The Federal High Court in Nigeria has clarified the very knotty issue of whether a Nigerian company should pay tax on profits it makes from trading in long-term money instruments (such as Federal Government of Nigeria bonds).
It is fairly undisputed that a Nigerian company’s incomes from short-term money instruments are subject to tax by the federal tax authority—the Federal Inland Revenue Service (FIRS). Section 9(1)(g) of the Companies Income Tax Act requires that tax shall be payable upon the profits of any company derived from Nigeria in respect of any amounts of profits or gains arising from acquisition and disposal of short-term money instruments like Federal Government of Nigeria (FGN) securities, treasury bills, treasury or savings certificates, debentures certificates or treasury bonds.
But profits made from long-term instruments have been subject of some debate—whether they should be taxable despite the clear provisions of the CITA. In section 9(1) of CITA, the legislative intention is that a Nigerian company will be taxed on its global income but only in respect of profits listed in paragraphs (a)–(g) of that section. Of the items listed in paragraphs (a) to (g), only (g) refers to money-market instruments. And paragraph (g) only refers to short-term, money-market instruments.
Defining Terms: What do Short-term and Long-term instruments mean?
Short-term money instruments are instruments with short maturity dates. They include FGN securities, debenture certificates, treasury bills, treasury or savings certificates, or treasury bonds. Their maturity dates usually range from one day to one year.
On the other hand, long-term instruments are instruments with longer maturity dates usually a minimum of 3 years. These are usually in the nature of bonds. FGN bonds, for example, usually have maturity of between three to twenty years.
The Case Between Citibank v FIRS
The facts of the case in Citibank Nigeria Limited v FIRS are that as a commercial bank in Nigeria, Citibank frequently acquire and dispose of FGN money market instruments—bonds, commercial papers, treasury bills, and other money-market instruments. In the course of its activities, Citibank purchased and then resold some long-term FGN bonds before their maturity dates. In response, the FIRS issued Citibank notices of additional assessment for the years 2008-2010 (basis period) in respect of its corporate profits from those long-term instruments Citibank had sold before their maturities. Aggrieved by this, Citibank sued the FIRS at the Tax Appeal Tribunal. The FIRS’ view is that since Citibank had traded i.e. sold these instruments before their maturity dates, these instruments (though with long maturity dates) had effectively christened from long-term instruments into short-term instruments, thus became taxable. The Tax Appeal Tribunal decided against Citibank. The Tribunal held that for the bond to maintain its long-term character:
- the holding period of (at least) 3 years must apply;
- there must be proof that the holder had the initial intention of holding it as an investment till the end of the tenure unless unforeseen circumstances render it saleable.
Unsurprisingly, the Tribunal reasoned that if the purpose of holding the bond is to meet short-term obligations as they arise in the ordinary course of business, then they are not any different from short-term securities.
Citibank was unhappy with the Tribunal’s decision. It took its grievance to the Federal High Court. The Federal High Court agreed with Citibank’s position that its income from FGN bonds were not subject to tax. The Court ruled that by the clear language of section 9(1) of the CITA, only profits or income derived by a Nigerian company from the acquisition and disposal of short-term money instruments are taxable under section 9(1)(g) of CITA.
Applying the legal interpretative guide which states that the express mention of a thing excludes the other, the Federal High Court ruled that by expressly subjecting the profits and gains from the acquisition and disposal of short-term money instruments to tax under section 9(1), CITA automatically excludes long-term money instruments from tax. Profits from long-term instruments are not taxable under the CITA.
The Court also ruled that there is nothing in the law that requires long-term instruments to be held till maturity or held for 3 years in order for profits or gains from their acquisition or disposal to be exempted from tax.
It is without doubt that by expressly mentioning short-term money instruments, the CITA intended to exclude profits or gains from long-term instruments. More so, tax statutes are construed strictly and against the tax collector where there is any ambiguity.
By the provisions of CITA and the decision in Citibank, income from FGN-backed medium-term instruments are also not taxable. Also by Section 30 of the Capital Gains Tax Act, gains made from disposal of FGN securities, stocks, and shares are not subject to capital gains tax (CGT). In any case, CGT only applies to capital gains accruing from disposal of assets.
The exemptions implied from the CITA and CGTA, from an investment perspective, serves as an incentive to companies investing in instruments with longer maturity dates.
Investors in both short-term and long-term instruments in Nigeria will however be happy with the FGN’s 10-year tax exemption for both instruments under the Companies Income Tax Exemption Order. The base years of assessment that brought about the Citibank case were 2008-2010. In January 2012, the FGN issued a Companies Income Tax Exemption Order which effectively exempted companies investing in FGN securities (short and long-term) from paying income tax on profits or gains from such securities for a period of 10 years. By this, all income received during the 10-year period from trading in FGN securities are not subject to tax. By implication also, there will be no withholding tax on such income. But after the 10-year period from the issuance of the Companies Income Tax Exemption Order 2012, income from short-term instruments will be subject to tax while those from long-term instruments will continue to be exempted from tax.
Yibakuo David Amakiri advises on commercial transactions in Nigeria.
 In Citibank Nigeria Limited v Federal Inland Revenue Service Appeal No. FHC/L/01A/2016.
 Cap C21 Laws of the Federation of Nigeria 2010.
 Citibank Nigeria Limited v Federal Inland Revenue Service Appeal No. FHC/L/01A/2016.
 Cap C1 Laws of the Federation of Nigeria 2010.