International rating company, Moodys and the Chartered Institute of Bankers of Nigeria have drawn attention to the detrimental effects that the recently proposed windfall tax will have on the nation’s banks.
In a report titled ‘Nigeria’s proposed windfall tax on foreign-exchange gains is credit negative for banks, Moodys said, “The windfall tax will have a particularly negative effect on banks whose capital adequacy is close to regulatory thresholds. The tax follows record profits declared by banks in 2023, largely because of foreign-currency revaluation gains related to the naira’s massive devaluation of 37 per cent in June 2023, according to The Punch.
“Eight of the nine Nigerian banks we rate reported more than N3.5tn in aggregate pretax profits in 2023 versus N1.1tn in 2022, and we estimate that over a third of the profits were from foreign-currency revaluation and trading gains.
“It is unclear, however, what proportion of the revaluation gains will be taxed, given the differences between trading and revaluation gains. Additionally, the 2023 revaluation gains include unrealised gains, which may affect how the tax is applied, particularly as the government has not been clear how the 50 per cent windfall tax will be achieved.”
Last week, President Bola Tinubu’s request to modify the Finance Act to levy a one-time 50% windfall tax on banks’ foreign exchange earnings in 2023 was expeditiously passed by the Senate.
A windfall tax is a higher tax levied by the government on sectors or businesses that have disproportionately benefited from favourable market conditions.
According to the President, the money would be part of the revenue used to fund the N6.2tn supplementary budget.
The government has vowed to sanction principal officers of banks who refuse to comply with the law.
The Senate amended the bill on Tuesday, increasing the windfall tax to 70 per cent, claiming that the gains were a result of government policy and not effort on the part of the banks.
However, the rating company claims that in a less aggressive scenario, a surplus tax of 20% on the FX gains would equal the whole 50% windfall tax, given that banks have already been subject to the ordinary 30% corporate income tax rate for 2023.
According to Moody’s, the government might receive as much as 0.3% of 2024 GDP from the windfall tax.
“Although this is not negligible given the government’s small tax intake of around nine per cent of GDP in 2023, it remains marginal and only a temporary revenue measure,” it stated.
Meanwhile, the President/Chairman of Council, CIBN, Professor Pius Olanrewaju, in a statement on Wednesday said, “This proposed tax will violate fairness and equity in taxation as banks are the only entity singled out for this payment. This is discriminatory. What about other sectors or businesses that have recognised the same foreign exchange gains in their books in 2023? In countries where such windfall tax has been imposed, there is always a corresponding incentive to cushion the effect on the affected entities but nothing to that effect has been stated in the proposed bill.
“This action can discourage foreign investors. The implementation of this tax could lead to reduced investment, decreased liquidity, and increased costs and negatively impact Nigeria’s economic growth and development and the tax could lead to reduced market participation, exacerbating currency fluctuations and potentially destabilise the economy.”
The CIBN president stated that although the organisation recognized the need for increased government revenue—which was one of the motivations behind the proposal to impose a tax on banks’ foreign exchange gains—it required careful thought.
