There are various tax changes affecting government securities, corporate bonds, and equity investment that you should be aware of.
- On 2 January 2012, the federal government issued the Companies Income Tax (Exemption of Bonds and Short-Term Government Securities) Order, 2011. The Order granted corporate income tax waiver on all bonds and debt instruments issued by all tiers of government and corporate entities effective from 2 January 2012 for a period of 10 years. Due to the sunset clause, the exemption is no longer applicable effective from 2 January 2022.
- The Capital Gains Tax (CGT) Act provides exemption from capital gains tax on the disposal of Nigerian Government securities including Federal, State and Local government bonds, stocks and shares. However, an amendment via the Finance Act 2021 is seeking to impose CGT on the disposal of shares subject to a specified threshold and other conditions for roll over relief.
- Exemption from capital gains does not cover gains which are considered to be of revenue nature or trading profit depending on frequency, holding period and nature of investor’s trade, among others (generally referred to as badges of trade principles).
- Para 31A of the Third Schedule of the Personal Income Tax (Amendment) Act [PITA] 2011 which was published in the gazette on 24 June 2011 with a commencement date of 14 June 2011, grants tax waiver to persons taxable under PITA in respect of income earned from bonds and short-term securities issued by Federal, State and Local Governments and their agencies; corporates and supra-nationals. The exemption provision does not have a sunset clause. Consequently, the exemption subsists.
- The Value Added Tax (Exemption of Proceeds of the Disposal of Government and Corporate Securities) Order 2011 dated 9 January 2012 was issued with an effective date of 2 January 2012 valid for 10 years to exempts disposal of government and corporate securities from VAT. However, by virtue of the Finance Act 2019, the VAT Act has been amended to specifically define goods as excluding securities. Note that commissions on stock market transactions was previously exempted from VAT via the Value Added Tax (Exemption of Commissions on Stock Exchange Transactions) Order 2014 published in the gazette dated 30 July 2014 with a commencement date of 25 July 2014 for a period of 5 years which expired on 24 July 2019.
Implications:
- Corporate investors are now liable to income tax on their income from corporate bonds and government securities. This means WHT at 10% will be applicable as advance payment against CIT of 30% in addition to Education Tax of 2% for resident companies while WHT at 10% or 7.5% will be the final tax for non-resident investors. This will raise the cost of borrowing for issuers.
- Based on the Local Loans (Registered Stock and Securities) Act of 1946 (as amended), the Minister of Finance may issue registered stocks, Government promissory notes or bearer bonds specifying, among others, the exemption from all or any of the taxes and duties payable under any other enactment in force in Nigeria. The exemption under the Local Loans Act has not historically been used to cover Treasury Bills and state government bonds
- Individuals will continue to enjoy tax exemptions on income from both government and corporate securities. This means WHT should also not apply.
- Capital gains tax will not apply on government securities while corporate bonds will be subject to capital gains tax (where applicable). Gains on shares as specified in the Finance Act 2021 will also be subject to CGT.
- VAT will not apply on the disposal proceed of government and corporate securities. However, VAT will apply on fees and commissions on such transactions.
While it is not stated whether the exemption sunset should only affect securities issued after the expiration date or all income accruing after the expiration regardless of when the instrument was issued, the latter is the more appropriate interpretation.
What to do
You need to be aware in order to take necessary steps to ensure compliance and tax optimisation. You may need to track the income on various securities and segregate taxable from exempt income for tax purposes. Any expense incurred in generating taxable income will be tax deductible.
Read our 2012 alert on the subject here and see the relevant legal instruments below:
Download CIT bond-exemption-gazette 2011(Published 2012)
Download VAT exemption Order on Securities 2011
Download VAT exemption Order 2014 on capital market commission