The Federal Inland Revenue Service (FIRS or “the Service”) recently published the Non-Interest Finance (Taxation) Regulations 2022 (“the Regulations”), which provide a framework for the taxation of financial institutions offering non-interest financial products and services in Nigeria. The Regulations, with a commencement date of 1 April 2022, were issued pursuant to the FIRS’ power under Section 61 of the Federal Inland Revenue Service Establishment Act (FIRSEA).

On 9 June 2022, the Central Bank of Nigeria (CBN) had issued the revised Guidelines for the operation of non-financial instruments to provide a uniform set of rules for authorised institutions to access non-interest financial instruments (NFIs) contained in its Circulars: “Guidelines for the Operation of Non-Interest Financial Instruments by the Central Bank of Nigeria” of December 2012 and “Introduction of Two New Instruments - “Funding for Liquidity Facility and Intra-Day Facility for Non-Interest Banks” of August 2017, respectively.

Therefore, the Regulations provide tax and regulatory framework for the operation of NFIs offered by the CBN for authorised institutions operating under the principles of Islamic Commercial Jurisprudence to ensure equal treatment of both conventional and non-interest financial services and transactions in Nigeria.

The Regulations are divided into seven (7) parts and address twelve (12) different NFIs provided by authorised institutions and their tax implications.

We have summarised below the relevant instruments listed under the various product categories and their tax treatments as provided in the Regulations:

1. Sale-based products

The Regulations describe three types of sale-based products, namely:

i. Murabaha (Cost plus mark-up)

Here, a financial institution, at the request of a customer, purchases an asset from a vendor and resells to the customer at a markup, also known as Murabaha.

Paragraph 3 of the Regulations requires the financial institution to treat the initial purchase price as a loan to the customer. Further, the resale price, excluding the markup, will be treated as a loan repayment and will not be subject to value added tax (VAT), stamp duties and capital gains tax (CGT). However, the markup element will be treated as interest payable on the loan and subject to withholding tax (WHT). Similarly, the purchase of the asset from the vendor will be subject to both VAT and WHT respectively.

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