The Lagos Internal Revenue Service (LIRS) following a tax audit for 2013 and 2014 years of assessment issued a Notice of Refusal to Amend (NORA) to Nexen Petroleum Nigeria Limited ("the company"). The LIRS assessed the company to additional liabilities on the grounds that the company had under remitted Pay As You Earn (PAYE) tax by taking statutory tax relief for Voluntary Pension Contributions (VPCs) made by employees to pension fund administrators (PFA).

The Tax Appeal Tribunal's decision Some relevant issues considered by the Court of Appeal and the conclusions reached are highlighted below:

1 Whether the company fulfilled its obligation of deducting and remitting PAYE accurately hence cleared of any additional obligations from withdrawal

The Tax Appeal Tribunal (TAT) held that the 18% minimum contribution and VPCs are tax exempt relying on Section 10(1) of the Pension Reform Act 2004 (PRA) which has an expansive view on contributions. The company provided verifiable documentary evidence of the contributions and had satisfied its statutory obligation of deducting PAYE taxes accurately with the filed returns.

2 Whether an agency relationship exists between the company and the LIRS, thus making the company merely an agent of the LIRS for PAYE scheme and not a taxpayer for purposes of future actions of its employee on their earned income

The Tax Appeal Tribunal held that the company in this case is appointed as an agent of the Lagos State Government for the purposes of deducting the taxes payable by her employees and remitting same to the LIRS. Thus, by deducting the PAYE tax for the relevant years, its responsibility of acting as an agent of the LIRS was fully discharged.

3 Whether VPCs qualify as tax deductible contributions and remain so in relation to the agency relationship

The Tribunal held that the LIRS cannot assess the company to a liability for under-remitting PAYE tax, because VPCs qualify as tax exempt. Section 4(3) of the PRA recognises VPCs as contributions and does not limit the exemption to the 18% minimum contribution.

4 Whether the LIRS acted judicially and judiciously by rejecting the company's computed PAYE tax on actual gross emoluments for its expatriates without considering documents submitted before making its best of judgment assessment.

The TAT held that the LIRS misused its discretionary powers of best of judgment, which is only permitted where inadequate returns or documentation have been made by a liable party. The LIRS' failure to consider documents submitted by the company before a best of judgement assessment was improper.

5 Whether under section 10(4) of the PRA, for a VPC made on behalf of employees to be treated as tax exempt, it must be shown that the VPC was not withdrawn by the employee affected for a period not less than 5 years.

The Tribunal held that the company fulfilled its statutory obligations by paying over all the pension contributions (VPC inclusive), to the Pension Fund Custodian, specified by the PFA. The employer had no further obligation to account for subsequent dealings by the employees but Section 10(4) specifically requires for tax on such withdrawals to be accounted for at source, i.e. upon withdrawal. Section 113 of the PRA further imposes a duty of confidentiality to the employees by PFAs/Cs.


Based on the judgment, VPCs are tax deductible for PAYE but are taxable where withdrawn earlier than allowed. The judgment may be well received by employers, who have until recently been asked to account for liabilities resulting from the withdrawal of VPCs. However, the tax authorities can still challenge artificiality of withdrawals that are done for the sole purpose of avoiding tax, where there is a collusion with the employer.

In addition, PAYE tax is an advance payment of income taxes so employees remain responsible for PIT on withdrawals from the PFAs. This may take up employees' time and effort resolving tax issues. Where the assessments become final and conclusive, the tax authorities may still appoint the employer to recover the taxes from any payment made on account of the employee in subsequent periods pending other recovery solutions.

The state tax authorities would need to improve on the current self-assessment filing system to ensure that individuals declare income earned from all sources and the applicable tax applied to the income. Employers and individuals should keep themselves updated on any appeals against the current ruling.

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.