Investors must pay taxes on profits made by lending money to the government

The federal government’s tax agency, the Federal Inland Revenue Service (FIRS), will begin taxing Nigerians and foreigners on profits made by borrowing money from the government through investment securities and bonds.

Bonds and treasury bills are investment instruments used by governments to obtain loans from investors [in need of a place to keep their money instead of saving it in a bank] rather than seeking debt from bilateral or unilateral creditors.

For the past ten years, investors who have participated in bonds have been exempt from tax on gains from the securities, but this exemption ended on January 1, 2022.

The bond tax exemption had been in effect since January 2, 2012, during President Goodluck Jonathan’s first term, but the FIRS will now tax income earned by investors on bonds issued by local and state governments and their agencies.

The FIRS only excluded bonds issued in the securities market by the federal government, while it also plans to apply tax on income that corporations derive from bonds and short-term securities.

READ ALSO: Nigerians and Businesses Pay N6.4 Billion Naira Government Tax in 12 Months

This means that treasury bills and promissory notes are also taxable by the federal government’s tax administrator.

“Therefore, the taxpaying public is advised that income tax applies to income derived by corporations from bonds and short-term securities from January 2, 2022, except for bonds issued by the federal government.

“Taxpayers are therefore expected to comply with the law by including such income in self-assessment returns and business tax calculations and paying appropriate taxes,” said a statement signed by FIRS Executive Chairman Muhammad. Nami and preview by Ripples Nigeria.

How Bond Tax Policy Affects Everyone, Businesses

Nigeria is making itself less attractive to investors in the securities market, given that its African counterpart, Ghana, does not tax interest earned on government-issued bonds, including treasury bills, to increase its visibility in African markets.

This will discourage investors from choosing bonds issued by local and state governments as a safe haven to hedge against inflation. Already, states are struggling to convince investors to invest, as experienced by Lagos State, the country’s most revenue-generating state.

In December 2021, Ripples Nigeria reported that Lagos State could not entice investors to subscribe to its bond three weeks after issuing it in the securities market.

Governor Babajide Sanwo-Olu was hoping to raise N125 billion, however, Lagos State was unable to raise N100 billion despite rising bond yields, with pension funds also ignoring the government of State.

This struggle took place during the tax exemption of bonds. With the tax now enforced by the FIRS, the difficulty in securing investors’ funds will trickle down to less profitable state and local governments if they issue bonds.

And this will result in a lack of capital for state and local governments to build infrastructure or carry out projects such as the 125 billion naira that Lagos State needs to repair roads in the states.

The ripple effect will not leave out residents and business owners in the states as the lack of infrastructure or good roads will increase the cost of living and the cost of doing business as seen in Lagos, where companies now spend six to seven figures transporting their goods from the port to Ikeja.

What are the experts saying about this?

Financial and economics expert Kalu Aja said FIRS has eroded investors’ incentive to go into bonds: “I don’t know of any country that taxes loans to its own federal government.

“A big reason to invest in municipal bonds (local government bonds) is that they are tax free. How can a government borrow me and tax me because I lend money to the government Aja wrote on Twitter, adding, “Why are federal loans tax exempt but not state loans? Isn’t Nigeria the Federal Republic?”

Financial analyst, Olufemi Awoyemi, also wrote on the social media platform that the attempt to reintroduce the bond tax shows that the government lacks the capacity to solve its revenue generation problem, “Some Bull Jive revealing the lack of imagination to solve the income problem, a self-inflicted burden.

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Troy M. Hoffman