Global tax and advisory service firm, KPMG Nigeria has criticised the 50% windfall tax on the bank’s foreign exchange revaluation gains recorded in 2023 stating that it could result in a legal dispute.
The firm stated this in its reaction to the recently imposed tax on banks by the Federal Government where it stated that current revenue challenges of the government may have triggered the tax.
A windfall tax is a levy imposed by a government on companies that have benefited from something they were not responsible for – in other words, a windfall.
According to the firm, Nigeria’s tax policy does not support retroactive taxation and since most banks have settled their tax liabilities for the financial year of 2023, it could lead to a constitutional crisis since it runs counter to the principle of legitimate expectations.
KPMG in a report stated, “Nigeria’s tax policy frowns at retroactive application of tax laws. It is, therefore, surprising, that the government has chosen to implement these windfall taxes retroactively. Moreover, many of these banks have submitted their tax returns for the 2023 financial years and have settled the resultant liability.”
“The impact of this retroactive application may raise constitutional concerns as it may violate the principle of legitimate expectations. It will, therefore, not be surprising if the implementation leads to legal disputes and challenges.”
KPMG opined that retroactive taxes such as this could discourage investment from foreign businesses due to the unpredictability of the country’s tax laws.
Also, the report suggested proper technical consultation with stakeholders on the impact of the tax before the bill is enacted into law stating that such feedback is needed to prevent unintended consequences.
Furthermore, the firm criticised the projected use of 50% of the projected N6.2 trillion funds to be generated from the tax for recurrent expenditure as well as the timing since commercial banks are approaching the capital markets to raise funds to meet the Central Bank of Nigeria new capital requirements.
Major commercial banks such as Fidelity, Access Holding, and GTCO have approached the capital market to raise funds to meet the CBN’s new capital requirements and more are expected.
It is projected that banks will need to raise N4 trillion in fresh capitals in the next 18 months.
The report called on the Ministry of Finance to liaise with the CBN on the capacity of banks to meet the proposed capital requirements calling the windfall tax a distraction that banks do not need at this time.
The tax and advisory firm also described the windfall tax as a tacit double taxation as banks already paid 30% of their overall profit including those from foreign exchange transactions as Company Income Tax.
It sought clarification on whether the banks would be required to pay 20% to their hitherto 30% company tax or pay afresh a new 50% on foreign exchange profits.
Also, it noted that in climes where retroactive taxes were imposed, it is ideal they provide some form of tax relief to cushion the effects of such taxes. It lamented the absence of such in the amendment to the finance bill.
The report also questioned why banks alone were singled out in this tax, suggesting they were likely not the sole beneficiaries of foreign exchange revaluation gains.
According to it, any business holding foreign currency assets would have profited if those transactions were settled in 2023.
It further noted that singling out banks contradicts the tenets of the National Tax Policy, which hinges on equity and fairness.
“KPMG opined that retroactive taxes such as this could discourage investment from foreign businesses due to the unpredictability of the country’s tax laws.”
KPMG also noted that there needs to be proper monitoring and evaluation to ensure that the objectives of the policy are realized to prevent a business-as-usual situation.
President Bola Tinubu is seeking Senate approval to amend certain provisions of the 2023 Finance Act.
The proposed amendment aims to impose a 50% tax on foreign exchange gains recorded by commercial banks in Nigeria for the full year 2023, based on their financial statements.
In a letter to the Senate, the President explained that the funds generated from this tax would be used to support capital infrastructure development, education, healthcare access, and public welfare initiatives.
According to the financial statements of seven listed commercial banks in the country, around N3.37 trillion was recorded as profit from foreign exchange revaluation in the full year of 2023 and the first quarter of 2024.
The Federal Government might be taking a cue from the UK which imposed a 25% windfall tax on oil and gas companies in 2022 due to massive profits made after COVID restrictions were lifted and oil prices surged after Russia’s invasion of Ukraine. The government made £2.6 billion that year.
The Energy Profits Levy was raised to 35% in 2023 and has been extended by a year to 2029. The levy will however cease if oil prices drop below $71.40 per barrel and £0.54 per thermal unit for gas for six months in a row.
