdiction.
2. HR professionals may have to update and upskill on their compensation tax
knowledge
3. HR professionals will need to work with their finance/tax department to also fully
understand and domesticate the implications of this public notices on their existing
employee policies.
4. HR professionals will need to analyze and articulately communicate the implications
of this notice to the executive management showing how it impacts on the
organization’s overall Corporate strategy and Human Resources strategic outcomes
5. HR professionals will also need to drive engagement and communication to
employees to inform and educate them on these emerging issues in employee
compensation tax.