Nigeria has begun the hard work of fixing its economy.
Floating the naira, scrapping fuel subsidies and tightening monetary policy were unpopular but vital steps. They stopped the bleeding, much like a doctor stabilising a patient in crisis.
But stabilisation alone does not guarantee recovery. For growth to follow, Nigeria must spark an investment cycle — and that requires lowering, not raising, the cost of capital.
The new capital gains tax regime, however, risks doing the opposite. Its ambiguities, retroactive application and punitive rates could choke investment just when Nigeria needs it most.
Ambiguity and Unintended Frictions
The first problem is ambiguity. Equity investors are told they can defer capital gains taxes if they reinvest in “equivalent securities.” But what does that mean? The same share class? An ETF? A global depository receipt? Public or Private Nigerian equities? Re-investment timeframe?
In addition, we understand reinvestment into other equities cannot be via intermediate instruments like money market and fixed income securities. This is potentially problematic. Given limited market liquidity, the process of investing in new equity securities can require significant time for relatively large investors. In the interim, cash is often deployed into money market and fixed income instruments. Without clarity, even routine reinvestments may trigger taxes, reducing liquidity in a market that already struggles with depth.
The regime also creates a major challenge for foreign investors by attempting to pull them into Nigeria’s tax net. Most already pay taxes in their home jurisdictions, and with Nigeria’s limited double taxation treaty network the burden is even heavier. Out of 193 countries globally, Nigeria has active DTTs with only 16, and crucially, none with the United States, the world’s largest capital market. This means foreign investors could face far higher effective tax rates than in peer markets, a clear deterrent to badly needed capital inflows.
Retroactivity and Fairness
The bigger issue is fairness. The regime uses historic cost to calculate liabilities. That means investors could be taxed on gains made years before the law even existed. Other countries have avoided this trap. South Africa in 2001 and India in 2018 both reset the cost basis to market value at the time of implementation, ensuring only future gains were taxed. Nigeria should do the same.
Consider an investor who bought shares at N10 in 2019. By 2026, when the tax begins, the stock is at N30. If they sell at N36 in 2026, Nigeria’s rules would tax N26 of gains — even though N20 was made before the policy. That is retroactive taxation in practice, and it erodes confidence and credibility.
A core principle of taxation is the avoidance of retroactive tax application. This undermines the image Nigeria has worked so hard to cultivate over the last two plus years: that of a market open for business and welcoming to investors (both local and foreign).
Pre-Emptive Selling Risk
Another unintended consequence is that local investors may try to pre-empt the regime by liquidating existing positions before the tax comes into force. This kind of defensive selling pressure is likely to depress valuations in the short term — precisely when Nigeria’s improving macroeconomic outlook suggests that the implied cost of equity should be falling and valuations rising.
Instead of building confidence, the policy could trigger a bout of instability and price weakness, undermining the reform story.
Too High, Too Soon
Most countries that broaden capital gains tax regimes pair the expansion with a rate cut to encourage compliance. Nigeria appears to be doing the opposite. At up to 30 per cent (25% post FEC approval), the rate is already high by frontier market standards.
Kenya levies zero per cent on listed securities, Ghana 15 per cent, South Africa roughly 18 to 22 per cent, and Vietnam 20 per cent. In a volatile economy where inflation and devaluation are the norm, applying historic naira cost can push Nigeria’s effective burden well above 25-30 per cent in real terms.
Adding Friction, Deterring Inflows
Nigeria’s equity market is already encumbered by significant frictions. Round-trip trading fees can be upwards of 1.5 per cent, making the market one of the more expensive in its peer group. The new regime effectively introduces an exit tax on foreigners — just as recent improvements in currency convertibility had positioned Nigeria for possible re-entry into global frontier indices such as MSCI and FTSE.
Inclusion in these indices would have catalysed billions of dollars in passive inflows and boosted liquidity. Instead, the imposition of exit taxes is likely to deter index providers. The result will be fewer foreign inflows, lower turnover, and ultimately a higher cost of equity for Nigerian corporates.
The Cost of Capital
This matters because investment cycles begin when the cost of capital falls. Lower costs encourage companies to raise equity, finance projects and expand. Higher costs do the reverse.
If policy uncertainty drives up the returns investors demand, Nigeria risks stalling the investment cycle before it starts. That in turn threatens to undermine the macroeconomic reforms already underway and the government’s $1 trillion GDP target.
A Better Way Forward
The solution is not to scrap CGT but to design it properly. Nigeria should:
- Clearly define “equivalent securities” for equities.
- Allow temporary parking of equity proceeds (via safe-harbour provisions) in money markets and fixed income instruments within a defined window without triggering CGT.
- Reset cost bases to implementation date values to avoid retroactivity.
- Moderate rates to align with peers, encouraging compliance rather than avoidance.
- Suspend CGT for foreign investors with Certificate of Capital Importation (CCI) pending expansion of the treaty coverage network to prevent double taxation for foreign investors.
Stabilisation has bought Nigeria breathing room. But unless policymakers build investor confidence with clarity and fairness, the patient may have stopped bleeding — yet still struggle to recover.
Very well said Mr Adewale. I hope this falls on listening ears. Nigeria is off to a great start hope this continues positively