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.”
Moodys said the windfall tax may yield revenue of as much as 0.3 per cent of 2024 GDP to the government.
“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.
Describing the windfall tax as discriminatory, the President/Chairman of Council, CIBN, Professor Pius Olanrewaju, in a statement made available to The PUNCH 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.
Imposing taxes on foreign exchange gains may deter foreign investors and negatively impact Nigeria’s investment landscape, especially at a time when banks are required to raise capital and they may be looking towards foreign investors.
“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.”
On the way forward, the CIBN president said that while the institute understood the need for improved government revenue, which was one of the reasons for proposing a tax levy on foreign exchange gains of banks, it called for careful consideration.
According to the rating company, given that banks have already been subject 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.
“Imposing taxes on foreign exchange gains may deter foreign investors and negatively impact Nigeria’s investment landscape, especially at a time when banks are required to raise capital and they may be looking towards foreign investors.
“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.”
On the way forward, the CIBN president said that while the institute understood the need for improved government revenue, which was one of the reasons for proposing a tax levy on foreign exchange gains of banks, it called for careful consideration.
considered the bill after it was read before the floor for the third time the chairman of the Committee on Finance during plenary session on Tuesday.
The Senate in addition approved further amendments to the Finance Amendment Bill presented by President Bola Tinubu.
The windfall bill initially proposed a 50% sharing formula beteen the banks and Federal Government on the realized profits on the Forex transactions of the banks, but the Senate amended it to reflect an upward review to 70%, stressing that the windfall was not a result of any effort of the banks or value addition, but as a result of government policy which must be redistributed
The Senate in improving the finance act amended the Bill approving the payment of the levy to take effect from the new foreign exchange regime of 2025, and not from January 2024. Lawmakers noted that the initial proposal would mean creating a retrospective law.
The Upper Chamber also remove the three year jail term proposal bill for defaulting principle officers of the banks.
The Bill now prescribes that any bank that fails to pay the windfall levy to the federal Inland Revenue Service and has not executed the deferred payment agreement shall be liable to pay a windfall levy.
And that the default banks windfalls gains will be remitted in addition to a fine of 10% of the levy withheld or not remitted per annum and interest at the prevailing Central Bank of Nigeria (CBN) Minimum Rediscount Rate (MMR).
The Chartered Institute of Bankers of Nigeria and MOODY company,an international rating company have highlighted the negative impact of the newly proposed windfall tax on banks in the country.
A windfall tax is a higher tax levied by the government on sectors or businesses that have disproportionately benefited from favourable market conditions
The government has vowed to sanction principal officers of banks who refuse to comply with the new law.
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 new tax follows the super profits records 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 pre profit tax in 2023 versus N1.1tn in 2022, and we estimate that over a third of the profits were from foreign-currency revaluation and trading gain
According to the rating company, given that banks have already been subject 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.
Moodys said the windfall tax may yield revenue of as much as 0.3 per cent of 2024 GDP to the government.
“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.
Describing the windfall tax as discriminatory, the President/Chairman of Council, CIBN, Professor Pius Olanrewaju, in a statement made available to The PUNCH 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 said that while the institute understood the need for improved government revenue, which was one of the reasons for proposing a tax levy on foreign exchange gains of banks, it called for careful consideration so as not to drives away foreign investors especially the financial sector
“As an institute, we advocate careful consideration and thorough analysis before imposing taxes on foreign exchange gains by banks.
We would, therefore, propose stakeholders’ consultations comprising the Ministry of Finance, the Central Bank of Nigeria, the banks, and other relevant stakeholders where all the parties would do a holistic review of the implications of the proposed tax on the banks.
The proposed imposition of tax on realised forex gains of banks may not be the best way to address the foreign exchange position of banks at this time,” he concluded.
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