July 19, 2022
The economic growth of a country is the result of the actions of various contributory factors. These factors may be domestic, such as increased trade and other economic activities, or foreign, such as investments by foreigners in a local entity. Foreign investments could take the form of Foreign Portfolio Investment (FPI), which is the purchase of securities or shares of a company on a stock exchange to be held largely for a short to medium term or Foreign Direct Investment (FDI) which involves establishing businesses and associated assets/infrastructure.
Nigeria is one of the largest host economies for FDI in Africa and attracts investors in various sectors such as of hydrocarbon, energy, buildings etc. In the past few years, several notable investments have been made in Nigeria through FDI. One of such major investments is the equity injection of US$ 221 million in Lekki Deep Sea Port by China Communications Construction Company out of a planned total investment of US$ 629 million. There have been several such investments recently and according to the United Nations Conference on Trade and Development (UNCTAD) 2021 World Investment Report, FDI flows to Nigeria totaled US$ 2.4 billion in 2020, showing a slight increase of 4.3% from the previous year (US$ 2.3 billion in 2019), despite the global economic crisis triggered by the Covid-19 pandemic.
Over the years, one of the major incentives for foreign (and local) portfolio investments in Nigeria, was the exemption of Capital Gains Tax (CGT) on disposal of such investments. However, in January, 2022, the Federal Government introduced Capital Gains Tax (CGT) on disposal of shares via the Finance Act, 2021. Based on this amendment, investors will, for the first time in over two decades, be liable to CGT on disposal of shares in any Nigerian company where the disposal proceeds, among other stipulations, are more than ₦100 million (One Hundred Million Naira) or the proceeds of investment is not re-invested in the same company or any other Nigerian company.
While the introduction of CGT on disposal of shares has been applauded by some commentators, as it will likely result in increased revenue for the government, amidst Nigeria’s increasing debt profile and dwindling public revenue, it has also been criticized by some. On the flip side are concerns that the introduction of CGT on disposal of shares could negatively impact the Nigerian economy, as this may discourage foreign investors due to the additional tax cost.
This Article examines the key changes introduced by the Finance Act, 2021 with respect to CGT, and the likely consequences of introduction of CGT on disposal of shares on the Nigerian economy and our recommendations thereon.
Section 2 of the Finance Act, 2021 amended Section 30 of the Capital Gains Tax Act (CGTA) to subject gains arising on disposal of shares to capital gains tax where the aggregate proceeds (gross amount received) from such disposal exceeds ₦100 million in any 12 consecutive months., irrespective of the accounting period of the company.
However, the CGTA provides a proportionate waiver from CGT where the whole or part of the disposal proceeds are reinvested within the same year of assessment (YOA) in acquiring shares in the same or other Nigerian companies, provided that the portion which is not so utilized will remain subject to CGT. Since the reinvestment period for qualification for share disposal relief is the YOA in which the disposal occurred, any subsequent investments in the shares of the same or another company would qualify so long as they occur within the same YOA.