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

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.