Introduction
On 14 September 2017, Lagos
Inland Revenue Service (LIRS) released a public notice on the treatment of
interest benefits on employee loans. In the notice, LIRS defined employee loans
are loans given by “an employer to an employee for specific reasons with the
expectation that such loan will be repaid in full to the employer through
pre-agreed deduction from the employee’s net salary, with or without any
interest”[1].
Interest benefit is the difference between the open-market interest rate
(Monetary Policy Rate “MPR”)
and the lower interest rate charged by employers on loans given to employees.
This benefit is enjoyed because employees pay zero or lower-than-market
interest rates on loans collected.
LIRS relying on section 3
of the Personal Income Tax Act now seeks to tax interest benefits.
Tax
Treatment on Interest Benefit to Employees
Before this public notice
was issued interest benefits on loans granted to employees were largely
unrecognized and the tax treatment was unclear.
LIRS will now treat all employee
loans using an adjusted MPR of 3% less than the standard MPR as the minimum
interest rate allowable on employee loans. When the adjusted MPR is higher than
the interest rate given on the employee loan, the difference will be recognized
as an additional benefit (income) to the employee and will be taxed. But if the
interest rate is higher than the adjusted MPR it means that no benefit has
accrued to the employee.
Since the MPR is currently
14% and LIRS will allow a 3% adjustment, this means that 11% will be the
minimum interest rate recognized by LIRS on loans to employees. For any loan given
to an employee at less than 11% interest rate, the difference in the rate will
be treated as a benefit to the employee and will be taxed.
This interest benefit
remains taxable as long as the loan subsists even when the employment
relationship has ended.
Persons
Affected by this Notice
Employees:
Employees
will now be expected to pay tax on benefit enjoyed on loans given by employers
for loans with lower-than-11% interest rates.
Directors
and Significant shareholders: Though captioned “Taxation of Employee Loan”, this tax treatment
also applies to loans given to directors and significant shareholders.
Employers:
Employers have the burden of deducting tax on the interest benefit given to the
employee and remitting to the LIRS either monthly or yearly depending on the
repayment terms agreed between the parties. The annual returns file by
employers in January must now include a schedule of employee loans and
repayment terms.
Possible
Effects of this Treatment of Employee Loans
LIRS’s treatment of
employee loans may result in any of these outcomes:
1. Some
employers may no longer give loans to their staff.
2. Some
employers may increase their interest rates to 11%. This way, no benefit will
accrue to the employee and companies get the additional income to run their
businesses. This interest will eventually be taxed as companies’ income tax.
3. Some
employers may retain low interest rates while deducting tax on the interest
benefits to their employees.
[1]
Public Notice on “Taxation of Employee Loan” issued by Lagos Internal Revenue
Service , published in The Guardian on Thursday 14 September 2017 at Page
22.
