Windfall tax will affect banks, say Moody’s, CIBN

International rating company, Moodys and the Chartered Institute of Bankers of Nigeria have highlighted the negative impact of the newly proposed windfall tax on banks in the country.

Last week Wednesday, the Senate 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 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.

The government has vowed to sanction principal officers of banks who refuse to comply with the law.

The Senate 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.

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 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.”

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.

“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.

“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.