Friday, May 15,2020 / 3:10 PM / PwC Nigeria / Header Image Credit: Twitter; @PwC_Nigeria

Background

The Federal Inland Revenue Services (FIRS) has issued a circular on thetax implications of regulated securities lending (RSL) transactions in Nigeria. 

RSL involves various parties including: 

• Lender: Owner of dividend-bearingsecurities.
• Borrower: Borrows securities from Lender and provides acollateral.
• Agent: Facilitates transactions between both parties.

The Borrower obtains securities from Lender through an approved Agent,for an agreed fee and a stipulated period. Borrower provides collateral toLender usually in the form of cash. Borrower seeks to profit by selling andrepurchasing the securities ("short selling"). 

Lender receives the securities back at the end of the transaction andprofits by earning a fee.

Agent profits from commission or brokerage fees. 

In the period that ownership is transferred temporarily to Borrower,Borrower pays any dividends on the securities to Lender. Also, Lender paysinterest earned on the collateral to the Borrower. These are regarded as "compensating payments" which can be made directly to Borrower or Lender, orthrough the Agent.

These activities are subject to approval and regulation by theSecurities and Exchange Commission (SEC).

Highlights

The circular clarifies the following:

Companies Income Tax (CIT)

Rights, bonuses, fees and other benefits accruing to Borrower or Lederconstitute taxable income.

Dividends paid by Borrower to Lender are Franked Investment Incomeexempt from CIT in Lender's hands.

Such dividends paid by Borrower to Lender will not be an allowablededuction for the Borrower.

Interests on collateral paid by Lender to Borrower are taxable inBorrower's hands.

Interests paid by a Lender to earn taxexempt dividends are nottaxdeductible.

Dividends and interests received or paid by the Agent on behalf of otherparties are exempt and non-deductible respectively.

Withholding Tax (WHT)

WHT applies on interests paid by Lender to Borrower. However, if Lenderpays through Agent, the responsibility to deduct WHT is on the Agent.

WHT does not apply on dividends paid by Borrower to Lender irrespectiveof whether the dividends are paid directly to Lender or through the Agent.

The WHT Regulations issued under Section 81 of CITA will not apply tocompensating payments made in an RSL.

Personal Income Tax (PIT)

The amendments relating to RSL only affect entities taxable under theCITA. Therefore, individuals that participate in RSL will continue to be taxedin line with existing provisions of the PIT Act.

Stamp Duties

RSL instruments such as receipts, shares, stocks or securities and otherdocuments issued by the SEC are exempt from stamp duties.

Capital gains tax (CGT)

Transfer of securities in RSL transactions are not disposals. Capitalgains on the sale of shares are already exempt from CGT under the CGT Act.

Takeaway

The FIRS circular considers rights and bonus issues as taxable incomewhereas in the strict sense they are "compensating payments" in respect ofcapital, and therefore should not be taxed. Rights and bonus issues areadjustments against share capital which do not constitute income for theholders.

The circular regards dividends paid by Borrower to Lender as franked,and exempt from CIT. However, this may not always be the case where suchdividends have been exempted from WHT.

Overall, the new tax regime introduced by the Finance Act willfacilitate activities in RSL which is expected to have a positive impact on thecapital market.

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