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Much Ado About the FIRS' 6% Stamp Duty on Leases

Taxes & Tariffs	1624 VIEWS
Taxes & Tariffs
1624 VIEWS

Wednesday, July 29, 2020 / 09:10 AM / by KPMG Nigeria / Header Image Credit: 50MINDS/Ecographics

The Finance Act, 2019 has resolved the decades-long dispute between regulatory agencies over the power to administer the Stamp Duties Act (SDA) by clearly vesting upon the Federal Inland Revenue Service (FIRS) the exclusive power to impose, charge and collect duties upon instruments that have been executed by companies or between a company and an individual. Stamp duties is an instrument utilized by governments to raise much needed revenue since their first use in England in the 17th century to raise funds needed to prosecute a war.

Stamp duties were first enacted in Nigeria, pre-independence in 1939 and 1954, and included in the compilation of the Laws of the Federation of Nigeria, 1990 and 2004, respectively. Originally, stamp duties were intended to apply to only physical instruments and documents, however, the Finance Act, 2019 has codified its extension to electronic transactions. Both the Central Bank of Nigeria and Nigerian Stock Exchange have endorsed the extension of dutiable instruments to electronic transactions as being in line with global practice and economic realities.

The FIRS recently stepped up to its mandate with respect to the SDA by issuing a Public Notice on 19 July 2020 providing clarification on the application and administration of Stamp Duties in Nigeria. The Public Notice also urged the public on the necessity to comply with the SDA by paying the appropriate duties on their instruments and transactions. Further, the FIRS provided a short form listing of transactions and instruments and the applicable duty rates as a quick reference point.

The FIRS should be commended for striving to fulfill its statutory responsibilities to administer tax legislation, including the SDA. We believe that further action by the FIRS in this respect will help Nigerian taxpayers to acquire appropriate tax awareness and imbibe the much desired civic responsibility of paying taxes voluntarily, and in a timely manner.

In doing so, however, we must encourage the FIRS to stay the course by anchoring its enforcement drives on the actual letter of the law. The statutory basis for the FIRS' tax drive should always be beyond doubt for it to retain the public trust. For the purpose of this brief communique, we would highlight the reference in the FIRS Public Notice to leases as being subject to ad valorem stamp duty rate of 6%. This was clearly an overstatement of the applicable law given that the SDA stipulates a graduated rate for agreement for a lease or any letting. The SDA prescribes a flat floor rate of 39 kobo for leases of less than a year; 0.78% for leases of 1 to 7 years; 3% for leases of 8 to 21 years; and a top rate of 6% for leases of more than 21 years. Interestingly, the SDA goes further to suggest that the graduated rate for leases might not apply at all where the consideration for a lease consists of money, stock or security, but that a rate of 1.5% would apply in that case.

Most commentaries on this subject have been as to the rate applicable to individuals, who are actually not even subject to the FIRS' enforcement powers as stated in the opening sentence of this communique. Furthermore, most individuals obtaining residential leases do not do so for long periods, but for short periods between 1 to 3 years with most renewals being on an annual basis on payment of the applicable rent with no creation of a dutiable instrument, whether physical or electronic. Therefore, generally, most Nigerian leases will not be affected by the SDA.

Nonetheless, our attention has been drawn to a twitter handle of the FIRS seeking to clarify the basis of applying stamp duty on leases. The FIRS should go further to issue an official statement clarifying the correct rate. Besides the incorrect postulation of the ad valorem rate applicable to leases, the FIRS Public Notice also contains other similar generalisation as to applicable duty rates, for instance, as regards loan agreements and contracts.

We think that a wholesale review of the SDA may be required in order to properly evaluate its continuing relevance as an instrument of revenue collection in Nigeria. This has been the approach taken by several countries including the United Kingdom (from where we obtained the concept of stamp duties in the first place) and other Commonwealth countries and the United States, where SDA has either been rolled back completely or its application reduced in scope to only a few dutiable subjects. We would, therefore, urge the FIRS to lead the initiative for the economic review of the fiscal impact of the instruments and rates currently covered by the SDA, in the light of modern realities and current economic uncertainty faced by most businesses due to the Covid-19 pandemic.

In closing, we urge Nigerians to be ready to contribute their fair share to the finances of the Federation and the States to enable governments at all levels to discharge their constitutional mandates. However, such contribution must be fair and not onerous, and eminently sympathetic to economic realities. Uncertainty of tax rules, public distrust of tax administrators, and a multiplicity of taxes do not encourage taxpayers to be compliant and contribute to an uncertain fiscal environment that potentially discourages much needed investment in Nigeria.