Nigeria: CBAs & Severance Benefits: Where Is The "Loss Of Office"?

Last Updated: 9 February 2016
Article by Yomi Olugbenro
Most Read Contributor in Nigeria, July 2017

It amounts to an abuse of the CBA framework to incorporate and sustain clauses that circumvent the provisions of the law based on the union's potential to create or trigger industrial crisis at will.

The circumstances of the 2016 budget of Nigeria have made tax or taxation a permanent agenda item and its discussion inevitable.  The tax system in Nigeria is yet to attain such a level of maturity in which one can declare, "we don't need new taxes; we need new taxpayers, people who are gainfully employed, [and new businesses] making money and paying into the tax system" 

Individual and corporate taxpayers the world over love tax reliefs, exemptions and/or holidays.  Employees love tax free pays. One instance of employee tax free pay is compensation for loss of office, although most employees do not wish to suffer loss of employment outside mutual agreement. 

The tax and regulatory framework regarding industrial relations in Nigeria allow for collective bargaining.  Collective bargaining consists of the process of negotiation between representatives of a union and employers (generally represented by management, or by an employers' organization in some countries) in respect of the terms and conditions of employment of employees, such as wages, hours of work, working conditions, grievance procedures, and about the rights and responsibilities of trade unions.  The outcome of this process is the collective bargaining agreement (CBA), which typically operates for a defined period say, 3 to 5 years and stipulate provisions for re-negotiation after such periods. 

Adverse economic conditions naturally provoke response from employers of labour, individual or corporate.  One standard response is a review of operating costs.  In reviewing such costs, salaries and wages is one big item that never escapes review.  Thus, management's decision to downsize usually trigger payment of severance benefits.  Severance package are benefits which an employee receives at the end of an employment.  It is therefore the norm for provisions to be made for end of service benefits, be it for redundancy, retirement or resignation of a staff.  In most cases, the staff may be entitled to gratuity/end of service benefits as agreed upon resignation or termination of employment.  In some instances, the funds for the retirement benefits are kept with a fund manager and in other cases, the fund is administered by the company. 

Terminal benefit characterized as compensation for loss of office is exempt from tax based on the provisions of Paragraph 26 of the Third Schedule to Personal Income Tax Act, Cap P8, LFN 2007 (PITA) (as amended).  The rationale for exempting compensation for loss of employment under PITA is to shield an exited employee from double jeopardy and to enable him enjoy some measure of relief from the burden of tax on the compensation received. 

Recently, CBAs have included clauses which state that the payment of severance benefit at the time of re-negotiation of the CBA "shall be without prejudice to continuity in service and will not lead to loss of years in service and other benefits enjoyed by workers".  At such time of re-negotiation, the employer is expected to disengage all the staff and eventually re-engage them on different terms to be contained in a new CBA.  However, payment of severance benefit must be for compensation for loss of office to qualify as tax exempt. 

A compensation for loss of office arises where an employee's engagement has been determined or terminated through a unilateral termination arising under a process of redundancy or restructuring of the employer's business or other factors. Consequently, to enjoy the tax exemption under Paragraph 26 of the Third Schedule of PITA, the compensation should be triggered strictly by loss of employment. 

In the case of these CBAs, is the employer in doubt as to the appropriate treatment? Probably not.  However, the need to avoid potential industrial crisis regardless of duration and its disruptive impact for the employer's business has made some employers cower to honour these clauses. Given that such clauses appear to have been designed to circumvent the provisions of the PITA, employers in these situations clearly need support from the authorities to be able to deal with resistance from their respective union. 

The practical reality of these employers is no different from that of Lauryn Hill when she said, "the danger I faced was not accepted as reasonable grounds for deferring my tax payments, as authorities, who despite being told all of this, still chose to pursue action against me, as opposed to finding an alternative solution". 

Thus, tax authorities where they obviously disagree that the payment is not a compensation for loss of office, often raise assessment notices on the employers who by law are the collection agents for government on due taxes whether at the material time the liability fell due or as a consequence of a tax audit or investigation exercise.  Such employers where they settle the assessment notices are also unable to claw same back from the employees protected by the CBAs because of what the union can do to the business. 

It amounts to an abuse of the CBA framework to incorporate and sustain clauses that circumvent the provisions of the law based on the union's potential to create or trigger industrial crisis at will.  In the final analysis, in addition to pursuing accelerated expansion of the tax net by the tax authorities, it is worthy to recall the wisdom in this statement: One "key to revenue growth is tax reform that closes loopholes and that is pro-growth. Then with a growing economy, that's where your revenue growth comes in, not from higher taxes".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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