Introduction

One of the highlights of former President Muhammadu Buhari's administration was the annual passage of Finance Acts (FA), to ensure a resilient tax administration, as well as to support the execution of the annual budgets. One of the prominent amendments in the FA 2021, is the introduction of Capital Gains Tax (CGT) on gains made from disposal of shares. Over the years, the Government has been on a quest to strengthen and develop the Nigerian capital market to a point where mobilization of capital required for economic and industrial development flows easily. To achieve this, incentives such as tax exemptions on gains from share disposals and on income from bonds and other short-term securities were introduced. Essentially, gains on shares have not been taxed for over 20 years in Nigeria, while the tax exemption on bonds lasted for ten years.

The resulting effect of the growth recorded in the capital market due to the exemptions have been tremendous. At the onset of exemption of CGT on shares, the market capitalization at the Nigeria Stock Exchange (now Nigerian Exchange Group (NEG)) was about ₦300 billion and the All-Share Index (ASI) in mid-1999 was about 5,0001 points. However, market capitalization had risen to about ₦23.3 trillion and the ASI was 42,716.442 points, as at when the exemption was discontinued. Similarly, the bond market capitalization significantly grew all through the ten-year exemption period, with notable growth of about 55.6% increase in bond market capitalization, in the first year of implementing the Bond exemption Order3 .

Clearly, the gains from tax incentivization have brought forth numerous dividends but the glory days of tax-free benefits from the capital market are over. The Federal Government now appears focused on increasing Nigeria's tax to GDP ratio to 18%. As such, the Government tax policies are along the direction of increasing tax revenue generation. The CGT amendment is a clear example of this policy direction, likewise, the expiration of the bond exemption Order, which has little or no likelihood of being reintroduced. Thus, gains from short term securities which were hitherto exempt are now taxable (except Federal Government of Nigeria (FGN) Bonds).

The amendment introducing CGT on share disposals is the beginning of a new era, especially for tax administrators in Nigeria. Taxpayers have had to take differing views as they navigate the uncharted territory of CGT compliance on shares in the last two years. This article evaluates some of the emerging compliance and administrative issues encountered in the process of complying with the CGT provisions on shares, as well as recommendations that may be adopted to give certainty in tax treatment and administration.

Compliance Issues with CGT Amendments and Recommendations

a. Cost Methodology

  • To determine applicability of CGT, a chargeable gain must be realized upon disposal of an asset. This is usually arrived at by subtracting the historical cost of the asset from the disposal proceeds after considering incidental costs. As expected, determining the historical cost for most assets (tangible and intangible) should be quite straightforward, as the records maintained should enable easy identification of the costs associated to each asset or group of identifiable assets. However, for shares, the context is different as it can be challenging to associate the historical cost per share. This is especially where the investor has purchased/accumulated several shares at different prices over a period of time and decides to dispose a portion from the portfolio of shares.
  • The CGT provision on shares is silent on the basis of valuation to be adopted in determining the historical cost of shares, despite its fungible nature. As such, taxpayers are left with the decision to explore any of the accounting cost methodologies available. This, therefore, leaves a lacuna for taxpayers to take a position on the most suited cost methodology. Generally, based on international accounting standards (IAS), all equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position. The change in value may be recognized in the profit or loss account or other comprehensive income. However, this approach is not viable for determining historical cost for CGT purposes. Thus, taxpayers typically adopt the cost methodology prescribed by IAS 2 in determining the historical cost.
  • IAS 2 provides several methodologies such as the First in First Out (FIFO), the Last in First Out (LIFO) and the Average Cost (AVCO)/weighted average method. The FIFO approach assumes that the oldest unit of stock is sold first, while the LIFO method assumes that the last unit to arrive in the inventory is sold first. The AVCO method uses weighted average of all inventories purchased in a period to assign value to the cost of items available in stock.
  • Taking a look at practices in other climes, the United States Internal Revenue Service (US-IRS) generally identifies two methods of calculating cost basis - the average cost method and actual cost method. Individuals and corporate entities are allowed to determine the historical cost of their assets based on the aforementioned cost basis4. Whereas, in the United Kingdom (UK), the tax authorities – His Majesty's Revenue & Customs (HMRC) – use a set of rules that combines a LIFO and AVCO methodology. Thus, to determine the chargeable gain on a class of shares disposed in the UK, you are required to consider first, shares bought on the same day as the disposal was made. Next is to consider shares purchased thirty days before the disposal was made (this is known as the 'bed and breakfasting rule'). The rest may be treated as held in a pool acquired at their average price5.
  • The absence of guidance from the Nigerian tax authorities has left taxpayers to implement any methodology they deem fit. The effect of this is that various cost methodologies are in use and will result in varying historical costs, giving rise to different taxable positions. Practically, taxpayers may simulate the impact of the different methods and conclude on the most favorable cost methodology for each compliance cycle, i.e., that which results in the least tax payable. However, at the time of a tax audit, the tax authorities may end up challenging the basis used by a taxpayer which can result in disputes, imposition of additional liabilities and litigation. Thus, as the tax authorities are saddled with the responsibility of tax administration, they need to ensure uniformity in tax treatment and certainty in the interpretation of the law.
  • The issuance of a regulation or circular is ideal to make clear the cost methodology that will be acceptable to the Nigerian tax authorities. Therefore, we urge the tax authorities to ensure that the next implementation guidelines provide clarity on the approach and cost methodology basis, similar to what is obtained in leading jurisdictions.

b. Multiple Filing Deadlines

  • The CGT Act requires taxpayers who dispose chargeable assets during the year to self-assess, file and pay the resultant CGT by 30 June and 31 December of the same year, to the relevant tax authority. The provision does not take into consideration the peculiarities of other CGT provisions such as threshold for compliance and exemption on reinvestment:
  • The Act provides for the imposition of CGT where an aggregate disposal of ₦100million or more worth of shares are sold within a 12-month period;
  • The Act provides for tax exemption on proceeds reinvested during the period.
  • Based on the above, the expectation is that taxpayers should be required to self-assess, file and pay the resultant taxes after the threshold has been met and the tax exemptions considered during a 12-month period. However, it appears the tax exemption for reinvested proceeds were not considered adequately in the introduction of the biannual filing.
  • Consequently, the burning question is, how will taxpayers who have filed and made payment in June recoup, where they reinvest in the second half of the year and qualify for tax exemption? This scenario will leave most taxpayers in a refund position. However, most taxpayers would rather not be in a refund position, knowing how onerous obtaining a refund from the tax authorities can be. It is beneficial for taxpayers to have a 12-month period to determine their taxable position after considering the threshold and reinvestments provisions, before proceeding to file. Prescribing a biannual filing in view of other CGT provisions seems disruptive for taxpayers. Also, while the need for Government to realize tax revenues promptly from share disposals is well understood, the exigencies have to be considered to create an effective and efficient tax system for all stakeholders.
  • In addition, the timeline for filing returns during the year must be re-evaluated, the Federal Inland Revenue Service (FIRS) issued a circular in 2021 clarifying that CGT due in June relates to chargeable assets disposed from 1st December in a previous year to 31st Whilst CGT returns for assets disposed of from 1st June to 30th November each year, must be filed not later than 31st December of the same year. The clarification from FIRS is helpful. However, the provision on filing deadline needs to be adjusted further to give sufficient time after the assessment period for taxpayers to prepare and finalize their CGT return.
  • In South Africa, for instance, there are no separate dates for CGT compliance. Where chargeable disposals are made during the year, the CGT returns are prepared and submitted as part of the income tax submissions. Therefore, a taxpayer has ample time from the date of deemed disposal to the date of tax return to make the submission, and ultimately final assessment for the necessary payments6.
  • Similarly, the tax authorities in India require CGT returns to be made with income tax returns by the filing deadline of 31st July7. We urge the Federal Government to emulate the timeline prescribed by other jurisdictions in subsequent amendments. Taxpayers should be allowed to file only one CGT return in a year, which should be submitted within six months of the financial year-end in the case of corporate entities. For individuals, 31st March may be adopted to coincide with the period individuals are required to file their annual returns.

c. Additional Obligations for Nonresidents

  • Finally, it is commendable that the CGT provisions capture within the Nigerian tax net, both resident and nonresident investors making disposals of their Nigerian share portfolios. However, other tax compliance obligations are now required of the nonresident entities, which is unnecessary. Due to the Tax-pro Max (Nigerian online tax filing platform) onboarding set up, nonresident entities are required to comply with VAT and CIT filing requirements despite having no fixed base in Nigeria and not making taxable supplies to residents in Nigeria. The administrative burden to comply with the other taxes is generally unpleasant and more costly.
  • While the administrative burden may be unintended from the outset, the expectation is that the tax authorities would have removed the unnecessary filing obligations for nonresident entities. We urge the tax authorities to adjust the Tax-pro Max system to allow nonresidents with only CGT compliance obligations to file the returns only. This will ensure an effective compliance process for the nonresident taxpayers trying to comply with the CGT requirements.

Conclusion

It is clear from the CGT provisions that local and foreign institutional investors, as well as high net worth individuals are prime targets of revenue generation in the Nigerian capital market, in view of the ₦100 million exemption threshold. However, other government policies affecting capital market investors may need to be relooked in view of the recent economic downturn in Nigeria. This is essential to facilitate the sustained growth of the market and to attract more foreign investment to shore up on the much-needed foreign direct investment.

The implementation of the CGT amendments relating to the disposal of shares in Nigeria, marks a significant shift in the tax landscape. The transition from the era of tax exemptions on gains from share disposal reflects government's commitment to increasing tax revenue and achieving the target tax-to-GDP ratio. Whilst these CGT amendments are commendable, a re-evaluation of the compliance and administrative strategies to ensure alignment with international best practices is also required. Addressing the issues highlighted above will contribute to a business-friendly environment for investors and enhance the overall effectiveness of the tax system.

Footnotes

1. https://www.cbn.gov.ng/out/2011/publications/statistics/2010/PartA/aTableA.4.7.1.xls and Financial System Strategy (FSS) 2020

2. Central Bank of Nigeria (CBN) financial markets department, annual activity report, 2021 (Page 14)

3. Page 36 of the 2018 Annual Report and Statement of Accounts, of the Debt Management Office of Nigeria

4. Capital Gains and Cost Basis - Fidelity

5. https://www.which.co.uk/money/tax/capital-gains-tax/capital-gains-tax-on-shares-aOus88Q1VUve

6. https://www.treasury.gov.za/documents/national%20budget/2000/cgt/cgt.pdf

7. https://cleartax.in/s/capital-gains-income

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.