The Federal Government recently proposed the imprisonment of principal officers of banks who refuse to comply with the one-time windfall tax on banks’ foreign exchange profits in 2023.
It also proposed a penalty of 10 percent of the levy withheld or not remitted annually and interest at the prevailing Central Bank of Nigeria minimum re-discount rate.
On July 17, 2024, the Senate gave expeditious passage to President Bola Tinubu’s request to amend the Finance Act to impose a one-time 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 additional N6.2trn added to the 2024 budget.
Expectedly, the move has generated conversation around the timing and legality of the proposal with major tax and advisory bodies wading into the amendment.
The proposed retrospective imposition of the windfall tax has sparked a debate on its legality and the potential erosion of investor confidence. The principle of non-retroactivity in law is a cornerstone of legal fairness and certainty.
A new report has also warned that implementing a windfall tax amid a Central Bank of Nigeria mandated recapitalisation could “break the camel’s back” for banks.
The report by a US-based Emerging & Frontier Capital also revealed that the banking industry was currently under high regulatory costs from Cash Reserve Ratio, AMCON levy, and deposit insurance premium.
It disclosed that top six banks in Nigeria incurred regulatory costs to the tune of $1.8 billion in 2023, and a total of $7.6 billion over the past five years (2018-2023).
Also, the chairman, Bank Directors Association of Nigeria Mustafa Chike-Obi, has announced that the banking community would soon release its official position on the contentious windfall tax imposed on banks by the Federal Government.
Chike-Obi said that personal views expressed by some bank chairmen on the matter do not represent the collective stance of the banking community.
In the past few days, Chairman FBN Holdings, Femi Otedola, and the Chairman of UBA, Tony Elumelu, have both voiced their support for the windfall tax.
Billionaire businessman Otedola threw his weight behind the implementation of the windfall tax, emphasizing its role in fostering a fairer economic environment.
“Taxing these extraordinary gains ensures a fairer distribution of wealth, allowing those who benefit disproportionately to contribute more significantly to the broader societal good,” he said.
Elumelu also approved of the move, saying it was aimed at alleviating poverty.
The businessman and philanthropist said there was a need to “democratise prosperity for Nigerians, ensuring access to a good life for all.”
“While the tax aims to ensure that banks contribute their fair share to the national coffers, it must be implemented in a manner that upholds legal principles and maintains investor confidence.”
Windfall taxes have a chequered global history. Nigeria has had sparing contact with such a tax. This is the first time a tax on windfall FX gains has been ordered in the last three decades.
The FX gains resulted from the government’s harmonisation of the country’s differential exchange rates. While justifiable by the design of a windfall tax policy, regulatory actions that precede the tax imposition (FX market liberalisation, order on non-distribution of FX gains, and cap on Net Open Positions, among others) suggest a deliberate design.
Unlike oil sector windfall taxes, which are the outcome of external economic factors such as a major rise in international oil prices, the Nigerian FX windfall tax is the consequence of an internal decision by the government to harmonise the exchange markets and thereby devalue the domestic currency.
The outcome has been a restatement of corporate comprehensive incomes for the previous year.
This suggests that Nigerian banks will pay tax arrears on liabilities for 2023, which would require a restatement of their accounts by the year-end of December 31, 2024.
Additionally, subsection 30 of the new Act has been revised to extend the implementation period to 2025 financial year.
According to the subsection, there shall be levied and paid to the benefit of the Federal Government of Nigeria a levy of 70% on the realised profits from all foreign exchange transactions of banks with the 2023 to 2025 financial year.
The punishment for non-compliance with the Act would be a further liability of 10% ‘of the tax 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’
The National Assembly is not alone in legislating for a windfall tax or surtax on businesses or industries that have benefited from certain economic conditions to redistribute the excess profits/gains from those businesses and industries to fund social or development projects.
The Italian Windfall Tax for Banks at 40% for FY 2023 resulted from a government rate hike, which triggered higher Net Interest Margins and yielded record profits for banks.
The windfall tax was implemented as the cost of loans soared while lenders held off paying more on deposits. Similarly, the UK’s 25% energy profits levy was imposed as a windfall tax on oil and gas companies that profited from the increase in crude oil prices due to rising demand after Covid-19 restrictions.
The introduction of the windfall tax marks a departure from the status quo for Nigerian banks. It signals a new era of fiscal policy that requires careful navigation by both the banking sector and the government.
While the tax aims to ensure that banks contribute their fair share to the national coffers, it must be implemented in a manner that upholds legal principles and maintains investor confidence.
As Nigeria treads into this uncharted territory, the outcomes of this policy will have significant implications for the country’s financial system’s stability and economic growth.
