Copyright bizwatchnigeria
The Federal Inland Revenue Service (FIRS) has directed banks, stockbrokers, and other financial institutions to begin deducting a 10 per cent withholding tax (WHT) on interest earned from short-term securities, signalling a major policy shift aimed at broadening Nigeria’s tax base. According to a circular released by the agency, the new measure applies to treasury bills, corporate bonds, promissory notes, and bills of exchange, with the tax to be deducted at the point of payment. This replaces the previous exemption regime designed to stimulate investor participation in Nigeria’s financial markets. Scope and Exemptions While the directive affects a wide range of short-term investment instruments, interest earned on Federal Government bonds will remain exempt from the tax. FIRS clarified that investors will be granted tax credits for the amounts withheld, except in cases where the deduction constitutes a final tax. The new policy is expected to alter investor appetite, particularly among those drawn to short-term instruments for their liquidity and competitive returns. Compliance and Enforcement FIRS Executive Chairman, Zacch Adedeji, emphasised the importance of strict compliance, warning that defaulters would face penalties in line with tax laws. “All relevant interest-payers are required to comply with this circular to avoid penalties and interest as stipulated in the tax law,” Adedeji stated. The circular, which was addressed to banks, discount houses, stockbrokers, corporate bond issuers, primary dealer market makers, financial institutions, and government agencies, reinforces provisions under Sections 78(1) and 81(1) of the Companies Income Tax Act (CITA), as amended, as well as the 2024 Withholding Tax Regulations. FIRS, however, did not provide projections for the expected revenue inflow from the policy. Understanding Withholding Tax Withholding tax is a form of advance tax deducted at source from specific payments to individuals or companies. The payer is responsible for remitting the deducted amount to the tax authority on behalf of the recipient. According to FIRS, the applicable WHT rates are as follows: Rents on properties – 10% Dividends or company profits – 10% Interest on bank deposits or securities – 10% Royalties – 5% The agency noted that the new measure aligns with its broader objective of improving compliance, strengthening domestic revenue mobilisation, and ensuring fairness in the tax system. Investor Reactions and Implications Analysts say the introduction of the 10% withholding tax could reshape Nigeria’s short-term investment landscape, potentially affecting demand for instruments such as treasury bills and corporate notes. Market watchers, however, note that the move could also help diversify government revenue sources amid fiscal pressures, while encouraging more sustainable investment behaviours among market participants. The directive underscores FIRS’s continuing drive to enhance tax transparency and accountability, while ensuring that both corporate and individual taxpayers meet their statutory obligations under Nigeria’s evolving fiscal framework.
