By Babajide Komolafe

Nigeria may lose N5 trillion in tax revenue if the Bill seeking to compel private companies to list on the stock exchange is passed by the National Assembly.

The Bill known as Private Companies Conversion and Listing Bill, 2013, seeks to compel private companies to convert to public companies by becoming listed on the Nigerian Stock Exchange (NSE).

The thresholds for the mandatory conversion are: shareholders fund in excess of N40 billion Naira ($250 million), turnover or total assets of N80 billion ($500 million).

A private company that meets any of the thresholds must be converted to a public company and be listed on the NSE within 12 months.

Failure to comply with the Bill attracts fine of 10 percent of annual turnover and imprisonment of at least 2 years.

It also contains a packet of incentives including five year tax incentive at a rate up to one-third of its applicable income tax for a company that lists at least 40 percent of its issued share capital.

Listing of 30 percent of issued share capital is eligible for a tax incentive of up to one-fourth of applicable income tax; while a listing of 20 percent of issued share capital is eligible for a tax incentive at a rate up to one-eighth of applicable income tax.

Expenses incurred in compliance with the Bill will be deductible for tax purposes in addition to the existing capital gains tax exemption on share transactions.

A tax expert, Mr. Taiwo Oyedele however faulted the Bill, saying it would lead to lose of tax revenue of up to N5 trillion. Oyedele, who is the Partner and Head of Tax and Corporate Advisory at PwC Nigeria, noted that, “ Based on the 2013 tax revenue profile, oil and gas companies in Nigeria (all private) and non-oil private companies paid over N3 trillion in income taxes to the Federal Inland Revenue Service.

If these companies list at least 40 per cent of their shares and hence enjoy a reduction of one-third of their income tax rates, then Nigeria will lose at least N1 trillion annually for five years.

Oyedele also noted that the proposed bill contradicts extant laws such as Section 25 of the Nigerian Investment Promotion Commission Act which states unequivocally that “no person who owns, whether wholly or in part, the capital of any enterprise shall be compelled by law to surrender his interest in the capital to any other person”.

He noted that if the implementation of the proposed Bill may lead to melt down in the Nigeria Stock Exchange. He said, “Another issue is whether the NSE has the absorptive capacity to cope with such a large scale listing.

How much free cash flow do we have in the economy or that foreign investors will be willing to inject? Due to the frenzy of a new listing, existing shareholders of listed entities will seek to sell off their stocks to buy the new shares.

This in turn will depress the market given its relatively small size. Institutional investors like pension funds, banks, insurance and investment funds all have paucity of equity investable cash given the various legal restrictions and attractiveness of the money market that offers high returns and a much lower risk.”