Taxation Of Employee Loan

BACKGROUND

September 15, 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 the loan granted to employees by their employers.

DEFINITION OF EMPLOYEE LOAN

According to the public notice, employee loans include the loans granted by an employer to its employees for specific reasons with the expectation that such loans will be repaid in full to the employer through a pre-agreed deduction from the employer’s salary, with or without any interest.

LEGAL BASIS

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 a benefit which is taxable in the hand employees.

EMPLOYERS’ OBLIGATION

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. Please 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.

CONCLUSION

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.

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