September 25, 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 loan granted to employees by their employers.
DEFINITION OF EMPLOYEE LOAN
According to the public notice, employee loans are granted by employer to her employees for specific reasons with expectations that such loans are repaid in full through a pre-agreed deduction from the employees’ salary with or without any interest.
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 benefits which are taxable in the hand employees.
- 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. 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.
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.
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. For further clarifications on this, do not hesitate to contact us.