The introduction of a Capital Gains Tax (CGT) in Nigeria has sparked a debate, and at its heart lies a crucial question: How can we balance the need for government revenue with the imperative to foster a thriving investment environment? This is the central issue, and it demands careful consideration.
While the goal isn't to eliminate CGT entirely—a well-structured CGT can actually bolster Nigeria's financial stability while encouraging market growth and investor confidence—the current approach has raised some serious concerns. The devil, as they say, is in the details.
Many market players don't object to CGT itself, but there's widespread agreement that the proposed rate is too high. The real worries center on the specifics: how the cost basis is determined, how reinvestments are handled, and how these rules will affect foreign portfolio investment (FPI) in Nigeria.
Here's a breakdown of the key areas needing attention:
Introducing a Safe Harbour for Reinvestment: Investors who sell shares should be allowed to reinvest their proceeds in money-market or fixed-income instruments within a specific timeframe (e.g., 90 to 180 days) without triggering CGT. This encourages portfolio rebalancing, maintains market liquidity, and helps keep the market active.
Resetting Cost Bases to the Date of Implementation: To ensure fairness and encourage voluntary compliance, investors' cost bases should be reset to the market value of their holdings on the policy's effective date. This prevents retroactive taxation on past gains and builds trust in the system. But here's where it gets controversial... Failing to do so could be seen as unfair, potentially discouraging investment.
Aligning CGT Rates with Peer Markets: Nigeria should benchmark its CGT rate to other emerging markets, which typically range between 5% and 15%. A moderate rate promotes compliance rather than avoidance and helps Nigeria remain competitive for both domestic and foreign investors.
Offering Temporary Relief for Qualified Foreign Investors: Foreign investors with Certificates of Capital Importation (CCI) should be temporarily exempt from CGT until Nigeria's tax-treaty network expands sufficiently to prevent double taxation. This would sustain portfolio inflows while the supporting tax infrastructure matures.
There's also a common misconception driving this conversation. Some argue that the improved cash flows resulting from allowable deductions and a lower corporate income tax (CIT) regime will offset the impact of a 25% CGT rate. However, this assumption doesn't always hold true in practice.
The idea that taxation itself can encourage capital inflows depends on two critical factors: uniform tax treatment across markets and the existence of effective double taxation treaties. Where these are absent, tax becomes a deterrent rather than an incentive. Unfortunately, Nigeria currently has only 16 ratified double taxation treaties, and the United States—by far the largest source of global portfolio investment—is not among them.
This is the real issue that needs attention. The solution isn't to remove tax collection from the source but to expand treaty coverage and modernize administrative capacity.
In most emerging and frontier markets, the United States accounts for roughly 50% to 60% of capital inflows. Many of these investments are structured through tax-exempt wrappers and collective vehicles. As a result, foreign investors may not even be able to claim tax credits in their home jurisdictions for taxes paid in Nigeria. This creates a structural disadvantage that undermines competitiveness.
It's unsustainable that the majority of Nigeria's foreign inflows are concentrated in short-dated Central Bank instruments designed for liquidity management rather than nation-building. To evolve beyond hot-money cycles, the capital-flow profile must be rebalanced toward genuine equity participation.
Given the modest revenue that this new CGT regime is expected to generate, the policy feels counterproductive. The trade-off between limited fiscal gain and the potential damage to market confidence, liquidity, and valuations is simply not worth it.
At a time when Nigeria urgently needs to attract equity risk capital, not repel it, this measure sends the wrong signal. The government should have deferred implementation until the market regained sufficient depth and the administrative framework, especially around cost-based tracking, reinvestment rules, exemptions, and treaty coverage, was ready.
In its current form, the policy risks doing long-term reputational harm to Nigeria's capital market in exchange for short-term fiscal optics.
“At a time when Nigeria desperately needs to attract equity risk capital, not repel it, this measure sends the wrong signal.”
This should be self-evident. Governor Cardoso has done a herculean job to stabilize the naira and attract flows to Nigeria; a lot of these investors are still on the fence when it comes to Nigeria. This is a call not to chase them away with this policy, which is not well thought out in its current form.
What do you think? Do you agree with the concerns raised about the CGT? Are there other factors that should be considered? Share your thoughts in the comments below!
