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THE LEGAL AND REGULATORY FRAMEWORK ON TAXATION OF REDUNDANCY BENEFITS IN NIGERIA

AYODEJI O. OLABIWONNU, ESQ*. – Managing Partner, THE LEGALHUB PARTNERSHIP

What is Redundancy?

The term redundancy has been statutorily defined as an involuntary and permanent loss of employment caused by an excess of manpower[1]. The definition of the term has also received some judicial perspectives such as in Peugeot Automobile Nigeria V. Oje & Ors[2] and a retinue of other cases[3] where the Courts have agreed that redundancy is an involuntary loss of employment resulting from excess of manpower.

Redundancy Payment and the Tax Regulatory Framework-

As with resignation and retirement which comes with some form of benefit upon the disengagement of the employee from the employer’s employment, an employee who has involuntarily lost his employment due to excess of manpower (redundancy) is by law entitled to payments/compensation for the loss of his employment.

Generally, the Nigerian Legal and Regulatory Framework on the deduction of taxes from payments received or receivable by an employee for loss of employment is a subject of legal ding-dong. While Paragraph 26 of the Third Schedule of the Personal Income Tax Act[4] (PITA) clearly exempts “any compensation for loss of employment” from taxation, Section 6 (1)(a) of the Capital Gains Tax Act[5] (CGTA) provides that “where any capital sum is derived by way of compensation for any loss of office or employment” such payments shall be “Capital Gains” which are chargeable to tax under the Act. Bad enough, the body of Nigerian Laws on taxation fails to give any statutory definition of what “compensation of loss of employment” means.

PITA OR CGTA?

In dealing with the legal conundrum presented by these two conflicting provisions of the law, tax administrators and regulatory bodies have generally devised a categorization model for the determination of which law would apply to payments received or receivable by an employee as compensation for loss of employment at any given time, depending on the facts of each case.

Under the model, payments for loss of employment are categorized either as “terminal benefit” or “termination benefit” for the purposes of tax treatment. While pre-arranged payments such as gratuities, payments in lieu of notice or pensions[6] which are all payments received or receivable upon the disengagement of the employee whether by satisfactory completion of the required years of service, voluntary resignation by the employee or by the exercise of the employer’s right of termination in accordance with the provisions of the Contract of Service are generally termed as terminal benefits, payments received or receivable upon premature and involuntary termination of employment, by way of redundancy for instance, are categorized as termination benefits. While terminal benefits are generally subjected to taxation as Personal Income Tax under PITA, termination benefits are subjected to taxation as Capital Gains Tax under CGTA.

The rationale behind this model is that terminal benefits usually form part of the pre-agreed payments under the Contract of Service which is akin to the regular remunerations in the course of employment and, therefore, chargeable as regular “income” or “revenue” under PITA. Termination benefits on the other hand are not predetermined, they are unexpected and are irregular lump sum payments accruing as compensation for sudden, involuntary loss of employment which by its very nature would qualify as “capital” and, therefore, chargeable under CGTA. It will then stand to reason that when payments for involuntary loss of employment were pre-agreed, they will be categorized as terminal benefits.

The import of all of the above is that generally, any lump sum received as compensation for loss of employment is subject to one taxation or the other, either as Personal Income Tax under PITA or as Capital Gains Tax under CGTA.

The belief that “compensation for loss of employment” is exempted from taxation is illusory as whatever is exempted under PITA is caught under CGTA and vice-versa. In the real sense, the only disengagement benefits that is exempted or truly immune from taxation is Pensions which are exempted under Section 10 of the Pensions Reform Act, 2014, subject to the conditions stated in the Act.

As has been mentioned earlier, the determinant of the tax deductible from any payment is the categorization of that payment; either as terminal benefit or as termination benefit. Where the provisions of the Conditions of Service or the Contract of Employment on redundancy merely state the “how” and not the “how much” in terms of redundancy payments, then it can be argued that the sum payable has not been pre-agreed and the lump sum will be treated as “termination benefit” which will be chargeable under the CGTA as capital gained.

As one may wonder, why should it matter which head of tax is applicable anyway? The difference is in the rate applicable and chargeable on each of the two heads of taxes. The current rate chargeable on taxable incomes as Personal Income Tax is a graduating percentage of between 7% at the minimum and 24% at the maximum. Meanwhile, the rate chargeable as Capital Gains Tax is constant at 10%.

End Note: The new Finance Act, 2020 has no significant effect on the position highlighted above. The Act amends certain parts of seven (7) subsisting Laws on Taxation in Nigeria including PITA and CGTA[7]. However, the parts of PITA and CGTA amended by the Finance Act bears no direct effect on any part of the two Acts relevant to the subject under discussion in this document.[8]


*Ayodeji O.Olabiwonnu, Esq. (LL.B, B.L, LL.M) is the Managing Partner of the LEGALHUB PARTNERSHIP, a Lagos-based full service Law Firm.

[1] Section 20 (3) of the Labour Act, Cap L1 LFN 2004

[2] (1997) 11 NWLR Pt. 530 Pg. 625

[3] Union Bank v. Salaudeen (2017) LPELR-43415 (CA); Adibuah v. Mobil Oil (Nig.) PLC (2015) LPELR-40987(CA); Obaleye v. Dunlop Ngerian Industries Ltd (1997) 11 NWLR (Pt. 530) 625.

[4] Cap P8 LFN 2004

[5] Cap C1 LFN 2004

[6] Total exemption status is granted to Pensions under Section 10 of the Pensions Reform Act, 2014 (PRA), although subject to certain conditions stated therein.

[7] Others are Companies Income Tax Act Cap C21; Stamp Duties Act Cap S8; Petroleum Profit Tac Act Cap P13; Value Added Tax Act Cap V1 and Customs And Excise Tariff, Etc (Consolidation) Act Cap C41.

Disclaimer: This article is for general information purposes only and should not to be taken as a Legal Advice as same does not constitute an advice to the world. The LHP and the author shall bear or assume no responsibility and is hereby fully discharged and excluded from all liabilities or claims that may arise from the reliance on the content of this document by any person, body or group of persons.

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POST COVID-19: INFORMATION TECHNOLOGY AND SUSTAINABLE LEGAL PRACTICE

By: Adeyemi ABIJO, ESQ.- Lead Partner, The LegalHub Partnership, Ikeja, Lagos.

I write from my little desk which has been serving as office for the last month. It is easier to stay at home particularly when you know that you can go out if you want, but if you are told that you cannot go out even if you have nothing serious to do out there it feels like a prison sentence.  As Lawyers, we understand the principle of false imprisonment better than the layman.

You will agree with me that, If there is any moment in our lifetime that can be referred to as a defining moment in history, this one will pass for it.  From the beginning of time, mankind has faced various global troubles, armed conflicts, which have changed the course of history.

The generation before us lived through the second world war while their predecessors went through the first world war and the influenza pandemic of 1918.

In Nigeria today, the Coronavirus crisis has already changed lives and livelihoods as we know it. A lot of things will also change in Legal Practice business too.

The phenomenon called digital age is now experiencing greater growth than ever in our Country and our practice is no exception. The idea of teleconferencing or virtual meeting is now becoming essential.  Physical meetings will now have to intertwine with virtual meetings when we resume partially on Monday, 4th May, 2020 or when we resume fully as this has become inevitably part of life henceforth.

 It is pertinent for us to know that until the concept of ‘social distancing’ and/or physical distancing is relaxed, Chambers meetings, Clients’ meeting or Court appearance and proceedings as we know and used to, will never be the same again.

A masked man used to scare people, but now he may actually be safer than the unmasked!  People will now be wary of unmasked men. This is because the fear of the virus is rising and also raising stress and psychological problems.  I see people who are panic-stricken because they have a cough, or had a headache.

The economic crisis that is developing from this will make you even more scared and we don’t know when this will end.  As for Nigeria, our revenue is about 90% dependent on oil for which reason the world economy will need to recover for oil demand to pick up. Though, for economic sustenance, Nigeria must continue to diversify and be less reliant on oil revenue as it is no longer viable.

Like the Rotary International has been doing in the case of Polio in Nigeria, a vaccine will need to be found, and mass vaccinations done for people to feel free to engage in productive economic activities. The experts are telling us that any reliable vaccine will still take about twelve to eighteen months away to be in sight.  Airlines will find it difficult to fly full capacity because it is impossible to have social distancing in an Aeroplane. That is even if any Country will let you in!

The other worry is the expectation of a ‘second wave’ of infections when this phase subsides.  We expect this because it has always occurred in previous pandemics.  Isn’t this scary?

Whichever way it is, we are in it for the long haul.  So, learned Silks, Seniors, Younger colleagues and Contemporaries, unknot, take off your tie and relax, it is going to be a long day.

In the course of this lockdown I have taken part in several online sessions/webinars and have found that the growing community of Lawyers cannot but step up our practice style and standard. The business environment has changed and the question to ask oneself is ‘am I in or out’ of the box.

As well delivered during the virtual knowledge sharing session had on 30th April, 2020, Ngozi Aderibigbe of Jackson, Etti and Edu, asked a rhetorical question implying the assumption that every participant who is a Lawyer has personal Laptop to work with. Should a Lawyer not have a personal Laptop that you can operate by yourself in this age and time, then, your business has not started at all. Yes, you may have been in active practice but not in active business.

As far as the pandemic is concerned we are in uncharted territory now. This is the situation for Lawyers who are yet to join the bandwagon of IT-compliant community of Lawyers. Even though, it was the opinion of the Israeli Attorney, Michael Decker, the second Speaker during the webinar attended on the 30th April  2020, that virtual meeting is not going to completely take the place of physical meeting, I still posit that it is advisable to join the bandwagon in this unpredictable period. We are not sure when we will be fully out of this pandemic.

Despite the several legal issues already raised about whether the Rules of Court as presently drawn can accommodate full-fledged virtual court proceedings, we need to begin to study the new Practice Direction of the Lagos State High Court in this regard, so as to ensure we remain in business. This is another reason we must join the bandwagon now.

These are challenging times, but since the world has survived worse times I am confident we will beat this too.

I welcome us to a brand new Month.

Let’s not forget to stay safe to stay alive.

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MR. PRESIDENT, NIGERIA IS BLEEDING

By: Yusuf Temilola NURUDEEN, ESQ.- Senior Associate, The LegalHub Partnership, Ikeja, Lagos.

Sometime last week a young lady was interviewed somewhere in Lagos State. Her reaction was to
the initial partial lockdown announced by Lagos State Government as a measure to contain the
spread of the virus. The lady retorted “…so please, I am bleeding for our Governor, our President.
They ought to, they can, as in, I am bleeding. So, I am on my knee… they can help us. Corolla virus
is something…. as in… I am hearing it right now at Mushin there, are you hearing now? I think you
are hearing? The crowd is a lot. Many people is shouting for hungry, for eating…”.


I also joined in the frail and made a mockery of the lady because she couldn’t put the words together
properly. But, the position that the young lady maintained is the sad reality today. Are we not
bleeding? Can’t you hear the crowd shouting? Don’t we have hunger in land? General Muhammadu
Buhari don’t tell me you cannot feel the pulse of Lagos and Ogun State. Even if you do, we will not
take that from you.


As I write, the attendant insecurity occasioned by the total lockdown is staring us. Sir, you have
botched your part of the social contract by failing provide palliatives that commensurate the
lockdown, and as it were, a relative stable power supply to differentiate the lockdown from detention.
The desperation of the idle youth population has boiled over. Since on Friday, we have experienced serial cases of daylight armed robbery in more than ten (10) areas in Lagos State concurrently. Ogun State too has its own fair share of the unrest. Meanwhile, the people have resorted to self-
help. They have formed themselves into vigilante groups brandishing all sorts of weapons to protect
their lives and property.


What is more? Sir! You have again failed us in the primary responsibility of the government which
we have entrusted you with. That is, the security and welfare of the people of Nigeria. I think this
should have been the time when the civil security architecture is not overburdened.


Then, we couldn’t have been able to help the situation we found ourselves today more importantly
when the Secretary to the Government of the Federation never knew Nigeria’s healthcare
infrastructure is in such bad state, Health Minister see no reason to pay or insure medical officers
and the Police are hard-working in their extortionate practices. Sir, this is upshot of your paltry
budgetary allocation of less than 8% to health Sector, education and youth development from 2016
till date. Mr. President, these boys are no longer begging. They are demanding menacingly with
weapon.


Sir, I can see the fear in your face. You are terrified by this situation. You cannot look us in the eyes
and tell us the sad truth. Maybe that is why your tards took to Twitter to admonish Nigerians on
Saturday 11th of April, 2020, to continue to endure the unfriendly sufferings courtesy of your
approaches, dispositions and attitude to issues of national importance. General Buhari, you need to
man-up. Those Tweets cannot be taken for an exercise your powers under to the Quarantine Act. As
it is, we are in a state of quandary as to the extension of the lockdown that ended yesterday.


Yes! You have brought this suffering on us. COVID-19 was already in more than Sixty (60) countries
before 27th of February, 2020 when we recorded the first case of an Italian Citizen who returned to
Nigeria on 25th of February, 2020. Yet, you do not order restrictions of flight till 25th of March, 2020,
when your daughter and others of top government functionaries and politicians arrived the country
infected with the virus. Before now, all reported cases of COVID-19 were imported. You could have
intensified contact tracing and indexing of all returnees within the last 30 days using the airlines
manifests. You should have invited them and treated any case of disobedience as an enemy of the
State.


Sir, I understand that we are dealing with a pandemic that have changed human history in less than
Hundred (100) days and that the lockdown has to be maintained to contain the spread of corona
virus but, the people are hungry. Your people need food. If you do not consider them now, the next
ten (10) days will not be funny. There is anger in the land, the tension is palpable, tempers have
risen across boards, any extension or prolongation of the lockdown without a watertight mechanism
or provisions to cushion the effects, would most likely spell doom at the long run. Let us avoid socio-
economic Armageddon!

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THE PLACE OF THE NIGERIAN BAR ON THE CALL TO FREE INMATES FROM CUSTODIAL CENTRES

By: Adeyemi ABIJO, ESQ.- Lead Partner, The LegalHub Partnership, Ikeja, Lagos.

On the 7th April, 2020, I listened to a podcast sent via email by the IBA (International Bar Association).  Leading human rights lawyer and Director of the IBA’s Human Rights Institute, Baroness Helena Kennedy, and IBA Director of Content, James Lewis, discussed the balance between the fundamental priorities of security and freedom and access developments in countries including Hungary, Russia, India, the UK and the US. Though, the discourse was far-fetched about the case in Nigeria presently, but still prompted the following.

I seem to be very much disturbed about the silence of the Nigerian Bar on the need to decongest the Prisons (Correctional Service or Custodial Centres) in Nigeria. I believe that the Bar should be in the forefront of the call for decongestion of the Prisons in Nigeria. If not for any other reason but for the health risk this may pose given the ravaging Covid-19 pandemic. Recall that some Countries have started decongesting their Prison facilities for this purpose and our own Attorney General of the Federation, Abubakar Malami, has followed suit. The best times are here for the Human Right Community only if we take advantage immediately as advised by the A.G.F requesting conditional or unconditional release of awaiting trial persons in Nigeria.

THE ROLE OF THE POLICE AND COURT OFFICERS IN THE CONGESTION OF CUSTODIAL CENTRES.

We must not forget Custodial centres like the Police Stations, Area Commands and, particularly in Lagos State, the SARS (Special Anti-Robbery Squad) with extremely congested cells which are mostly poor in basic hygiene standard. Search light must be beamed on the I.R.T(Inspector General Response Team) too.

 The duty is even more on us as the Human Rights Community for the fact that a lot of individuals remain in such custody due to failure of the system to review or check the excesses of both the Nigeria Police and the Judicial Officers (The Magistrates).

 The Police as we all know are partly responsible for the loads of unnecessary cases before the Magistrate Courts in Lagos today. This has been confirmed by the Lagos State Government through the Ministry of Justice by its overhauling of criminal cases and the recommendation for necessary screening of cases before being assigned in the Magistrate Courts at all.  The move is to also gradually and systematically withdraw lay Policemen as Prosecutors in our Courts. This is indeed a welcome development that must be sustained and improved upon too. The ultimate effect will be to reduce drastically the number of criminal cases before the Magistrate Courts in Lagos State. This will also reduce the workload of Magistrates as they have been overworked for too long to the extent that cases have become garbage in garbage out.  Given the list of cases on a daily basis, no Magistrate can be at his/her best both judicially and judiciously.

Lawyers suffer a lot too as a result of the physical and mental stress the system has placed on Magistrates because they(Lawyers) are less likely to learn or improve on their knowledge of the law in the circumstance we all have found ourselves. The professional rapport required between the Lawyers and Magistrates to develop the law is daily jettisoned at the earliest opportunity. Avoidable loss of precious man hours has become the order of the day. It should not be lost on the Magistrates that some simple cases can easily be discarded by way of putting the I.P.Os on their toes in open Court to determine if the facts are deserving of the Court’s precious time.  Non-custodial sentencing should be encouraged more on simple cases or misdemeanours at the discretion of the Court.

THE BAR AND FIGHT AGAINST CORRUPTION

“Let’s call a spade a spade“.

Another positive effect of the newly introduced screening initiative by the Attorney-General is the fact that it will also reduce the level of corruption in the Magistracy.

 Corruption in this context means the interplay or the exchange of illicit funds generated within the Courts on a daily basis starting from the Investigating Police Officers otherwise called I.P.Os, the Police Prosecutors, the Court Registrars and the Court Orderlies on one hand, and the Magistrates on the other hand. Can we the gentlemen of the Bar honestly deny our complicity in this miasma? We are either directly or remotely involved. From Lawyers who write frivolous Petitions to the Police or who bribe the Registrars or any of the Court Officers to cut corners believing that we are smarter than others forgetting that we are indeed working against ourselves in the real sense.

As we can see, the Court officers are now so brazen in their approach to bribe in criminal matters that even in Civil cases they not only demand “settlement” to issue Hearing Notice or C.T.C of Judgement but will not release to you until you pay a certain amount known to every Court Registrar as the benchmark. Anything less is not acceptable. In fact, we can categorize this set of people (Court officials) as “vulnerable” in this period of Covid-19 for they have not been making the ‘usual daily’ since the stay at home order. This period is bad business for them. Their conduct is a serious bane and drain to law practice as it has always been bad business for the Bar.

 The reality that it is bad business for law practice and particularly, the young Lawyers creeps in when Clients pay so much more to the Police or the Court officials and in some cases, the Judicial officers(Magistrates) than they pay the Lawyer. What has the Bar done in this regard? Painfully, we have left this for too long that we all see it everyday and look away. Unfortunately, relying on my personal assessment it has been discovered that the physical cash that moves around daily unofficially or better-put, illegally should be enough to enrich young Lawyers in practice of today.

THE BAR AND THE NEED TO DECONGEST POLICE AND SARS CELLS

Much ado about the Court. Let’s look critically at congestion in the aforementioned SARS cell right inside the Lagos State Police Command, Ikeja. What role and interventions should the Bar put in place in this period?

I am strongly of the opinion that we should take this as a Special Project in this period in the interest of the public at large. I think we should be very alarmed at the treatment of the victims of SARS arrest especially of cases that ordinarily should not be treated by this Police formation or Section. There are a lot of persons in SARS’ custody for no just cause or for no fault of theirs whatsoever but for a bad system that fails to track the activities of Agencies that deal with human lives. Thanks to the scourge of Covid-19 that we can all see clearer the pitiable condition of our medical facilities in the Country. We should take advantage of the same period to see the condition of SARS Cell facilities too.

Should we have to consider the right to individual freedom as against collective public interest we may not readily succumb to the need to be alarmed as I sought earlier. However, if we consider individual right to medical care, abuse of power by the Police during this period and the need for record and accountability on the part of a Government agency like the Police, we should be interested in playing our part as true Defenders of the masses.

Even if the right to health which is a part of the social rights is not justiciable in Nigeria, the right to health in the African Charter to which Nigeria is signatory and has domesticated same as part of our laws, THE AFRICAN CHARTER ON HUMAN AND PEOPLE’S RIGHTS (RATIFICATION & ENFORCEMENT) ACT (CAP A9) LAWS OF THE FEDERATION OF NIGERIA, 2004, will fly. This is enshrined in article 16 and reads as follows: ‘(1) Every individual shall have the right to enjoy the best attainable state of physical and mental health. It adds that States Parties shall take all the necessary measures to protect the health of their populations and to ensure that they receive medical attention when they need it.

It is certain that a lot of people are being locked-up unjustly as we speak without any medical care. This should be a clarion call to us without any external prompting to take up this assignment now that we are less or not busy at all. I dare say that I pledge myself to this project.

I can readily state that the role of the Human Right Committee of Ikeja Branch in ensuring release of innocent persons from Police custody has been impressive and cannot be overstated. The interface between the Branch and Police authority in Lagos State is commendable and should be further exploited without delay.

 The Media as usual is expected to be our Partner now than ever as I use this opportunity to invite the press to take this beyond now.

References:

  1. International Bar Association podcast (Rule of Law in the time of Covid-19) 6th April, 2020.
  2. Coronavirus: Malami writes Governors, wants speedy decongestion of custodial centres. BusinessDay online, 10th April, 2020.