With the introduction of the Finance (Amendment) Bill, 2024, the Nigerian government seeks to impose and charge banks in Nigeria with a one-time windfall tax.[i] The Bill aims to finance capital infrastructure development, education, and healthcare access among other public welfare initiatives in the country.[ii]
The windfall tax signals a new era in fiscal policy in Nigeria which demands careful navigation by both the banking sector and the government. While the tax seeks to ensure banks contribute fairly to national revenue, a balance must be struck between upholding legal principles and preserving investor confidence.
The Bill has been passed by the Senate as of July 23, 2024, and is awaiting assent by the President.[iii]
IMPOSITION OF WINDFALL TAX ON BANKS IN NIGERIA
Windfall taxes are specialized levies imposed on organizations that experience unanticipated and substantial financial gains, usually referred to as “windfalls.” These unanticipated profits can come from a variety of sources, including notable changes in market conditions, the discovery of natural resources, or changes in governmental policy.[iv]
The Nigerian economy experienced a major devaluation of the Naira against other foreign currencies in the 2023 fiscal year. This major decline in the value of the Naira is attributed to the unification of the FX policies announced by President Bola Ahmed Tinubu. While some sectors in Nigeria suffered significant FX losses in their balance sheets, banks recorded significant FX gains.[v]
In a bid to raise additional revenue for the federal government, the Finance (Amendment) Bill, 2024 imposes a windfall tax of 70% on the realized profit from foreign exchange transactions in the 2023 financial year. The assessment period has been set to commence from the effective date of the forex unification policy which is June 14, 2023, to December 31, 2025.[vi] The tax aligns with the Central Bank of Nigeria’s September 2023 policy prohibiting banks from using foreign currency-related profits for operational expenses and dividends.
IMPACT OF WINDFALL TAX ON FOREIGN INVESTMENT IN NIGERIA’S BANKING SECTOR
The Bill carries significant implications for the operational and financial health of banks in Nigeria. The Bill among other things seeks to retroactively tax profits from foreign exchange transactions in the 2023 financial year even though Nigerian banks would have filed their respective income tax returns for the 2023 financial year in June 2024.[vii] This suggests that banks have already paid an average of 33% tax on their realized FX earnings. This is because foreign exchange profits would have counted toward a Nigerian bank’s assessable profit for the fiscal year 2023.
The windfall tax is an additional layer of tax which has the potential to weigh heavily on Nigeria’s banking sector, impacting banks’ profits, liquidity, and investor confidence.[viii] It may be considered as double taxation of the same income.
Following the recent increase by the Central Bank of Nigeria (CBN) of the minimum capital requirement for Nigerian Banks on 28 March 2024, banks have to contend with raising capital in line with the CBN’s directive.[ix] This windfall tax is coming at a period when the banks are making arrangements for recapitalization and increased profits would have cushioned the impact of the recapitalization.
Fortunately, Nigerian banks that are required to pay the tax may embrace a deferred payment agreement with the Federal Inland Revenue Service (FIRS), which must be executed on or before December 31, 2024. Nigerian banks that fail to pay the tax to FIRS and do not enter into a delayed payment agreement before December 31, 2024, will be required to pay the tax, plus a penalty of 10% of the tax not paid every year, plus interest at the current Central Bank of Nigeria (CBN) minimum rediscount rate.[x]
CONCLUSION
Although it is recognized that the primary objective of windfall taxes is to appropriate a portion of these extraordinary profits to benefit the general public, such a high tax has the potential to stifle growth and innovation within the banking sector, ultimately affecting the quality of services delivered to customers and the broader economy.
[i] KPMG, ‘Nigeria imposes income tax on forex gains of banks’ https://kpmg.com/ng/en/home/insights/2024/07/nigeria-imposes-income-tax-on-forex-gains-of-banks.html Accessed August 21, 2024
[ii] https://www.thisdaylive.com/index.php/2024/08/13/the-windfall-tax-debate/
[iii] Deloitte, ‘Proposed windfall tax on Nigerian Banks’ foreign exchange gain’ https://www.deloitte.com/ng/en/services/tax/perspectives/proposed-windfall-tax-on-nigerian-banks–foreign-exchange-gain.html Accessed 22, 2023
[iv] Julia Kagan, ‘Windfall Tax: Definition, Purposes, Examples’ https://www.investopedia.com/terms/w/windfalltax.asp Accessed August 23, 2023
[v] Supra Note 3
[vi] Supra Note 3
[vii] Supra Note 3
[viii] BMI, ‘Nigeria’s Windfall Tax Creates A New Problem For Banks’ https://www.fitchsolutions.com/bmi/banking-financial-services/nigerias-windfall-tax-creates-new-problem-banks-13-08-2024 Accessed August 21, 2024
[ix] This Day Live, ‘The Windfall Tax Debate’ https://www.thisdaylive.com/index.php/2024/08/13/the-windfall-tax-debate/ Accessed August 20, 2024
[x] Supra Note 3
Written by Adeife Omolumo for The Trusted Advisors
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