LIRS clarifies the definition of reasonable removal expenses for the purpose of tax exemption

The Lagos State Internal Revenue Service (LIRS) recently issued a public notice to all employers, company owners and their representatives, employees, high net worth individuals and other members of the public to clarify the definition of reasonable removal expenses for the purpose of tax exemption. LIRS cited Section 4(3)(c) of Personal Income Tax Act, LFN Cap P8 2004 as amended, which exempts “reasonable removal expenses” from tax.

LIRS thus defined “reasonable removal expense” as any expense which an employee incurs to move to a new employment location and the payment made by the employer towards the expenses which results in no net overall benefit to the employee. It is also any payments made to or on behalf of an employee taking up employment with a new employer such as relocation allowance. The reasonable amount should not be more than the amount incurred by the employee in relocating.

Other highlights of the public notice are as follows:

  1. Criteria for removal expense to qualify as tax deductible are:
  2. The reimbursement or payment to the employee is in respect of relocation/ removal expense actually incurred
  3. The expense is of a reasonable amount
  4. The payment of expenses must be properly documented
  5. Changing accommodation must be necessary for the given circumstance
  6. Documents and information to be maintained by the company to substantiate the expenses include:
  7. Name and address of the employee
  8. Date and reason for the relocation/removal
  9. Distance (km) involved
  10. Receipts of the actual expenses.

Further, any amount paid to the employee as temporary subsistence allowance which covers expenses already incurred by the employer shall be taxed as it would amount to duplication.

In order to obtain certainty for tax deductibility of such removal expenses and temporary subsistence allowances, LIRS has also requested corporate and business enterprises to submit their staff policy and guidelines, as well as their per diem rates for pre-approval.

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