Tax Appeal Tribunal’s judgement on the tax-deductibility of voluntary pension contribution

TAT judgement on the tax-deductibility of VPC

The Tax Appeal Tribunal (TAT or “the Tribunal”) sitting in Lagos on Tuesday, 18 June 2019, delivered judgement in the case of Nexen Petroleum Nigeria Limited (“Nexen” or “the Appellant”) and Lagos State Internal Revenue Service (LIRS or “the Respondent”) to the effect that:

Wole Obayomi

Partner, Tax, Regulatory & People Services

KPMG in Nigeria

Tax Appeal Tribunal’s judgement on the tax-deductibility of voluntary pension contribution

a. voluntary pension contribution (VPC) is a valid deduction for calculating Pay-As-You- Earn (PAYE) tax on employees’ emoluments; and

b. Nexen has no further obligation to account for tax payable on VPC withdrawn by its employees within 5 years of contribution.

Section 4(1) of the PRA mandates every employer and employee to contribute a minimum of 10% and 8%, respectively, of the employee’s monthly emoluments to the Contributory Pension Scheme (“the Scheme”) established under the PRA. Section 4(3) of the PRA further allows employees to make voluntary contributions to the Scheme, in addition to the mandatory pension contribution. The PRA places obligation on employers to deduct and remit both the statutory contributions and VPCs to the credit of the employee’s retirement savings account (RSA) monthly.

Section 10(1) of the PRA provides that contributions to the Scheme shall form part of tax-deductible expenses in the computation of income tax payable by an employer or employee under the relevant income tax law. In addition, Section 20(1)(g), and Paragraphs 2 and 3 of the Fourth Schedule to the Personal Income Tax Act (PITA) 2011 (as amended) guarantee tax deductions for contributions made by any employee to approved pension scheme, in determining their PAYE tax liabilities. However, Section 10(4) of the PRA subjects the income earned on VPC to tax at the point of withdrawal, if the withdrawal is made within 5 years of the contribution.

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