"In order to achieve the objective of lowering the interest rates, particularly to the priority sectors, we would encourage large corporates to issues commercial paper notes in the market." - Godwin Emefiele, CBN Governor.1
In 2011 the Federal Government (FG), amongst several other initiatives to incentivize increased investment in Nigeria, issued the Companies Income Tax (Exemption of Bonds and Short Term Government Securities) Order, 2011 (CITEO).2 Gazetted in 2012 with a commencement date of 2nd January 2012, CITEO exempts: (a) short term FG securities (such as treasury bills (T-bills) and promissory notes); (b) bonds issued by FG, State and Local Governments, their agencies (MDA), corporate bodies; and (c) interest earned from such short term securities and bonds, from taxes imposed under CITA.3
Historically, the Local Loans (Registered Stock and Securities) Act4 which enabled the Minister of Finance issue: registered stock; government promissory notes; bearer bonds and stipulate privileges, exemptions and immunities to be attached to them, did not cover T-bills as well as State Government and corporate bonds.
The amendment to the Personal Income Tax Act (PITA)5 however made provision for the exemption of public bonds by the Governments, MDAs and also corporate bonds from PIT, but not short term FG securities.6 Thus, until the enactment of CITEO and Personal Income Tax (Exemption of Bonds and Short Term Government Securities) Notice (PITEO), 2011 all short term FG securities were subjected to tax under CITA and PITA.7
Presumably, CITEO was issued to expand and encourage more activities in the bonds market. It was to also provide cheaper short/long term debt funding for the private and public sectors8 by affording both individuals and corporate bodies, the opportunity to enjoy the benefits of tax free bond transactions. Such exemption also translates into lower discounts (interest) rates.
The impact of exempting bonds from taxes was immediate as the bonds market experienced rapid transformation. From N108.5 billion in 2009, the Nigerian domestic bond market capitalisation rose to N4.55 trillion in September 2011.9 Recently, it has been observed that firms bypass banks to raise debt at lower rates through the use of commercial papers (CPs).10 The trend is likely to continue – for example, sector market leaders, Dangote Cement Plc and Nigerian Breweries Plc, are expected to issue more CPs in 2018.11
Given the more aggressive push for tax compliance by the Federal Inland Revenue Service (FIRS) and States' Internal Revenue Service (SIRS), post expiry of the Voluntary Asset and Income Declaration Scheme (VAIDS), the question may arise: "which financial instruments will qualify as 'bonds' for the purposes of CITEO?" This is because both CITA and the CITEO omitted to define 'bonds'. Will all financial/money instruments be classified as bonds? What happens if the Revenue disagrees that particular instruments qualifies as 'bond', and therefore ineligible to enjoy the CITEO exemption? This article considers the various implications of the related issues from taxpayer transactional and compliance enforcement perspectives.
Features of 'Bonds'
The need to differentiate bonds from other financial instruments is inevitable as not all financial instruments qualifies as bonds. According to Idris, J in Citibank v. FIRS: "Indeed, if the legislature had intended that income or gain from the acquisition and disposal of all money instruments (whether long term or short term) will be taxable, it would have adopted express wording to achieve that objective and there will be no need to limit the taxable income or gain to that derived from acquisition and disposal of short-term money institutions (sic) it had done in section 9(1)g of CITA."
Generally, a bond is a certificate of debt under which the issuer obligates itself to pay the principal to the bondholder on a specified date, usually three (3) years or more after the date of issue. The main characteristic of a bond is that it is a debt obligation made by way of transferable instrument with a medium or long-term maturity. Bonds are usually issued on a fixed rate basis - their rate of interest is fixed at issue and will not change during the life of the bond. They are probably the most widely used security in the capital market. They are usually issued as loan stock or debentures, carry a fixed rate of interest and generally repayable at a predetermined future date, or earlier at the discretion of the issuer.
Bonds are used by Government to enhance fiscal discipline, develop and ensure liquidity in the domestic bond market on a sustainable basis and diversify government financing sources from bank borrowing.12 It also widens borrowing options for corporates whilst better enabling bond issuers (Government or Corporate) 'dictate' interest rate.13 According to Black's Law Dictionary, 'bond' means "An obligation or a promise. A written promise to pay money or do some act if certain circumstances occur or a certain time elapses; a promise that is defeasible upon a condition subsequent." Also, Stroud's Judicial Dictionary of Words and Phrases14 defines 'bond' to mean "an obligation by deed." The Dictionary of Taxation and Public Finance15 defines 'bond' as "a long-term debt instrument which carries a definite understanding of the issuer or borrower to repay the amount so borrowed on a given date with interest and usually at a fixed rate."
On its own part, section 273 Investments and Securities Act (ISA),16 defines 'bond' as "an instrument of indebtedness issued by a body to which this part of this Act applies [Governments and MDAs] to secure the repayment of money borrowed by such body."17 The definition of "bodies" under the ISA suggests that its definition of 'bonds' does not cover bonds issued by the private sector.
An analogy may be drawn from the Companies and Allied Matters Act (CAMA)18 which although does not define 'bonds', defines 'debenture' as: "a written acknowledgement of indebtedness by the company, setting out the terms and conditions of the indebtedness, and includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not."19 CAMA also then defined 'securities' to include "shares, debentures, debenture stock, bonds, notes (other than promissory notes) and units under a unit trust scheme", and confirms that "long term investment include Bonds, debentures and Federal Government Development Stocks."20 This implies that bonds are classified as debentures; and securities are defined to include bonds.
Bonds: A Substantive Test
We submit that whether an instrument is called a bond or not is immaterial, what is critical is that it has the characteristics of a bond. Thus financial instruments such as: debentures, CPs and securities with requisite characteristics would qualify as bonds for the purposes of CITEO since none of CITA, CITEO, VATEO and PITEO (the Orders) defined bonds.21
Basic features of bonds are: (a) an existence of an issuer and bondholder; (b) promise to pay on a specified day (which may however be altered); (c) a usually fixed rate which does not change; and (d) maturity which can be medium or long term (whatever the duration of a bond and the issuer must fulfil its debt obligation when the bond reaches its maturity).
According to Silver E. Quindry: "The fact that an instrument is called a bond is not conclusive as to its character. It is necessary to disregard nomenclature and look to the substance of the bond itself. The distinguishing feature of a bond is that it is an obligation to pay a fixed sum of money, at a definite time, with a stated interest, and it makes no difference whether a bond is designated by that name or by some other, if it possesses the characteristic of a bond. There is no distinction between bonds and certificates of indebtedness which conform to all the characteristics of bonds."22
Tax-Exempt Provisions for Bonds
In exercise of the powers conferred on him by section 23(2) CITA,23 President Goodluck Jonathan issued the CITEO in 2011 which provided inter alia that: "all short term Federal Government of Nigeria securities such as treasury bills and promissory notes; bonds issued by Federal, State and Local Governments and their agencies; bonds issued by corporate bodies including supra-nationals; interest earned by holders of the bonds and short term securities"24 are to be exempted from taxes imposed under the CITA for a period of ten (10) years. However, bonds issued by the FG will enjoy indefinite exemption, unlike ten (10) year period exemption for corporate bonds.
Around the same time, VATEO was also issued to exempt proceeds from the disposal of: (a) short term FG's securities and bonds; and (b) short term bonds issued by State, Local Governments and corporates (including supra-nationals) from VAT.25 Paragraph 2 VATEO provides that except for bonds issued by the FG which shall continue to enjoy VAT exemption under the VATA,26 the VAT exemption on bonds shall be for ten (10) years. This provision is consistent with section 38 VATA which empowers the Minister of Finance to amend, vary or modify the list set out in First Schedule VATA (VAT Exempt List). Note, however that in practice, substantive bond transactions were never subjected to VAT in Nigeria.
Also, Item 31A, Third Schedule PITA provides that interest earned by holders of corporate bonds including supra-nationals and Governments and their agencies are exempted from tax under PITA. However, PITEO specifies that the PIT exemption on bonds would also be for ten (10) years, instead of the unlimited duration exemption in Para 31A, Third Schedule PITA.27
Can the PITEO validly circumscribe the 'indefinite' exemption of Third Schedule PITA?
To start with, both are subsidiary legislation and are therefore not superior to each other.28
In considering which of the two conflicting provisions should prevail, recourse would be made to rules of statutory interpretation. In Akintokun v. LPDC29 the Supreme Court (SC) held that where a later enactment does not expressly amend an earlier statute but its provisions are inconsistent with the former; the later amends the earlier by implication so far as is necessary to remove the inconsistency between them. This is a logical necessity - since two inconsistent texts cannot be valid.
It is trite that in case of conflict between a statute and an administrative order, the former must prevail. A rule or regulation must conform to and be consistent with the provisions of the enabling statute in order for such rule or regulation to be valid. The provisions of the PITEO is consistent with that of the enabling statute, given that the PITA allows the Minister to amend by notice, the exemptions provided in the PITA.30 In A.G Abia v. A.G Federation31 the SC considered the validity of the promulgation of the Revenue Allocation (Federal Account, Etc) (Modification) Order (Statutory Instrument No. 9 of 2002) and held that the President acted pursuant to section 315 1999 Constitution. Thus, the promulgated Order was held to be consistent with the Constitution and therefore valid. Consequently, our considered view is that the PITEO could validly amend Paragraph 31A, Third Schedule PITA.
The Capital Gains Tax Act32 (CGTA) also exempts from CGT, gains accruing from disposal of Nigerian Government (a) securities which includes: Nigerian treasury bonds; savings certificates and premium bonds issued under the Savings Bonds and Certificate Act,33 (b) stocks, and (c) shares.34 CGT is generally not charged on income made from disposal of bonds in line with provisions of section 30 CITA and given the long established regulatory practise post section 30 CGTA of exempting stocks from CGT.
Can the Revenue Validly Disregard a Money Market Instrument as a 'Bond'?
The Orders' specifically distinguishing between 'short term securities' and 'bonds' cannot be said to be an oversight, but reflective that the parliament does not legislate in vain by use of meaningless words and phrases.  This further emphasises that not all money market instruments will qualify as a bond. For instance: as defined on the FMDQ website, CPs are short-term (not more than 270 days), discounted unsecured money market instruments issued in the form of promissory notes primarily by corporates.36 Bonds however, from the given definitions, are usually for a medium or long term. What then happens if the Revenue disagrees that CPs qualifies as bonds?
The Revenue (whether FIRS or SIRS) must take utmost care to ensure that the person sought to be taxed is not someone who is completely outside the taxing statute or is exempted from paying the relevant tax. In Citi Bank v. FIRS37 the Court held that section 9(1)(g) CITA expressly subjecting the profits and gains from the acquisition and disposal of short term money instruments to tax under it, automatically excludes long-term money instruments from tax. This is in line with the interpretative maxim: "expression unius est exclusion alterius" (express mention of one thing excludes others not mentioned) as applied by the SC in Ojukwu v. Yar'dua.38 The Court has no power to read into a statute what is not contained therein, as judges are generally meant to interpret and not to make laws.
A corollary of this is that if there are any doubts or ambiguity of any taxing provisions, the beneficial construction will be in favour of the taxpayer rather than the Revenue. According to Idris, J in Citi Bank: "where a literal interpretation of a tax statute is inappropriate because the provisions to be construed are ambiguous or in doubt, the tax statute must be constructed in favour of the taxpayer."39 Also in D.I.T v. E-Funds IT Solution40 the High Court of Delhi held that: "in other words, when DTAA and provisions of the Act apply to an assessee, then the Article of DTAA or the provision of the Act will apply depending upon, which one of the two is more beneficial or advantageous to the assessee." This implies that where two laws exist on a similar tax issue, the one most beneficial to the taxpayer will prevail.
However, Ogunwumiju JCA (as she then was) in FBIR v. I.D.S Ltd41 espoused the decision of the CA in Phoenix Motors Ltd. v. National Provident Fund Management Board42 that "If a statute is revenue based or revenue oriented, it will be part of sound public policy for a court of law to construe the provisions of the statute liberally in favour of the revenue or in favour of deriving revenue by Government... This is because it is in the interest of the generality of the public and to the common good and welfare of the citizenry for Government to be in revenue and affluence to cater for the people... No court should lend its hands to a person or body bent on beating the efforts of the Government at collecting revenue by relying on technicalities of the law with a frugal aim to cheat Government of its legitimate income." With respect, this decision is not only contrary to the settled principles of taxation, but was also erroneously relied upon by Musa, J. in Arvin Ventures v. Chairman Abuja Municipal Area Council & Anor.43
In Aderawos Timber Trading Co. v. FBIR,44 the SC held that if the State claims a tax under a statute it must show that the tax is imposed by clear and unambiguous words, and where the statute is ambiguous, it must be construed in favour of the subject. This further shows that the decision in FBIR v. I.D.S Ltd was held per incuriam. The Court will not help legislature or the Revenue fill omitted gaps. Thus, the CA held in Ibrahim & Anor v. Kogi State Govt. & Ors45 that: "A law which imposes pecuniary burden is under the rules of interpretation subject to the rule of strict construction. All charges upon the subject must be imposed by clear and unambiguous language because in some degree they operate as penalties. Thus, the subject is not to be taxed unless the language of the statute clearly imposes the obligation: The language of the statute must not be strained in order to tax a transaction which had the legislation thought of it, would have been covered by appropriate words."46
Bonds: Potential Bonds Tax Dispute Dimensions
The key areas of potential conflicts are whether WHT is applicable on the interest income if bonds are considered not covered by the Orders; and secondly whether bond issuers can deduct the interest expense. We do not see any issues with the latter as they are clearly deductible pursuant to the "WENR test" that is whether they are wholly, exclusively, necessarily and reasonably incurred for the purposes of generating taxable profits.47
A taxpayer aggrieved by an assessment, demand notice, action or decision made upon him by the Revenue regarding applicable tax treatment of bonds may appeal against such decision, assessment or demand notice within thirty (30) days from the date a copy of the order or decision which is being appealed against is made, or deemed to have been made. The Tax Appeal Tribunal (TAT) may however, entertain an appeal after the expiry of the period of thirty (30) days if it is satisfied that there is sufficient cause for the delay. Such appeal is made to the TAT in the required form, and accompanied by the prescribed fee.48
Note that where a taxpayer does not object or appeal as required within prescribed timelines, the assessment or demand notices by the Revenue becomes 'final and conclusive' and the Revenue may charge interests and penalties in addition to recovering the outstanding tax liabilities which remain unpaid. The Court in I-D Sam Nig. Ltd v. Lagos SIRS49 stated that "the Claimant clearly had a right to disagree with the assessment as being arbitrary, out of touch with reality etc. However, the only way to have communicated that disagreement was for the Claimant to have filed a Notice of Objection within 30-day period as prescribed in Section 58 of PITA...Section 66 provides that where no valid appeal or objection is lodged as prescribed, the assessment becomes final and conclusive. Where the payment is not made then, at this point, Section 104 comes into play."
Withholding Tax (WHT) Treatment of Bonds
The PITA, CITA, and related Exemption Orders did not specifically mention that bonds will be exempted from WHT. However, since WHT is advance payment of tax, transactions not liable to income tax are also not subject to WHT in Nigeria.50 WHT is "a form of tax administration which enables tax authorities to recover at source from taxable persons tax from payment made for certain services which such persons render to another. What is deducted by the person who pays for the services is a percentage of the payment. Now if so deducted, when taxable person's tax for the year is duly assessed, whatever has been deducted is credited to him in a manner that he does not pay tax twice on the same income accruing from that payment."51 This implies that if proceeds from bonds are tax exempt, bonds will not be subject to WHT.52
Penalties for Non-withholding/Non-remittance of Tax
Every eligible individual, bodies or companies are subject to tax unless specifically exempted. Non-compliance with mandatory WHT, PIT, VAT, CIT deduction and remittance provisions could expose the non-compliant taxpayer to penalties. We argue that CPs are bonds but the FIRS Establishment Act (FIRSEA)53 provides that any person who being obliged to deduct any tax under the FIRSEA or other tax laws, but fails to deduct, or having deducted, fails to pay to the FIRS within thirty (30) days from the date the amount was deducted or the time the duty to deduct arose, commits an offence and shall, upon conviction, be liable to pay: (a) the amount that it ought to have remitted; (b) penalty (at 10% per annum) for non-deduction and remittance; and (c) interest (at prevailing CBN minimum rediscount rate, plus spread to be determined by the Minister) on (a) and (b) above.54
Immediately after the ten (10) year period stipulated in the CITEO, VATEO and PITEO taxpayers should ensure that taxes on bonds are deducted and remitted as applicable in order to avoid payment of penalties or interest.
Given that previously bonds lagged behind as an investment option in Nigeria, granting bond related tax incentives spurred investment in both government and corporate bonds. The CITEO, PITEO and VATEO are therefore good efforts in this direction.
Dispute could arise if the Revenue disagrees that CPs are tax exempt pursuant to the CITEO and PITEO. This is because there is no contextually relevant, statutory definition of bonds. Such dispute could provide opportunity for binding judicial determination, pending legislative action to introduce clarity. The legislative action could introduce tax relevant statutory definition of bonds and also remove the discrepancy in the number of years for the tax exemption of bonds in the PITA and the PITEO.
Pending such amendment, we submit that controversies on whether "debt financial instruments" pursuant to which investors earn agreed returns, are bonds and therefore subject to tax exemption, should be resolved in favour of the taxpayer.
1. Hope Moses-Ashike et al., 'CBN Embraces QE, May Buy CPs from Corporates to Push Down Rates', Business Day, 25th July 2018, 1.
2. An example of such initiative was the issuance of CITEO which exempts: (a) 5% of the assessable profit of any company with a minimum net employment of ten (10) employees of which 60% are employees without any form of previous work experience within three (3) years of graduating from school or any vocation; and (b) an additional 30% of the cost of infrastructure or facilities of public nature provided by a company, from income tax, within the assessment period in which the profit was generated and the infrastructure or facility provided respectively. See also Value Added Tax (Exemption of Proceeds of the Disposal of Government and Corporate Securities) Order (VATEO), 2011 which exempts income and proceeds from the disposal of short term Corporate, Federal, State and Local Government bonds and securities from VAT.
3. Section (9)(1)(g) CITA imposes CIT on "any amount of profits or gains arising from acquisition and disposal of short term money instruments like Federal Government securities, treasury bills, treasury or savings certificates debenture certificates or treasury bonds."
4. Cap. L17, LFN 2004, originally enacted in 1946.
5. Cap. P8, LFN 2004. Amended vide section 33 PIT (Amendment) Act, 2011.
6. Short term Federal Government securities were exempted from PITA under the PITEO and not PITA.
7. Note that the CITA did not provide for the exemption of short term FG securities from taxes imposed under CITA.
8. "The exemption allow State and Local Governments to pay lower rates of interest on their debt than that paid on taxable corporate bonds of comparable risk": M.J Graetz et al., 'Federal Income Taxation Principles and Policies', Foundation Press, 5th ed., 215.
9. Deebii Nwiado and Leelee N. Deekor, 'The Domestic Bond Market and the Development of the Nigerian Capital Market: An Empirical Analysis', Journal of Economics and Sustainable Development, Vol.4, No.7, (2013): www.iiste.org, ISSN 2222-1700 (Paper) ISSN 2222-2855.
10. See Emeka Ucheaga et al., 'Firms Bypass Banks, Raise N226bn CPs at Lower Rates', Business Day, 23rd July 2018, 1.
12. "The Lagos State House of Assembly has approved the sum of N500 billion worth of bond for the State Government spanning between 2016 and 2019": Oladipupo Awojobi, 'Assembly Approves N500bn Bond for Infrastructure in Lagos', This Day, 7th September 2016, https://www.thisdaylive.com/index.php/2016/09/07/assembly-approves-n500bn-bond-for-infrastructure-in-lagos/.
13. Companies have opted to go directly to debt investors rather than banks as borrowing costs for bank loans start around 17% and above for prime borrowers compared to the lower cost of borrowing in commercial papers where yields currently average 15.6%. See Emeka Ucheaga et al. (supra).
14. 7th ed., Vol.1, 298.
15. Adebayo Olagunju, EL-TODA Ventures Ltd, 2011, 30.
16. Cap. I24, LFN 2004.
17. Section 222 ISA defines such bodies as: Federal, State (including FCT) and Local Governments and their respective agencies and any company which is wholly owned by any of the three tiers of government.
18. Cap. C20, LFN 2004.
19. Section 567 CAMA.
20. Schedule 1 (Balance Sheet formats).
21. A statute which deprives the citizen of his rights must be strictly construed. Hence if there is any ambiguity or doubt arising from the words used in the statute, this must be resolved in favour of the citizen's right: Nigeria LNG Ltd v. AG Federation (2018) 33TLRN 9 at 82.
22. Bonds & Bondholders Rights and Remedies, (2nd ed., 1934), 3-4. Cited in Black's Law Dictionary (supra).
23. "The President may exempt by order-(a) any company or class of companies from all or any of the provisions of this Act; or (b) from all tax or any profits of any company or class of companies from any source, on any ground which appears to it sufficient."
24. Sections 1 and 2 CITEO.
25. Paragraph 1 VATEO.
26. Value Added Tax Act (VATA), Cap. V1, LFN 2004.
27. Referred to as Paragraph 32 in PITEO.
28. Labiyiv. Anretiola 8 NWLR (Pt. 258), 139.
29.  13 NWLR (Pt. 1423), 13 at 85.
30. Section 19(2) PITA.
31.  4 NWLR (Pt. 809), 124 at 177.
32. Cap. C1, LFN 2004.
33. Section 30(2) CGTA.
34. Section 30 CGTA.
35. Shamrahayu, A.A. and A.O. Sambo, 'Internal Affairs of Political Parties and Judicial Review: An Expository Study of the Experience in Nigeria and Malaysia', Journal of Applied Sciences Research, 7(13): 2257-2265, 2011, www.aensiweb.com/old/jasr/jasr/2011/2257-2265.pdf .
37. (2017) 30 TLRN 40.
38.  4 NWLR (Pt. 1078), 435 at 461.
39. Supra, at 6.
40. (2015) 20TLRN 84 at 145.
41. 8 NWLR (Pt. 1144), 615 at 639.
42.  1 NWLR (Pt. 272), 718 at 731.
43. (2017) 31 TLRN 65.
44. (1966) NCLR 416 at 422.
45.  3 NWLR (Pt. 755) 502 at 522.
46. The FHC in Nigeria LNG. v. AG Federation (2018) 33 TLRN 9 at 18 toed the correct line by holding that "A statute which deprives the citizen of his rights must be strictly construed. Such statute must be construed fortissimo contrapreferentes, that is, strictly against the acquiring authority but sympathetically in favour of the citizen whose property rights are being acquired; meaning that as against the acquiring authority, there must be a strict adherence to the formalities prescribed for acquisition." See also the CA decision in NDDC v. NLNG.
47. Section 24 CITA. See also the "wholly, exclusively and necessarily" (WEN) test in section 10 Petroleum Profits Tax Act Cap. P13, LFN 2004 (PPTA).
48. Section 13, Fifth Schedule FIRSEA and Paragraph III Tax Appeal Tribunal (Procedure) Rules 2010.
49. (2011) 5 TLRN 41 at 51.
50. Paragraph 3.0 Federal Inland Revenue Service Circular No. 2006/02.
51. Per Oguntade JCA in 7up Bottling Co. Plc v. LSIRB  3 NWLR (Pt. 650), 565 at 617.
52. Brasoil Service Coy Ltd v. FIRS (2016) 24TLRN 24.
53. Cap. F36, LFN 2004.
54. Section 40 FIRSEA. See also section 74 PITA and sections 55, 92, 94 and 95 CITA.
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