Nigeria’s foreign exchange (FX) unification policy, implemented by the Central Bank of Nigeria (CBN) in June 2023, aimed to simplify the country’s multiple exchange rate system by consolidating it into a single market-driven rate.
The policy was designed to boost investor confidence, eliminate arbitrage opportunities, and address chronic FX shortages that plagued the economy.
However, one year after the policy’s implementation, the impact on tax revenues reveals an unexpected consequence.
While foreign companies have seen their tax contributions skyrocket, local firms have struggled to keep pace, revealing the deeper challenges facing Nigeria’s domestic economy.
Growth in Foreign CIT
According to data from the National Bureau of Statistics (NBS), the one-year period following FX unification (Q3 2023 to Q2 2024) saw a rise in foreign Corporate Income Tax (CIT) contributions.
Foreign CIT increased by 140.5%, rising from N1.42 trillion in the pre-unification year (Q3 2022 to Q2 2023) to N3.41 trillion in the year post-unification.
In contrast, local CIT only grew by 35.1%, moving from N2.16 trillion to N2.92 trillion over the same period.
This disparity in growth suggests that naira devaluation has contributed significantly to taxes the Federal Inland Revenue Service (FIRS) gets from foreign firms.
The total CIT collected in the year following FX unification reached N6.33 trillion, a significant increase from the N3.58 trillion collected in the year before the policy change.
However, foreign CIT accounted for 53.8% of this total, up from 39.6% in the pre-unification period.
This indicates that foreign firms are increasingly driving Nigeria’s tax revenue, masking the sluggish growth in local firm contributions.
Local firms struggle under FX Pressures
While foreign companies have benefited from FX unification, local businesses have faced more challenges.
In February, Nairametrics reported that the naira had lost about 68% of its value, marking a profound downturn since the implementation of the foreign exchange unification policy.
In the first six months of this year, Nigerians and businesses faced prolonged periods of exchange rate volatility, as the naira crashed by 40% between the end of December 2023 and June-ending.
- The devaluation of the naira by as much as 70% following the unification policy resulted in higher costs for local firms, particularly those reliant on imports for raw materials and goods.
- These rising costs have eroded profit margins, making it difficult for domestic businesses to match the growth seen by their foreign counterparts.
- Nairametrics earlier reported some of Nigeria’s leading companies incurred a combined forex loss of N1.7 trillion in the financial year 2023. The size and magnitude of the loss were so significant that it effectively wiped out the shareholder funds of some companies, forcing mega restructuring for others.
- Also, the NBS data shows that local CIT collections, while growing, have been inconsistent.
- After hitting N1.02 trillion in Q2 2023, local CIT dropped to N651.63 billion in Q3 2023 and further to N533.93 billion in Q4 2023.
- By Q1 2024, local CIT had fallen to N386.49 billion, before rebounding to N1.35 trillion in Q2 2024.
This volatility emphasizes the uncertain economic conditions facing local firms, who continue to grapple with inflation, supply chain disruptions, and the increased cost of doing business post-unification.
The Director-General of the Manufacturers Association of Nigeria (MAN), Mr. Segun Ajayi-Kadir, recently noted that the challenges facing the manufacturing sector, particularly due to the current macroeconomic conditions, are exacerbated by the ongoing foreign exchange volatility and high electricity tariffs.
Also, speaking to Nairametrics on the challenges of firms operating in Nigeria face, Olufemi Oyinsan, General Partner at The Continent Venture Partners (TCVP), said: “Companies in Nigeria struggle with dropping consumer purchasing power and the high cost of doing business, especially with energy and logistics. On top of that, they face challenges in repatriating profits due to currency devaluation. This makes it unsustainable for them to operate.”
He further stressed the need for businesses to be creative and more capital-efficient, cutting unnecessary costs and focusing on optimizing resources.
Ike Ibeabuchi, Chief Executive Officer, MD Services, earlier told Nairametrics that foreign exchange stability could steer firms’ rebound and boost their capacity to create value.
More Insights
The standard CIT rate in Nigeria is 30% of a company’s taxable profits for large companies (those with annual gross turnover of more than N100 million).
- Medium-sized companies (with turnover between N25 million and N100 million) are charged a CIT rate of 20%. Small companies (those with an annual turnover of less than N25 million) are exempt from CIT.
- The growing disparity between foreign and local CIT contributions raises concerns about the long-term sustainability of Nigeria’s tax base.
- While foreign firms have become the dominant source of CIT revenue, the slower growth of local firms highlights the vulnerabilities within the domestic economy.
- If local businesses continue to struggle under the weight of rising costs and inflation, their ability to contribute meaningfully to tax revenue may be further weakened, placing more pressure on foreign firms to sustain government revenues.
- Also, the reliance on foreign CIT could make Nigeria’s tax base more vulnerable to external shocks.
- Should global economic conditions deteriorate, or should foreign firms reduce their operations in Nigeria, the country’s tax revenues could take a significant hit.
- This highlights the need for policies that support local business growth and enhance the competitiveness of domestic firms in the post-unification economy.
