In 2016, Nigeria was plunged into an economic recession, which lasted from the third quarter of 2016 to the third quarter of 2017, hurting many businesses. The economic effect of the recession has led many companies to downsize in order to manage costs. According to the National Bureau of Statistics (NBS), the unemployment rate increased from 18.8% in the third quarter of 2017 to a staggering 23.1% by the third quarter of 2018. The NBS also stated that about 3.3 million Nigerians became unemployed between December 2017 and December 2018, raising the number of unemployed Nigerians to 20.9 million. Many of such companies that have downsized have paid some form of terminal benefits including compensation for loss of employment to the disengaged staff.

In 2017, the Lagos Internal Revenue Service (LIRS) issued a public notice intimating taxpayers that although compensation for loss of employment is not taxable under the Personal Income Tax Act (PITA), it is liable to Capital Gains Tax (CGT) under Section 6(1) (a) of the Capital Gains Tax Act (CGTA). More recently in January 2019, LIRS issued another notice appointing payers of capital sums, including employers, as collecting agents for the purpose of deducting and remitting the CGT on capital sums. The circular directed that CGT on such sums be remitted to the Lagos State Government. Such employers are also expected to file a statement showing all recipient of 'capital sums' when filing their annual returns.

Ingenious as the revenue generating efforts may seem, it is important to examine the legal basis for the application of CGT to compensation for loss of employment. This piece examines the basis of the taxation of compensation for loss of employment, and the instances in which such sums, may be liable to CGT.

What Constitutes Compensation for Loss of Employment?

The PITA imposes tax on any salary, wage, fee, allowance or other gain or profit from employment including compensations, bonuses, premiums and other benefits given to an employee. Section 81(1) of the PITA provides that income tax chargeable on an employee shall be recoverable from any emolument paid to the employee by the employer.

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