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Introduction

The Nigerian economy has for some years been burdened with the menace of deficit budgeting, which the government has often supplemented, using external and internal borrowings besides other measures. The internal borrowings have been largely via the issuance of government securities through the Central Bank of Nigeria. These include the Nigerian Treasury Bills, Treasury Certificates, Stocks and Bonds. This source of funding the budget is not peculiar to the Federal Government alone, but also applicable to State Governments as well as corporate entities that raise funds by issuing bonds to the public.

In order to encourage investment in these securities, the President in exercise of the powers conferred on him under Section 23 of CITA issued the Companies Income Tax (Exemption of Bonds and Short-Term Government Securities) Order 2011. In the same year, the Personal Income Tax Act (PITA), 2011 was also amended, introducing similar tax exemptions for non-corporate entities. The Personal Income Tax amendment Act which has a commencement date of July 2011, exempts from income tax, incomes earned by individuals, partnerships, trusts and other non-corporate entities, on Bonds issued by the Federal, State and Local Governments, as well as those issued by corporate organisations and Supra-nationals.

The Companies Income Tax Exemption Order, 2011 which became effective in January 2012, provides the legal backing for the exemption from Companies Income Tax (CIT), the income earned from the following securities:

  1. Short term Federal Government of Nigeria Securities, such as treasury bills and promissory notes.
  2. Bonds issued by the Federal, State and Local governments and their agencies.
  3. Bonds issued by corporate bodies and supra-nationals.
  4. Interest earned by the holders of the Bonds and short term securities listed in 1-3 above.

Matters Arising

While the tax exemption provided by the PITA does not have a time frame, the Companies Income Tax Exemption Order specifies a 10-year time limit, except on income earned by companies from Bonds issued by the Federal Government, which shall enjoy the tax exemption without limit.

By implication, effective January 2022, incomes accruing to companies on Bonds issued by corporate and supra-national bodies, State governments, Local government and their agencies shall be liable to Companies Income Tax at the prevailing rates as specified in CITA as well as Tertiary Education Tax at 2% for medium and large companies. Similarly, profits or gains arising from trading on short-term Federal Government securities such as treasury bills and promissory notes, e.t.c., will be liable to income tax. On the other hand, individual taxpayers and non-corporate entities shall continue to enjoy the tax exemption on incomes earned from these securities.

The disparity in tax treatment for corporate and non-corporate investors begs the question; will the expiry date of the Companies Income Tax Exemption Order 2011 be extended or a law enacted, to put both corporate and non-corporate investors on the same pedestal for tax purposes.

This uncertainty on the possibility of extension or otherwise creates the following challenges:

  1. Corporate investors will be faced with varied investment decisions on whether to hold or dispose existing investments in these securities, for more viable alternatives, considering the impact on returns on investment. These investors include mostly banks and other financial institutions.
  2. The ability to source financing via bond issuance by state & local governments, corporate entities, and supra-national entities will be affected.

Conclusion

The tax incentives created by both the Exemption Order and the PITA 2011 amendment, have over the years boosted capital market activities, made investments in the securities more attractive and provided the issuers (including Federal Government) access to long and short-term funding. It is therefore pertinent for all corporate stakeholders, investors and issuers alike to consider the future business implications of investment in these securities, evaluate viability should the tax exemption not be extended and take timely action, as necessary.

Also, the Government needs to embark on some tax expenditure reporting, to assess the impact of the Tax Exemption Order on the Nigerian economy over the past 10 years, and issue a timely public statement on the likelihood of extending the Tax Exemption Order or otherwise.