FIRS, Stock Market and the VAT Challenge

[Stockbear]

Something else to consider when buying/selling shares!

FIRS, Stock Market and the VAT Challenge
Posted Monday, January 15, 2007

For investors in companies whose shares are traded on the Nigerian Stock Exchange (NSE), who for sometime have complained under the weight of multiple taxes, the worst is just about to come. The Federal Inland Revenue Service (FIRS) under Ms. Ifueko Omoigui, may have started an onslaught to raise her organisation’s income base. The private sector from which she was appointed by President Olusegun Obasanjo some years ago is presently groaning under the weight of this urge.

The nation’s capital market operators seems her next stop, with her resolve to compel the NSE and its subsidiary– Central Securities Clearing System (CSCS) to pay about N780 million as Value Added Tax (VAT). VAT represents five per cent of cost services rendered, charged by the FIRS on behalf of the government. Both NSE and CSCS are being asked to pay the amount, for failing to charge stockbrokers and investors VAT as part of transaction cost for the past few years.

A breakdown of the amount shows that the NSE is being asked to pay N600 million and its subsidiary N180. While the NSE is still at a loss as to how to get such amount, the CSCS is believed to have paid. Fielding questions from capital market correspondents during the annual review of activities on the NSE last week, Director-General Dr. Ndi Okereke-Onyiuke noted that the soaring cost of doing business and multiple taxation is a disincentive to investment.

The bid to reduce "cost of transaction in the market is not being made easy by the government," she lamented.

Continuing, the NSE boss noted that the "FIRS has started charging VAT on transaction charges earned by the various stakeholders such as stockbrokers, CSCS and NSE, except the Securities and Exchange Commission (SEC)." Okereke-Onyiuke explained that such a move amounts to double taxation as both buyers and sellers in the cause of transaction pay tax, just as the companies statutorily pay 30 per cent tax yearly, on their profit from operations.

Continuing, she said, the NSE is putting together a formidable team to meet with the Minister of Finance on the need to reverse the situation.

One argument to be put up before government by the team is the likelihood that multiple taxes could stifle the desire of people to invest in shares. Such situation could lead to liquidity squeeze and generally douse investors’ appetite. A solution, she proffered is for government to listen to the long-term cry for adequate funding of the capital market apex regulator, SEC, such as in other economies in the globe, thereby ensuring that the agency is efficiently and effectively carrying out its function of policing the capital market and especially its primary role of investor-protection. For several years now, the commission has been funded by charging one per cent of transaction cost, an amount which several administrations in the organisation and stakeholders have argued is grossly insufficient for the amount of work to be done by it.

The NSE boss is not happy that while SEC, a government organisation is still retaining the one per cent charged as transaction cost, the FIRS, a sister agency is insisting on collecting another five per cent as VAT. Thereafter from the stockbrokers’0.3 per cent brokerage fees on transaction cost, they are also expected to pay 30 per cent of the fees accumulated during the year as company tax.

She joined her voice to those of stakeholders calling for a reduction in the cost of doing business in the nation’s capital market so that more companies would seek listing, just as more brokerage firms would come on board. The country’s quoted companies, according to her are already doing the nation proud, as tax from the 208 account for a significant 80 per cent of company income taxes that accrue to government in the last count.

"It would pay government more to reduce tax on our market. This high transaction cost is killing the market. High transaction costs impact adversely on market liquidity, especially for large (ticket) transactions," she stressed.

It would be recalled, reported late last year that the cross border listing of Ecobank Transnational Incorporated (ETI) on the three major West African exchanges in Nigeria, Ghana and Abidjan was being delayed by the exorbitant statutory cost in Nigeria. The management of the sub-regional banking group wrote the NSE to complain that the charges in Nigeria is 18 times the cost structure of Cote D’Ivoire and Ghana put together.

"So we met with SEC and it was agreed that we accept what ETI is paying Cote D’Ivoire, which was less than N2 million, after all the major investors, as well as the Managing Director and CEO are Nigerians," the DG said. The major challenge for the Exchange this year, to her, is how to bring down the cost of doing business, such that Nigerian would benefit at the end of the day.

She promised that the NSE would work closely with other regulatory agencies to achieve the desired cost reduction and attain stock market development objectives. The NSE boss wondered: "Where will we get N600 million to pay. The NSE shares one per cent of transaction cost with the CSCS (NSE 0.65 per cent and CSCS, 0.35 per cent). The NSE provides infrastructure to which the government, SEC and shareholders make no contribution. We are carrying the whole cost of providing market infrastructure and maintenance upgrade, that’s one of the reasons we have not gone public."

FIRS Argument

The FIRS onslaught against capital market operators however did not come as a surprise to some keen followers of developments in the recent past. The FIRS complained some months ago, expressing dissatisfaction with the poor level of tax compliance by capital market operators in the country. The tax authorities regretted that even some of those who file returns make false declaration.

Speaking at a national seminar on "the imperatives of asset backed securities to the Nigerian economy and the capital market" in Lagos, Ms. Omoigui, Chairman, FIRS and Chairman Joint Tax Board lamented that of the 200 companies operating in the capital market, only about 60, representing 30 per cent, file tax returns.

"The FIRS needs empowerment- vehicles, funds to move around to verify the returns filed" by various organisations around the country, he explained. The move may be one of the initiatives to increasing the nation’s tax base, widen the tax net and enforce compliance, just as the agency is enumerating tax payers for the purpose of developing a master list. There would also be audit and investigation of large taxpayers, as well as the updating and revising of tax laws to reflect current global realities.

The agency also hopes to begin public enlightenment programmes, including participation in trade fairs and conferences, this is in addition to simplifying tax payment procedures and strengthening tax collection systems. By this move, the FIRS may have ignored the warning of past president and chairman of council of the Chartered Institute of Stockbrokers, Mr. Tola Mobolurin to look beyond widening the revenue base, by seeing taxes as a development tool in any economy.

Ms. Omoigui who was appointed in May 2004 for a four-year tenure told the BBC at her Abuja home in 2005: "I can understand why people are averse to paying tax but two wrongs do not make a right. The payment of tax is a civic duty that we must all meet, as long as we live in this society. But I accept that the government also needs to win the trust and confidence of the people if we are to get them to pay taxes. If the hard-earned money they pay to the government's coffers is being stolen or misused, they will do everything to evade tax," she accepts.

The fee structure for buying and selling stocks on the floors of The Nigerian Stock Exchange, effective from Thursday, January 04, 2007 is provided in the tables below:

Sorry I was unable to upload the new fee structure the size of file was over the 19kb allowance!