Nigeria’s proposed windfall tax on foreign-currency revaluation gains of Nigerian banks could generate up to 0.3% of the country’s Gross Domestic Product (GDP) in 2024, offering a temporary fiscal boost amid ongoing economic challenges.
This is according to American-based credit rating agency, Moody’s Investors Service (Moody’s), which warned that such a tax is a credit negative for the banks.
Moody’s noted: “For the government, we estimate the windfall tax may yield revenue of as much as 0.3% of 2024 GDP. Although this is not negligible given the government’s small tax intake of around 9% of GDP in 2023, it remains marginal and only a temporary revenue measure.”
Announced on 17 July 2024, the one-off 50% tax aims to raise funds for infrastructure and other critical spending, contributing to a N6.2 trillion ($4 billion) addition to the national budget.
1/3 of banks’ profits from FX gains in 2023
The windfall tax has sparked concerns within the banking sector due to its potential to significantly reduce the profits available for provisioning against problem loans and for transfers to retained earnings, which are essential components of regulatory capital.
According to Moody’s Investors Service, “the tax will significantly reduce the profits available to banks for problem-loan provisioning and transfers to retained earnings, which form part of regulatory capital, both credit negative for the sector.”
This is particularly concerning for banks operating close to regulatory capital thresholds.
In 2023, Nigerian banks reported record profits largely driven by the naira’s devaluation of 37% in June, resulting in substantial foreign-currency revaluation gains.
Eight of the nine banks rated by Moody’s recorded aggregate pre-tax profits exceeding N3.5 trillion in 2023, compared to N1.1 trillion in 2022.
About one-third of these profits stemmed from foreign-currency revaluation and trading gains. However, the exact portion of these gains subject to the windfall tax remains uncertain, according to Moody’s.
Moody’s noted, “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 unrealized gains, which may affect how the tax is applied, particularly as the government has not been clear how the 50% windfall tax will be achieved.
“The severity of the negative effect of the tax on banks’ foreign-currency-related profits is also not yet known because details are not yet available. Given banks have already been subject to the standard 30% corporate income tax rate for 2023, in a less aggressive scenario a surplus tax of 20% on the foreign-exchange gains would equate to the total 50% windfall tax.
“It is also possible the government may pursue an additional 50% windfall tax on banks’ foreign-currency revaluation gains, which we estimate would equate to as much as 6% of the aggregate equity (shareholders funds) of banks rated by us.”
What you should know
- President Bola Tinubu had earlier written to the senate seeking to amend the 2023 finance act to introduce the payment of a one-time windfall tax on the foreign exchange revaluation profits of banks in the 2023 financial year.
- The amendment specifies that if banks fail to remit the required amount to the appropriate authority, they will, upon conviction, be required to pay the withheld tax along with a 10% penalty and interest at the Central Bank of Nigeria’s (CBN) minimum discount rate. Additionally, key principal officials may face imprisonment.
- The proposal now amended has generated conversation around the timing and legality of the proposal with major tax and advisory bodies wading into the amendment.
- KPMG Nigeria criticized the 50% windfall tax on the banks’ foreign exchange revaluation gains recorded in 2023, suggesting it could lead to legal disputes. The firm highlighted that Nigeria’s tax policy does not support retroactive taxes.
- PwC Nigeria expressed concerns that the unpredictability of the windfall tax, applied to already reported profits for 2023, could discourage investments.
- Furthermore, prominent lawyer Olisa Agbakoba noted that the proposed amendment to the Finance Act is an ill-thought-out policy and beyond the scope of the National Assembly. He further mentioned that if the proposal is passed, the burden will be transferred to the banks’ customers
- The Nigerian senate on Tuesday passed the amendment bill of the 2023 Finance Act and increased the windfall levy on banks’ foreign exchange revaluation gains from 50% as proposed by the President to 70%.
- Also, members of the red chamber increased the timeline for the application of the windfall levy from the end of 2023 to all profits from foreign exchange transactions from the beginning of the new forex policy to the 2025 financial year as stipulated in clause 2 of the amendment.
