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Nigeria’s tax agency the Federal Inland Revenue Service (FIRS) has directed banks, stockbrokers and other financial institutions to deduct a 10% withholding tax on interest earned from investments in short-term securities, the Federal Inland Revenue Service said on Tuesday.
Prior to this directive short-term bills were tax-exempt to boost return for investors. The new directive requires tax to be deducted at the point of payment on instruments such as treasury bills, corporate bonds, promissory notes, and bills of exchange.
It was unclear how much the government expected to generate from the withholding tax.
Yield-hungry investors usually snap up bills due to the attractive rates on the paper and their short-term nature.
Investors will receive tax credits for the amounts withheld unless the deduction represents a final tax, FIRS said.
Interest on federal government bonds remains exempt from the levy, the agency added.
“All relevant interest-payers are required to comply with this circular to avoid penalties and interest as stipulated in the tax law,” FIRS Executive Chairman Zacch Adedeji said in the notice.
Banks could be affected the most
Nigeria’s biggest banks realised N3.03 trillion income from treasury bills (T-Bills) in the first six months, which is 60.40 percent higher than 2024’s N1.89 trillion, according to data gathered by MoneyCentral.
GTCO, Zenith Bank Plc, United Bank Plc, Access Holdings Plc, FirstHolco Plc, FCMB Plc., Fidelity Bank Plc, and Stanbic IBTC Holdings Plc, are in the habit of buying up domestic government bonds that offer among the highest yields in emerging markets.
These juicy yields help lenders earn risk free interest income demand amid tepid credit demand from companies and consumers hampered by challenges in an economy too dependent on oil.
The yield environment is still relatively attractive and treasury income would remain a major income driver for banks in Nigeria, at least over the near to medium term.
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