Payroll costs
Severance Pay and End-of-Service Benefits
1. What Are We Talking About?
Two separate types of compensation are discussed together here because they are subject to the same tax treatment.
| The allowance | What it compensates for |
|---|---|
| Severance pay | Termination of the contract at the employer’s initiative |
| End-of-service severance pay | Years of service completed at the end of the employment relationship |
A clarification of terminology specific to Mali. What is commonly referred to as “end-of-service compensation” appears in Malian legislation under the term “compensation for services rendered.”
They refer to the same thing. Using both terms avoids the need to search the texts for a term that does not appear there.
2. The Principle: A Tax Exemption with a Cap
These payments are tax-exempt, up to the limits set by the Labor Code.
The rule combines two elements that must be considered together:
| The element | What it means |
|---|---|
| A tax exemption | These amounts are not subject to tax |
| Up to the limits set by the Labor Code | The exemption ends where the statutory tax scale ends |
What the reference to the Labor Code implies
This is the key point to understand: the tax statute does not set any specific amounts. It refers to the Labor Code.
In other words, the social security scale becomes the tax threshold. What the Labor Code requires the employer to pay is what the tax authorities agree to exempt.
The logic behind this mechanism: Statutory compensation does not pay for work; it compensates for the loss of employment. It would be inconsistent to tax as income what the law requires to be paid as compensation.
However, the tax exemption follows the exact scope of this compensation. Beyond the statutory amount, the sum ceases to be mandated compensation: it becomes a payment decided by the employer, and there is no longer any justification for it to be exempt from tax.
3. The Practical Consequence: The Case of a Negotiated Separation
This is where the rule has its most tangible effect.
| The Situation | The Process |
|---|---|
| The employer pays the statutory amount | Fully exempt |
| The employer pays more than the statutory amount: mutual termination, negotiated departure, settlement agreement | Exempt up to the statutory limit; the excess amount is no longer exempt |
This is often discovered too late. Negotiated terminations frequently provide for more favorable terms than statutory termination, which is what makes them acceptable to the employee.
The additional portion does not qualify for the same exemption. Negotiating a lump-sum amount without verifying where the cap lies therefore risks an unpleasant surprise: the employee receives less than they expected, or the company incurs a cost it did not anticipate.
Best practice: First calculate the statutory amount, then justify any deviation based on a full understanding of the facts.
4. How to Determine the Cap
The exempt amount is not specified in any tax law; it is calculated based on the Labor Code.
| The process | |
|---|---|
| 1. | Identify the relevant compensation: termination or service award |
| 2. | Apply the scale from the Labor Code that corresponds to the employee’s situation |
| 3. | The amount thus calculated constitutes the limit of the exemption |
| 4. | Any amount paid in excess is subject to general tax rules |
Key Points in 5 Steps
- Severance pay and end-of-service benefits are tax-exempt.
- Under Malian law, end-of-service compensation is referred to as “compensation for services rendered.”
- The exemption is capped: it applies only up to the amounts set by the Labor Code.
- Tax law does not establish a specific scale; rather, the social security scale serves as the tax threshold.
- In a negotiated separation, the portion paid in excess of the legal amount is not eligible for the exemption: the calculation must be made prior to the negotiation.