Business
Windfall forex tax threatens banking sector recapitalization
There are growing concerns among economic and financial analysts that the newly proposed windfall tax on banks’ foreign exchange profits in 2023 may be sending a dispiriting signal to foreign investors, thereby negatively impacting Nigeria’s investment landscape.
This, they say, is even more disturbing coming at a time the lenders may be counting heavily on foreign investors in their capital-raising agenda to meet the sector’s recapitalization deadline.
Business Hallmark reports that the Central Bank of Nigeria (CBN), on 29 March, directed commercial banks in Nigeria with international authorisation to shore up their capital base to N500 billion and national banks to N200 billion. It also instructed non-interest banks with national and regional authorisation to increase their capital to N20 billion and N10 billion respectively. The recapitalisation exercise is expected to commence from 1 April 2024 to 31 March 2026.
The Senate, penultimate Wednesday, gave expeditious passage to President Bola Tinubu’s request to amend the Finance Act to impose a one-time 50 per cent windfall tax on banks’ foreign exchange profits in 2023.
A windfall tax of 50% is a higher tax levied by the government on sectors or businesses that have disproportionately benefited from favourable market conditions. The President said the money would be part of the revenue used to fund the N6.2tn supplementary budget.
However, the upper legislative chamber 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.
But this did not go down well with bankers and other critical stakeholders in the Nigerian financial sector, who have asked the Federal Government to reconsider the tax. According to them, the introduction of the levy would be counterproductive given the critical contributions of the banks to the ongoing economic reforms and the current banking sector recapitalisation exercise.
In its reaction, the Chartered Institute of Bankers of Nigeria (CIBN), stated that the implementation of the levy could lead to reduced investment, decreased liquidity, and increased costs and negatively impact Nigeria’s economic growth and development.
In a statement signed by its President, Professor Pius Olanrewaju, CIBN noted that the forex windfall tax could worsen currency volatility due to reduced market participation, with a potential to destabilise the economy.
The institute stated that the forex windfall tax could amount to double taxation as banks have paid 30 per cent income tax when they filed 2023 tax returns.
CIBN said: “Will this not amount to double taxation? Or the tax already paid be deducted from this new imposition? 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.”
Similarly, the Association of Corporate & Marketing Communication Professionals of Banks (ACAMB), stated that banks should not be burdened with a new levy.
Its President, Rasheed Bolarinwa, noted that with the ongoing recapitalisation, which is also aimed at supporting the Federal Government’s $1 trillion economic agenda, banks need more monetary and fiscal incentives now.
“We shouldn’t kill the goose that lays the golden eggs. Government should have a rethink. We think further consultation is needed in this case. We know the President has a listening ear, as demonstrated on many occasions, and we expect that banks should be given fair hearing on this,” Bolarinwa said.
Also, a former President of the Chartered Institute of Stockbrokers, Mr. Olatunde Amolegbe, said the forex windfall levy could be counterproductive and have a negative effect on the ongoing banking recapitalization, which was intended to boost the government’s $1 trillion economic agenda.
According to him, imposing such a levy in the middle of ongoing banking recapitalization may send wrong signals to investors and impinge on the ability of banks to raise much-needed capital.
Beyond the shores
Similar sentiments are also shared among reputable international organizations of financial experts. For instance, global rating agency, Moodys on Tuesday said the windfall tax would 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.
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.
“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 unrealized gains, which may affect how the tax is applied, particularly as the government has not been clear how the 50 percent windfall tax will be achieved.”
According to the rating company, given that banks have already been subjected to the standard 30 per cent corporate income tax rate for 2023, in a less aggressive scenario a surplus tax of 20 per cent on the FX gains would equate to the total 50 per cent windfall tax.
Also, KPMG Nigeria has criticized the windfall tax on the banks’ foreign exchange revaluation gains, 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
Compulsory compliance
However, the Federal Government does not look deterred by the wave of rejection trailing the imposition of the one-time windfall tax, it has, instead, proposed the imprisonment of principal officers of banks that fail to comply. It also proposed a penalty of 10 per cent of the levy withheld or not remitted annually and interest at the prevailing CBN minimum re-discount rate.
The amendment states: “The Federal Inland Revenue shall assess the realised profits, collect, account, and enforce payment of levy payable under section 30 in accordance with the powers of the Service under the Federal Inland Revenue Service (Establishment) Act 2007; “and in the exercise of its functions in 32(a) above, may enter into a deferred payment agreement with the assessed banks, provided that such deferred payment agreement is executed on or before December 31, 2024.
“Any bank that fails to pay the windfall profit levy to the service and has not executed a deferred payment agreement before December 31, 2024, commits an offense and shall, upon conviction, be liable to pay the windfall profit levy withheld or not remitted in addition to a penalty of 10 per cent of the levy withheld or not remitted per annum and interest at the prevailing Central Bank of Nigeria minimum rediscount rate and imprisonment of its principal officers for a period of not more than three years.”
Income redistribution
Justifying the windfall tax while appearing before the finance committees of both chambers of the National Assembly on the Amendment of the Finance Bill, 2024 last week, Chairman of the Federal Inland Revenue Service (FIRS), Zacch Adediji, explained that the windfall tax was not a new tax imposed on banks, but taking from the already made profit.
Adedeji said, “These are the gains that you have without any contribution from you, without any value addition, which has had an adverse effect on others. And, who are these others? If you look at the report of all manufacturing entities in the last one and a half years, you will discover that a lot of the registers recorded huge losses coming from exchange transactions.
“The other flip of this law is recorded in banks. Anywhere in the world, your duty as the government is to redistribute the wealth to sustain the progress and prosperity of the nation.
“So the loss suffered by manufacturing, as a result of these foreign exchange gains, which is being recorded in the bank, it is what the government seeks to redistribute. And that is why we have this levy, which is done everywhere.
Allaying fears regarding possible cases of under-reporting by banks, Adedeji noted that the CBN in a memo in September 2023 and March this year had in a separate circular directed commercial banks in the country not to touch or spend the profits they made from foreign exchange transactions.
