July 8, 2021

The Tax Appeal Tribunal (TAT) sitting in Lagos, has delivered a judgment in a matter between Citibank Nigeria Limited (“Citibank”) and Lagos State Internal Revenue Service (“LIRS”). The composition of gross income for the purpose of calculating Consolidated Relief Allowance (CRA) was in dispute between the parties, and particularly whether tax-exempt income should be deducted from the gross income of an employee or otherwise, before calculating CRA.

Highlights of the Case

Citibank in 2017, made severance and relocation payments to some of its employees on the accounts of termination and transfer, respectively. These payments were excluded from the gross income of the employees in computing the employees’ applicable allowances/reliefs. Later in 2019, the LIRS imposed an additional PAYE liability including penalty and interest on Citibank on these bases. Although Citibank objected to this assessment, LIRS refused the objection by issuing a Notice of Refusal to Amend (NORA).

An amended demand notice was again issued in 2020 by LIRS, imposing an additional PAYE liability, to which Citibank objected, without a response from LIRS. Being dissatisfied with this decision, Citibank initiated an appeal at the TAT, seeking to set aside the Demand Notice issued by LIRS.
At the appeal, Citibank averred that the gross income of an employee encompasses all payments derived by reason of employment, and this includes severance pay and relocation allowance. Consequently, CRA should be calculated on the gross income of employees, in line with Section 33(1) of the Personal Income Tax Act (PITA). Citibank further stated that excluding severance pay and relocation allowance before applying CRA was in contravention of the provisions of the law.

LIRS also annualized incomes of some employees of Citibank who were in its employment for less than twelve (12) months, to which Citibank objected on the ground that PAYE is paid on actual income earned, and to be deducted by the employer monthly. Therefore, LIRS cannot raise assessment on fictitious income which was not earned during the months in which the employees had left the bank.

Finally, Citibank implored the TAT to declare that imposition of interest and penalties on the alleged PAYE liability was contrary to the provisions of the law as the assessment had not become final and conclusive, by reason of the series of objections to the assessment.

In its response, the LIRS stated that all tax-exempt incomes specified in the Third Schedule to PITA should not form part of an employee’s gross income in calculating CRA, emphasizing that in the interpretation of statutes, where the words are clear, simple and unambiguous, the words should be given their simple, natural and ordinary meaning. In response to the issue of penalty and interest, the LIRS stated that these become due on tax not remitted within the statutorily specified time, and not only when an assessment is in dispute.

TAT’s Decision

Upon submission by the parties’ representation, the TAT held that:

  • Paragraph 26 of the Third Schedule to PITA states that “any compensation for loss of employment”, under which severance payment is categorized, is a tax-exempt income. Therefore, since it is exempted from PIT, it cannot and should not be aggregated as part of an employee’s income, for the purpose of applying CRA.
  • A lacuna has been created by the combined reading of Sections 19 and 33(1) & (2) of PITA, with regards to the treatment of relocation allowance, and both Citibank and LIRS have interpreted these provisions of PITA to suit their purposes.
  • Where a tax law is found to be ambiguous, it is to be interpreted in favour of the taxpayer.
  • Although Finance Act 2020 has resolved this lacuna, its application in the instant case would constitute a retrospective treatment which is disallowed unless otherwise provided for.
  • Citibank cannot be made to remit the PAYE of employees for the months during which the employees were not on their payroll, and as such, LIRS was wrong to have annualised the income of the affected employees in respect of the months they were no longer in the bank’s employment.
  • Penalty and interest apply as soon as there is an unpaid tax liability by the due date of payment. However, interest and penalty should only apply in respect of PAYE outstanding for the months when the employees were in the bank’s employment.

Our Comments

The bone of contention in the instant appeal is the implication of Sections 19, 33(1) & (2), and Paragraph 26 of PITA with regards to application of CRA.

Prior to now, CRA could be applied on employees’ gross income according to section 33(1) of PITA. This was however not exactly defined in PITA but often used interchangeably with ‘gross emolument’, which was defined in section 33(2) of PITA to include any income derived solely by reason of employment, including severance payments being compensation for loss of office.

There was however a different school of thought which opined that all tax-exempt income be deducted before applying CRA, thus creating uncertainties in the application of the law. This previously created uncertainty has now been cured by the provision of the Finance Act 2020, albeit inapplicable to the instant case.

We therefore align with the position of the TAT that where there is an ambiguity in the law, the taxpayer’s interest supersedes that of the taxing authority, as decided in favour of Citibank.

Finally, as also held in recently delivered judgements, penalty and interest are only suspended pending the determination of an appeal, and when the appeal fails, penalty and interest are to be calculated from the date the tax liability arose.