An Appraisal of the Tax Implications of Derivative Instruments in Nigeria

Abstract

With the recent fall in the prices of Crude Oil and other commodities in the international Market and the attendant adverse effect on the Nigerian economy coupled with the Exchange risks arising from the sale and purchase of foreign currencies in the Foreign Exchange Market (FOREX), there was the need to come up with strategies for managing the risks associated with the fluctuations in the Exchange Rates by the introduction of derivatives for adoption by the various stakeholders and players in the market. Generally, Derivatives are usually used to hedge against risks and fluctuations in the Financial Market. The increasing use of derivatives often raises some tax questions and implications which must be properly analysed and understood. There is the need to examine the possible tax considerations and treatment of this emerging important instrument in the Nigerian Financial Market for proper guidance and direction for the regulatory authorities, the Relevant Tax Authorities (RTAs) and the active participants in the market. This paper therefore examines the tax treatment of derivatives under the existing tax and fiscal regime in Nigeria. Further, there will be comparative analysis of the various positions on the tax treatment of derivatives in the United States of America and Canadian.This paper proposes that there should be an enactment of a comprehensive tax code for the treatment of derivatives in Nigeria incorporating the lessons from the jurisdictions examined.

Keywords: Derivatives, Tax Treatment, Capital Gains Tax, Companies Income Tax, Options, Forwards, Futures, Swaps,