Currently, the COVID-19 pandemic has undoubtedly ravaged economies world over leaving some companies in dire states. Certainly, these unprecedented times have forced some companies to cut down the labour force resulting in some employees being retrenched. Besides the pandemic, there are various reasons why employers opt to terminate and retrench their employees.
I want to unveil the tax compliance issues surrounding termination of employees. In essence, the tax laws prohibit employers to retrench an employee and pay them their terminal benefits without BURS’s approval. I must state that I am using the term ‘terminal benefits’ loosely as it is the common one used to refer to payments such as gratuity, severance pay, pension and leave days at the termination of employees. Technically, these are not ‘benefits’ but monetary terminal payments as benefits are non-monetary. In this article, words importing the masculine shall be deemed to include the feminine.
Firstly, it is imperative that we understand that the tax laws do not prohibit neither do they prescribe whether employers can terminate employees. However, the tax laws exist to govern how employers should comply and treat terminal payments subsequent to the termination of an employee. Technically, the role of tax laws in such instances is merely to guard and govern revenue collection. Let us have a look at what the law says about this matter.
The Income Tax Act requires that any payment of remuneration to an employee on termination of employment should be done after BURS has granted approval for such payments. Further to note is that employers should apply to BURS requesting ‘for a direction as to the amount of tax’ to be deducted from the payment. The application should be submitted in not less than 15 days prior to the date of the payment of terminal amounts. In other words, employers can not pay terminal benefits before BURS determines how much the employee is owing tax returns or assessed tax. So, what’s the catch? Why is BURS so interest in the last payments of someone’s employment income?
Technically, the big deal is for BURS to clamp down on possible revenue loopholes. The assessment of an employee’s terminal benefits paves way for BURS to collect any tax debts owed by employees. Conversely, this will also enable employees to settle other tax liabilities without the burden of directly engaging the revenue authorities. For instance, a retrenched employee who has an income tax bill will receive his retrenchment package net of the tax owing to BURS.
How it works
PAYE will still be required to be determined on so much of the full amount payable as terminal benefits, regardless of how much you owe BURS. This implies that if you have an income tax liability of P10 000 and you are paid P160 000 as terminal benefits, the PAYE liability will be determined on the full P160 000. However, the employer must offset the P10 000 against the P160 000 and pay you the net amount. If you owe tax returns, BURS will insist on getting you assessed and pay the taxes before instructing your employer to pay you terminal benefits.
Employers might probably ask what happens if they just terminate employees, calculate the PAYE and pay their employees their terminal benefits without the BURS approval? Well, you might be familiar with the ‘carrot and stick’ principle in that the carrot resembles an incentive for compliance and the latter being a punishment for non-compliance. Unfortunately, there are no direct incentives associated with compliance. However, by complying with the tax provisions you would have done yourself a great deal of avoiding the ‘stick,’ in this case being required to bear the tax yourself.
Well folks, I hope that was insightful. As Yours Truly says goodbye, remember to pay to Caesar what belongs to him. If you want to join our Tax WhatsApp group or to know about our 9 Tax e-books, send me a text on the cell number below.