October 23, 2018
When Mr. Olowolayemo acquired a high rise building in the Marina Axis of Lagos in the 1970s, the nominal purchase price of the property at the time was only ₦1million. If he sold the property due to financial constraints at ₦1 billion in 2017, he would have made a capital gains of about N999 million despite the fact that he may be unable to purchase a similar property for ₦1 billion.
The above highlights the adverse inflationary trend that the Nigerian economy has witnessed over the past decades. Meanwhile, Capital Gains Tax (CGT) which arises from the disposal of “chargeable” assets has not moved in the same direction because the basis for determining what constitutes capital gain on which tax will be imposed does not consider the impact of inflation or the time value of money. Thus, a taxpayer is typically required to pay CGT when in real terms the seller (i.e. a taxpayer) has incurred a “loss” on the disposal of an asset.
The divergence between the provisions of the law and economic realities in Nigeria is a far cry from global best practices given that most developed economies allow taxpayers to adjust for inflation and purchasing power indices when computing CGT.
We have examined the inflationary trend in Nigeria’s economy and its impact on taxation with special consideration for CGT in this article. We have also considered the practice in other jurisdictions.
Although the inflation rate in Nigeria has been declining in recent times, it still remains at double-digit. According to the data published by the Nigerian Bureau of Statistics (NBS), inflation rate declined from 18.7% in January 2017 to 11.14% in July 2018. However, the rate increased slightly to 11.23% in August 2018. Nonetheless, there are doubts in some quarters as to the reliability of the inflation data as it appears that the actual purchasing power of the Nigerian currency continues to wane contrary to publicly available statistics.
The implication of the above is that taxpayers may be liable to CGT on assets disposed, even though they may have incurred a loss on the disposal in real terms.