THE JOINT TAX BOARD ISSUES PUBLIC NOTICE ON ABUSE OF VOLUNTARY PENSION CONTRIBUTION SCHEME
BY ANTHONY EZEAMAMA ESQ.
BACKGROUND
In a bid to ensure that every person who has worked in either the public or private sector of the Nigerian economy receives his or her retirement benefits as and when due, the Nigerian federal government introduced a contributory pension scheme through the Pension Reform Act 2014 (“the Act”) with a view to ensuring that every employee enjoys a decent life after retirement. Section 4(1) of the Act in this regard mandates every employer of labour to whom the Act applies to deduct a minimum of eight (8) percent of each employee’s monthly emolument and to pay same into the employee’s retirement savings account with a Pension Fund Administrator (“PFA”) of his choice, while the employer shall provide a minimum matching contribution of ten (10) percent toward the pension scheme. Section 4(3) of the Act further provides that any employee may in addition to the total contributions being made by him and his employer, make voluntary contributions to his retirement savings account. These contributions when made are tax deductible for the purpose of computing the employee’s taxable income – section 10(1) of the Act and paragraph 2(d) of the Sixth Schedule to the Personal Income Tax Act as amended (“PITA”).
However, the grounds under which payments made into the pension scheme can be withdrawn by an employee are limited to where:
1. The employee attains 50 years of age; or
2. The employee disengages or is disengaged from his employment and he is unable to secure another employment within four (4) months of that disengagement; or
3. The employee disengages from active service on health ground based on the advice of a suitably qualified physician or medical board.
Notwithstanding the above withdrawal restrictions imposed by the Act, an interesting trend has been discovered amongst employers whereby unlimited amounts are deducted from their employees monthly emoluments as voluntary contributions and treated as tax exempt items even though *section 5(7) of the Labour Act caps the total amount of deductions an employer can make from the wages of his worker in any one month period to a maximum of one third (1/3) of that worker’s wages.
This obnoxious tax avoidance practice which is being marketed mostly by PFAs allows an employee to make an unrestricted voluntary contribution from his monthly salary under an arrangement that permits the employee to withdraw same contribution contrary to the above legal restrictions and thereby significantly reducing the tax payable by such an employee.
On the other hand, section 17(1) of PITA which is an anti-tax avoidance provision gives the tax authorities the power to adjust any transaction they consider artificial or fictitious and which has the capability of reducing any tax payable by a taxable person.
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*Anthony Ezeamama is a corporate commercial lawyer and a tax specialist*
Email: anthonyezeamama@nigerianbar.ng
08033482067
