Introduction
The Federal Inland Revenue Service ( FIRS) is clothed with power to make subsidiary legislation that will give full effect to the provisions of FIRS (Establishment) Act this is pursuant to section 61 of the Federal Inland Revenue Service Establishment Act (FIRSEA). The FIRS issued the Non-Interest Finance (Taxation) Regulations 2022 to regulate the taxation of institutions offering non-interest financial services in Nigeria, in accordance with principles of Islamic commercial jurisprudence.
The Regulation is also aimed at providing a legal framework on the tax regulation of financial institutions offering non-interest financial services as well as ensuring equal treatment for both conventional and non-interest finance transactions.
The Notable Provisions
1. Murabaha ( cost plus mark-up) : This is a contractual agreement between an institution who sells a specified asset with a cost price and the profit margin. For the purpose of taxation, the initial purchase price will be treated as a loan to the customer, the resale price, excluding the markup, will be treated as a loan repayment and will not be subject to value added tax (VAT), stamp duties and capital gains tax (CGT). A mark-up is an increase in the price of something, for example the difference between its cost and the price that it is sold for.
However, the markup element will be treated as interest payable on the loan and subject to withholding tax (WHT). Similarly, the purchase of the asset from the vendor will be subject to both VAT and WHT respectively.
Paragraph 3 of the regulation
2. Istisna: This is where a financial institution undertakes the financing or engagement of a third party for a construction or manufacturing of goods or assets (the project) on behalf of its customers and transfers the project to the customer upon the completion of work by the third party.
The Regulations provide that the financing arrangement with the customer will be treated as a loan, which will not be subject to VAT and WHT. However, the transaction between the financial institution and the third party will be subject to VAT and WHT, respectively.
Further, the repayment of the principal amounts (or Istisna contract sum) by the customer will be treated in the same manner as a loan repayment. Therefore, only the markup portion, similar to an interest, will be liable to WHT. The customer will treat the capital portion and markup as qualifying capital expenditure (QCE) for income tax purposes, in line with the provisions of the Second Schedule to the Companies Income Tax (CIT) Act (as amended).
This is contained in paragraph 4 of the regulation.
3. Ijarah (Operating Lease): This is a situation where a financial institution acquires an asset from a vendor and leases it to a customer, who pays rent, at an agreed rate, for the use of the property to the financial institution.The Regulation provides that the property purchase transaction between the financial institution and the vendor is subject to the Value Added Tax Act, Stamp Duties Act and Withholding Tax Act while the lease rentals paid by the customer shall be subject to the provisions of the VAT Act and liable to WHT where it is practical to deduct same.
This is contained in paragraph 9 of the regulation
Conclusion
The new regulations is a welcome development as there will be a legal framework for the taxation of non-financial institutions. This will ensure that the Islamic banking is also at par with the conventional financial institution.

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