Introduction
On 3rd June 2021, the Federal Inland Revenue Service (FIRS) issued an information circular on Clarifications on the Provisions of the Capital Gains Tax (CGT) Act1 ("the circular").2 This circular contains clarifications of some changes to the CGT regime brought about by the Finance Act (FA) 2020.3 Chief of these changes is with respect to gains from the disposal of ships and aircraft used in international traffic or otherwise, treatment of compensation for loss of office for CGT purposes (and the duty to remit applicable CGT) and dates for filing of CGT returns.4
Firstly, this discourse provides a highlight of these CGT changes. Then, it particularly but briefly examines the CGT changes that pertain to disposal of ships and aircraft. It concludes that there may be a need to provide further amplification, in view of the likelihood of avoidable litigation against the FIRS.
Highlights of the Circular
CGT is charged in respect of gains accruing to a chargeable person upon a disposal of assets.5 The Nigerian CGT rate is 10%, imposed on the total value of chargeable gains net of allowable deductions.6 Also crucial to an understanding of the circular is the description of chargeable persons - (i) any company or other body corporate established by or under any law in force in Nigeria or elsewhere, or (ii) a person to whom the Personal Income Tax Act (PITA) applies and to whom chargeable gains accrue.7
Ships or Aircraft Used in International Traffic
By the erstwhile section 24(f) of the CGTA,8 "a ship or aircraft is situated in Nigeria if and only if the owner is resident in Nigeria, and an interest or right in or over a ship or aircraft is situated in Nigeria if and only if the person entitled to the interest or right is resident in Nigeria". This provision did not provide clarity regarding the nature or activities of a ship or aircraft vis-à-vis the treatment of the proceeds of their disposal for CGT purposes. Thus, by a literal interpretation of the erstwhile section 24(f) and as illustration of the problem, the private ship, or aircraft of a Saudi Arabian national lying idle in Saudi Arabia is deemed situated in Nigeria for the sole reason that such Saudi Arabian resides in Nigeria for a major part of the year, regardless of whether such ship or aircraft has been used for international traffic, was disposed of in Nigeria or has any connection whatsoever with Nigeria.
Apparently against this backdrop, the FA 2020 introduced an amendment. By section 3 of the FA 2020, the words "used in international traffic" is to be inserted after "aircraft" in line 1 of the paragraph, bringing the new section 24(f) of the CGTA to read thus:
"24. Location of Assets
For the purposes of this Act -
(f) a ship or aircraft used in international traffic is situated in Nigeria if and only if the owner is resident in Nigeria, and an interest or right in or over a ship or aircraft is situated in Nigeria if and only if the person entitled to the interest or right is resident in Nigeria."
By implication, if for a ship or aircraft used in international traffic:
- The owner of such ship or aircraft is resident in Nigeria; or
- A resident of Nigeria owns an interest in or right over such ship or aircraft,
then gains from disposal of the ship or aircraft (or gains from a disposal of the rights or interests thereof) are chargeable to CGT in Nigeria, regardless of the location of the ship or aircraft at the time of the disposal.
Ships or Aircraft NOT Used in International Traffic
On the flip side, the circular clarifies the tax position in respect of a ship or aircraft used in Nigeria for purposes other than international traffic, whether such ship or aircraft is physically situated in Nigeria or otherwise. By the circular, such ship or aircraft is deemed a tangible moveable property, the disposal of which is chargeable to CGT in Nigeria, regardless of whether the owner or alienator9 is a resident in Nigeria or not, and regardless of whether the disposal was conducted in Nigeria. As later explained in this article, this provision of the circular is potentially contentious.
Compensation for Loss of Office
By the erstwhile section 36 of the CGTA,10 sums of money obtained by way of compensation or damages for any wrong or injury suffered by an individual (personally, professionally or by virtue of his vocation, including wrong or injury touching on torts such as libel, slander, or enticement) are not chargeable to CGT11 except where such compensation exceeds N10,000 (ten thousand Naira) in a year of assessment. The idea behind this provision is laudable but was clearly lagging the reality of the Nigerian economy and its inflationary trend.
By section 4 of the FA 2020 [which enacts a new section 36(2), (3) & (4) of the CGTA], sums of money obtained for compensation for loss of office up to a maximum of N10,000,000.00 (ten million Naira) are exempt from CGT. Meanwhile, by the proviso to the new section 36(2) of the CGTA, where the sum received for compensation for loss of office exceeds N10,000,000.00 (ten million Naira), the excess amount12 is chargeable to CGT at 10%.
Duty to Remit CGT Charged on Sums Obtained for Compensation for Loss of Office
By the amendment to the CGTA, an employer that pays such compensation to its outgoing or erstwhile employee has an obligation to deduct the applicable CGT at the point of payment of such compensation and remit same to the relevant tax authority (RTA) on the 10th day of the month following payment of such compensation.13
The circular further clarifies the RTA in the following way:
- For a resident of a state, the internal revenue service of the state of residence.
- For a resident of the Federal Capital Territory, Abuja (FCT), the FCT Internal Revenue Service.
- The CGT will be remitted to the FIRS for persons (a) employed in the Nigerian Army, Navy, Air Force, Police otherwise than in civilian capacity; (b) officers of the Nigerian Foreign Service; and (c) a person resident outside Nigeria but derives income or profit from Nigeria.14
Filing of Returns
By section 2 of the FA 2020 which amends section 2 of the CGTA by the introduction of a fresh subsection 4, computation of CGT, filing of self-assessment returns15 and payment of appropriate CGT must be done not later than 30th June and 31st December of the year in which the chargeable asset/right/interest disposal takes place. The circular clears up any ambiguity that may arise by prescribing the following due dates or filing of CGT returns and payment of CGT:
- For chargeable assets/rights/interests disposed from 1st December in a year to 31st May of the year that immediately follows, not later than 30th
- For chargeable assets/rights/interests disposed from 1st June in a year to 30th November each year, not later than 31st
What Constitutes CGT Returns?
A properly filed CGT return comprises the following documents:
- Duly filed CGT Self-Assessment Form.
- Accurate computation of CGT.
- Evidence of payment of CGT.
Analysis/Conclusion
By prescribing two due dates (30th June and 31st December) for filing CGT returns and paying CGT, the FA 2020 had created confusion as it failed to specify which date of disposal would apply to either of the prescribed due dates. This circular is thus a breath of fresh air on the applicable deadlines to be applied by the FIRS. CGT being under the care and management of the FIRS,16 this circular will also guide remittance of CGT to other RTAs in line with paragraph 5.0 of the circular.
Furthermore, the circular seeks to clarify that gains from disposal of ships or aircraft used in Nigeria for purposes other than for international traffic will be subject to CGT notwithstanding that the owner of the ship or aircraft (or the right/interest thereof) is a non-resident and/or the ship or aircraft is not physically in Nigeria. This clarification may be subject to avoidable litigation in court, if not reviewed, for the following reasons.
Firstly, the circular already clarifies that a ship or an aircraft used in Nigeria for purposes other than international traffic (whether or not the ship or aircraft is physically situated in Nigeria) is a tangible movable property.17 Section 24(b) of the CGTA provides that the situation (or location for CGT purposes) of rights or interests in or over tangible movable property is that of the tangible movable property itself. By deduction, CGT on the disposal of a ship or aircraft used in Nigeria for purposes other than international traffic (a tangible movable property) should be based on the location of the asset. Thus, the circular can be challenged in that it is void to the extent of its conflict with the clear provision of section 24(b) of the CGTA.
It may appear that the rationale for paragraph 3.2 of the Circular lies in the need to prevent capital gains flight, that is, the transfer from Nigeria of capital gains accruing from disposal of ships or aircraft (used in Nigeria) to (capital gains) tax havens. It is submitted that the FIRS need not breach clear statutory provisions to actualize this objective. With the probable imminence of the Finance Act 2021, the CGTA can be amended by borrowing a leaf from maritime jurisprudence, especially the recognition of ships as real property and the attribution of a legal personality to them. Thus, tax laws can be amended to levy CGT on ships or aircraft where such ship or aircraft has significant economic presence (SEP) or significant residence (SR) in Nigeria. Accordingly, "SEP" or "SR" may then be defined to connote situations where ships are significantly used in Nigeria (in terms of time frame, say for 183 days at least). A lien may be placed on such ships or aircraft until the appropriate CGT value is paid on them.
Furthermore, the SEP concept may also be applied to the owner of the ship or aircraft. Where a ship or aircraft has been significantly used in Nigeria but moved out of Nigeria by its foreign owner to be disposed of to another foreigner, the ship or aircraft may be sued, and a lien placed on them until the accruing CGT is paid.
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Footnotes
1. Cap C1, LFN 2004 (as amended).
2. No. 2021/09, accessible here: < https://www.firs.gov.ng/wp-content/uploads/2021/06/CLARIFICATIONS-ON-THE-PROVISIONS-OF-CAPITAL-GAINS-TAX-CGT-ACT..pdf>, accessed 27th September 2021 at 4:35 pm.
3. Federal Republic of Nigeria Official Gazette No. 4 Volume 108 (Government Notice No. 1) 4th January 2021, accessible here: < https://ngfrepository.org.ng:8443/bitstream/123456789/3067/1/FINANCE%20ACT%202020.pdf>, accessed 6th December 2021 at 08:49 am.
4. See sections 2 (date of filing CGT returns), 3 (location of aircraft and ships for CGT purposes) & 4 (CGT treatment on amount obtained as compensation for loss of office) of the FA 2020, which amends sections 2(4), 24(f) and 36(2), (3) & (4) respectively of the CGTA.
5. Section 1, CGTA.
6. Section 2, CGTA.
7. Section 46(2), CGTA.
8. Prior to the FA 2020.
9. Person disposing of his rights or interests in a ship or aircraft.
10. Before FA 2020.
11. Section 36(1) of the CGTA.
12. Formula: Nx minus N10,000,000.00, where "x" > N10,000,000.00, and where "x" = The sum obtained.
13. Regulation 7(1) of the Operation of the Pay As You Earn (PAYE) Scheme Regulations, 2003, a subsidiary legislation made pursuant to the Personal Income Tax Act (PITA).
14. Paragraph 5.0 of the circular.
15. The circular introduces a Self-Assessment Form called Capital Gains Tax Returns 003 for the purpose of filing CGT returns.
16. Section 43(1) of the CGTA.
17. Lines 1-3 of paragraph 3.2 of the Circular.
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.
