Voluntary pension contribution scheme update | KPMG | NG

Recent developments on voluntary pension contribution scheme

Voluntary pension contribution scheme update

The Joint Tax Board (JTB) and Lagos State Internal Revenue Service (LIRS) recently issued separate Public Notices, on their position on the adverse effect of voluntary contributions (VC) on tax revenue.

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Recent developments on voluntary pension contribution scheme

The Joint Tax Board (JTB) and Lagos State Internal Revenue Service (LIRS) recently issued separate Public Notices, on their position on the adverse effect of voluntary contributions (VC) on tax revenue.

Section 4(3) of the Pension Reform Act (PRA or “the Act”) 2014 provides that any employee to whom the Act applies may, in addition to the statutory contributions, make voluntary contributions to his retirement savings account. Section 10(1) of the PRA provides for the tax-deductibility of pension contributions – including VC. Section 10(4) of the Act, however, provides that any income earned on VC made and withdrawn within 5 years would be subject to tax at the point of withdrawal. This is in contrast to Section 7(2) of PRA 2004 which taxed VC withdrawn less than 5 years after the date of contribution, and not merely the income earned from it.

 

Our Comments

The position of the tax authorities raises several issues. One obvious issue is how the Tax Appeal Tribunal (TAT) and/or the courts will evaluate the alleged artificial or fictitious ature of a VC scheme. For instance:

a.    What documentary evidence would be considere das sufficient for a tax authority to discharge its onus of proof that a VC scheme is artificial and without substance?

b.    What percentage of VC relative to total employment income would the TAT and/or the courts regard as artificial, in the absence of a legislative threshold in PRA 2014?

c.    What bearing does Section 16 of PRA 2014 have on the validity of VC withdrawal or the tax treatment of VC withdrawn, given the overriding provision in Section 10 of the PRA 2014?

d.    What frequency of withdrawal of VC from RSA would qualify a VC scheme as an artificial transaction since the PRA 2014 is silent on this? Would the periodic and consistent withdrawal of VC, for example, be viewed as being in alignment with the thrust of the PRA, which is primarily for the payment of retirement benefits?

In the final analysis, the critical issue appears to be whether the courts would focus on what the law simply says rather than what it was intended to say (no matter the undesirable outcome arising from its application) if and when the case of alleged abuse of VC comes up for hearing.

This excerpt is from our Newsletter document "Recent developmentson voluntary pension contribution scheme". Click here to download the publication.

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