By Peter Egwuatu

MULTIPLE taxation that characterises the nation’s stock market has continued to be criticized by stakeholders who have beckoned on the government to address the issue.

Shareholders of quoted companies are not supposed to pay tax from the dividend they receive from companies that declare dividends since these companies would have paid income tax from the profit earned in the businesses.

The same should apply to holders (unit holders) of Collective Investment Scheme, CIS. But in Nigeria, this is not so. You still find the unit holders paying double tax. They are supposed not to be taxed on the returns received as the trustees are exempted from tax payment.

It should be noted that the Securities and Exchange Commission, SEC, has been in the forefront of encouraging Nigerian retail investors to embrace the CIS in order to reduce or avoid the risk associated with direct investment in equities in the stock market.

Investment and Securities Act, ISA, defines a collective investment scheme as “a scheme in whatever form, including an open-ended investment company, in which members of the public are invited or permitted to invest money or other assets in a portfolio. The investors share the risk and benefit of investment in proportion to their participatory interest or on any other basis as determined in the deed.”

There are several collective investment schemes that are considered acceptable by the SEC .The prominent schemes include : A unit trust – this is a form of collective investment which allows investors with similar investment objectives to pool their funds together and thereafter invest in a portfolio of securities or other assets that would be of beneficial interest to the investors. A unit trust scheme may be open-ended or close-ended.

Real Estate Investment Scheme (REIS)- this scheme directly invests in both profit making real estate and related companies properties by utilizing pooled funds from subscriptions of its participant investors/unit holders.

Specialized fund-this is mutual funds that invest in securities of a particular sector, industry or geographical location. This kind of fund is notable for higher risks and returns when compared to other funds as a result of lack of diversification of the portfolio of investment.

In Nigeria capital market, unit trust scheme and REIS are the most popular schemes. Several financial institutions operate unit trust schemes. The scheme is considered to be beneficial for the development of the Nigerian capital market and gives assurance of returns to investors as well as the management of their funds.

The Companies Income Tax Act (CITA) recognizes the importance of an authorized unit trust.

Unit trust scheme

The trustes of an authorized unit trust scheme are treated as a company and the unit holders treated as shareholders. The profits earned by a unit trust are subject to tax in the hands of the trustees.

Furthermore, any income distribution to the unit holders is treated as dividends since the rights of such unit holders are deemed to be shares in the unit trust scheme.

But the dividend received by a company from a unit trust scheme is exempted from tax. Therefore, there should be no obligation to withholding tax on the dividend payable to companies that are unit holders in the scheme.

However, in practice, where any dividend is received by an individual from a unit trust scheme, personal income tax (PIT) is required to be accounted for on such income, as there is no specific exemption stipulated in the Personal Income Tax Act (PITA) in this regard. Consequently, the trustee of the scheme will apply withholding tax at 10 per cent on the dividend and remit same to the relevant State Internal Revenue Service.

It is pertinent to note in this regard that investors in CIS pay double tax like in direct equity investment which ought not to be.

If SEC hopes to achieve good results in its drive to encourage and develop CIS especially in this period of economic recession and downturn of the stock market, then it should champion the need to amend tax law especially as it affects the local retail investors who are regarded as the backbone of the nation’s capital market.