The Federal Inland Revenue Service has directed banks, stockbrokers, and other financial institutions to withhold a 10 per cent tax on interest earned from short-term securities.
This represents a major policy change, as these instruments were previously exempt from taxation to boost investor participation.
The notice, signed by FIRS Executive Chairman Zacch Adedeji, was addressed to banks, discount houses, stockbrokers, corporate bond issuers, primary dealer market makers, financial institutions, government agencies, tax practitioners, and the general public.
According to a circular, the new rule covers interest payments on treasury bills, corporate bonds, promissory notes, and bills of exchange, with the tax deducted at the point of payment.
While the directive covers various short-term instruments, interest earned on federal government bonds remains exempt from the tax.
FIRS explained that investors will receive tax credits for the amounts withheld, except in cases where the deduction is considered a final tax.
Short-term bills have long attracted investors seeking high yields and quick maturity, but the introduction of a withholding tax may reshape the risk-reward balance for many market participants.
FIRS Executive Chairman Zacch Adedeji emphasized the importance of compliance, stating, “All relevant interest-payers are required to comply with this circular to avoid penalties and interest as stipulated in the tax law.”
The agency did not provide any estimates on the potential revenue to be generated from the new tax measure.
According to the FIRS website, withholding tax is an advance tax collected at source from certain payments made to individuals or companies. The obligation to remit the deducted amount to the appropriate tax authority rests with the payer.
Rents on properties: 10 per cent; Dividends or company profits: 10 per cent; Interest on bank deposits or securities: 10 per cent; and Royalties: 5 per cent.
Last month, the FIRS issued a directive enforcing strict compliance with withholding tax rules on interest earned from short-term securities to prevent penalties for non-compliance.
