In 2011, the Federal Government of Nigeria (FGN), in a bid to boost investment in bonds in Nigeria, issued the Companies Income Tax (Exemption of Bonds and Short-Term Government Securities) Order, 2011 (“CITEO” or “the Order”). Effective from the commencement date of CITEO – 2nd January 2012 – the Order granted corporate income tax waiver on all bonds and debt instruments issued by all tiers of government, corporate and supranational entities, inclusive of interests accruing thereon. As such, incomes from disposal of government and corporate bonds and short-term government securities were exempted from income tax. Notably, the exemption was stated to last for a period of 10 years.
This situation changed in 2022 and the exemption has since lost potency, having become inapplicable from 12 am midnight of 2nd January 2022. This occasioned an era of relative uncertainty regarding the tax treatment of incomes from disposal of corporate bonds. Consequently, the Federal Inland Revenue Service (FIRS) has issued a public notice to clarify its position on the administration of income tax laws on this subject and settle any attendant controversy.
This article examines the peculiar tax situation caused by the CITEO and the FIRS public notice, considering corporate income tax, personal income tax, capital-gains tax, and value-added tax.
What are Bonds?
Generally, a bond is a certificate of debt with which the issuer obligates itself to pay the principal sum to the bondholder on a specified date after the date of issue. A major feature of a bond is that it is a debt obligation made by way of transferable instrument with a medium or long-term maturity. In Nigeria, bonds are generally a cheaper means of short/long term debt funding especially because they are substantially tax-free.
The Companies Income Tax (Exemption of Bonds and Short-Term Government Securities) Order, 2011 (“CITEO”)
In exercise of the powers conferred on him by section 23(2) Companies Income Tax Act, the-then President Goodluck Jonathan issued CITEO in 2011 which exempted from corporate income taxes for a period of ten (10) years, the following:
- Treasury Bills, Promissory Notes, and other short term FGN securities.
- Bonds issued by all tiers of government.
- Bonds issued by corporate bodies and supranational entities.
- Interest earned on 1 – 3 above.
However, by the Order, bonds issued by the FGN will enjoy indefinite exemption, unlike the ten (10) year period exemption for corporate bonds. This provision in the Order for the expiry of the tax exemption for corporate bonds is regarded in law as the Sunset Clause. A sunset clause is a provision in an enactment or subsidiary legislation to show the date and manner with which a particular provision of such law will expire. In other words, it stipulates an expiry date for a provision of a law.
Corporate Income Tax (CIT) on Income Earned from Bonds and Short-Term Securities
A sunset clause showing expiry of tax exemption is contained in Order 2 of CITEO. Thus, effective from 2nd January 2022, corporate income tax exemption applies only to FGN-issued bonds but does not extend to the following:
- Short-term FGN securities such as treasury bills and promissory notes.
- Bonds issued by State and Local Governments and their agencies.
- Bonds by corporate bodies including supranational entities.
- Interest accruing on such bonds and short-term securities. Such interests no longer enjoy exemption from corporate income taxes imposed under CITA.
Capital Gains Tax (CGT) on Gains Accruing to a Person Upon Disposal of Shares
Before the Finance Act 2021 (FA 2021) came into effect, profits/gains accruing to a person from the disposal of Nigeria Government Securities including the bonds, shares, and stocks of all tiers of government were CGT-exempted. However, the FA 2021 imposes CGT on gains from disposal of shares subject to a specified threshold and other conditions for roll over relief.
Precisely, section 30(2) of the amended CGTA provides thus:
“Without prejudice to any other applicable law, the gains accruing to a person on disposal of its shares in any Nigerian company registered under the Companies and Allied Matters Act shall be chargeable gains under this Act except where —
(a) the proceeds from such disposal are reinvested within the same year of assessment in the acquisition of shares in the same or other Nigerian companies:
Provided that tax shall accrue proportionately on the portion of the proceeds which are not reinvested in the manner stipulated in this subsection;
(b) the disposal proceeds, in aggregate, is less than N100,000,000 in any 12 consecutive months, provided that the person making the disposals shall render appropriate returns to the Service on an annual basis; or
(c) the shares are transferred between an approved Borrower and Lender in a regulated Securities Lending Transaction as defined by the Companies Income Tax Act.”
The CGTA taxes proceeds from disposal of shares generally at 5%. Meanwhile, by the above provision, every investor looking to sell shares pays a 5% tax on the capital gains made from selling shares in a company if such proceeds are not reinvested proceeds into shares. The tax also extends to anyone selling shares of any company in Nigeria even if the shares are not listed on the stock exchange which includes the sale of shares by private equity firms, startups, venture capitalists, or any shareholder looking to sell shares in Nigeria.
Personal Income Tax (PIT) on Income Earned from Bonds and Short-Term Securities
By paragraph 31A of the Third Schedule to the Personal Income Tax (Amendment) Act 2011 (“PITA”) which commenced on 14th June 2011, incomes earned from the following sources are exempted from PIT:
- Bonds issued by any or all the three tiers of government.
- Bonds issued by corporate entities including supra-nationals.
- Interest earned by holders of bonds and short securities of bodies/entities in (1) and (2) above.
It is noteworthy that this exempted by PITA has no sunset clause. As such, the exemption continues to apply.
Value Added Tax (VAT) on Income Earned from Bonds and Short-Term Securities
The VAT (Exemption of Proceeds of the Disposal of Government and Corporate Securities) Order 2011 was issued with an effective date of 2nd January 2012. This VAT Order does not contain a sunset clause. It exempts from VAT for 10 years, incomes from disposal of government and corporate securities. However, section 46(g) of the FA 2019 specifically excludes money and securities from the purview of vatable goods.
Furthermore, the VAT (Exemption of Commissions on Stock Exchange Transactions) Order 2014 exempted commissions on stock market transactions for a period of 5 years – 25th July 2014 to 24th July 2019.
By implication, VAT does not apply to proceeds of disposal of government and corporate securities since “securities” are no longer vatable. Meanwhile, fees and commissions accruing from such transactions are vatable services.
The FIRS public notice of February 2022 well and truly clarifies any issue that may arise in respect of any corporate income deriving from disposal of bonds. Similarly, revenue authorities of states may issue public notices to clarify the position as it relates to personal income taxes, though this article already shows that the situation is rarely controversial.
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 A replica of this initiative is the Value Added Tax (Exemption of Proceeds of the Disposal of Government and Corporate Securities) Order (VATEO), 2011 which exempts proceeds and income from the disposal of short-term Corporate, Federal, State and Local Government bonds and securities from being charged to Value Added Tax.
 Tax imposed under the Companies Income Tax Act Cap. C21 LFN 2004 (“CITA”).
 “The President may exempt by order – (a) any company or class of companies from all or any of the provisions of this Act; or (b) from all tax or any profits of any company or class of companies from any source, on any ground which appears to it sufficient.”
 Order 2, CITEO.
 Section 30 of the Capital Gains Tax Act Cap. C1 LFN 2004 (“CGTA”).
 Section 30(3) of the amended Capital Gains Tax Act.
 https://nairametrics.com/2022/01/07/finance-act-investors-to-pay-10-tax-on-sale-of-shares/ accessed 13th January 2022.
 This schedule to PITA governs exempted incomes.