Retroactive FX Windfall Tax Riles Banks

Nume Ekeghe writes on the federal government’s recent decision to implement a windfall tax on banks’ foreign exchange gains, highlighting the potential repercussions for investor confidence in Nigeria’s financial sector

In a move that could significantly impact Nigeria’s banking sector, the federal government’s proposed windfall tax on foreign exchange gains is sparking controversy. As the Central Bank of Nigeria (CBN) pushes for recapitalisation efforts to strengthen the financial system, analysts warn that this new tax policy might deter crucial investments, both local and foreign. The timing and approach of the windfall tax have been criticised for potentially undermining the investment climate, just as banks are striving to meet new capital thresholds set by the CBN.

Earlier this year, the CBN announced new minimum capital requirements of N500 billion and N200 billion for commercial banks with international and national authorisation, respectively. The apex bank in a statement announcing the requirement also set a new capital base of N50 billion for banks with regional licenses and merchant banks, while non-interest banks with national and regional authorisations must raise their capital to N20 billion and N10 billion, respectively. These requirements are to be met by March 31, 2026. 

The recapitalisation plan, initially announced by the CBN Governor Mr. Olayemi Cardoso, aims to bolster banks’ resilience, solvency, and capacity to support Nigeria’s economic growth. Banks have been encouraged to consider various options, including private placements, rights issues, mergers and acquisitions, or changing their license authorisations to meet the new capital thresholds. The CBN has emphasised that the new capital base will consist solely of paid-up capital and share premium, excluding shareholders’ funds.

Controversy Over Windfall Tax

The federal government’s proposal to retroactively amend the Finance Act 2023 and impose a one-time windfall tax on banks’ foreign exchange gains realised in their 2023 financial statements has generated significant controversy. Analysts have raised concerns about the timing and potential repercussions of this tax.

The Managing Director of Parthian Securities Limited, Mr. Tunde Awolola, emphasised the possible negative effects on Nigeria’s global financial reputation.

“The justification for the tax is not convincing, and it will likely affect our global ratings, potentially driving foreign investors elsewhere. Similarly, if the government is taxing windfall profits from bank activities due to policy changes in FX transactions, how will it support companies that incurred significant losses from the same policy? Is there a stabilization fund for these companies?” he questioned.

An anonymous analyst also critiqued the bill’s approach and timing, despite recognising the government’s fiscal challenges.

“The rationale for the bill is clear, given the weak fiscal state of the federal government of Nigeria. The recently agreed increase in the minimum wage is expected to further inflate government expenditure without new sources of revenue. However, the bill, if passed into law, could have more negative impacts. Targeting a specific industry rather than a specific activity violates the principle of fairness in taxation. Additionally, the timing is poor, as most banks are currently on roadshows trying to attract investors,” he said.

Impact on Banks, Investors

The proposed amendment to the Finance Act includes a one-time 50 per cent windfall tax on the foreign exchange revaluation gains recorded by Nigerian banks in 2023.

Analysts at Meristem in its latest report expressed concerns about the tax’s impact on banks’ effective tax rates, profitability, and ongoing recapitalisation efforts. They argue that this funding source is relatively insignificant compared to the N6 trillion funding gap identified by the government.

According to the analysts: “We consider this funding source to be relatively insignificant compared to the N6 trillion funding gap identified by the government. Additionally, there are concerns regarding the potential impact of the windfall tax on banks’ effective tax rates, profitability, and ongoing recapitalisation efforts.”

 Also, PricewaterhouseCoopers (PWC) Nigeria has highlighted the practical challenges posed by the windfall tax, noting that it complicates the allocation of expenses between different revenue streams. The retrospective application of the tax on profits from the financial year 2023, which were already filed and paid in June 2024, adds to the complexity. Banks must now navigate new compliance requirements and potential disputes with tax authorities.

PWC in their recent report titled ‘The Windfall Tax Conundrum; Navigating the Fiscal Impact on Nigerian Banks’ Investor Sentiments,’ stated: “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 similar principle was supported by the courts in the case between Accugas Ltd and the FIRS where it was ruled that taxes should not have retroactive application. By taxing profits already realised and reported, the government risks being perceived as unpredictable, which could deter future investment and impact confidence in the financial markets.”

Investor Sentiments

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. By taxing profits that have already been realised and reported, the government risks being perceived as unpredictable, which could deter future investments and impact confidence in the financial markets.

Navigating Regulatory Changes

As Nigeria navigates these complex financial and regulatory changes, the need for careful consideration and stakeholder consultation becomes paramount. Balancing fiscal policy with the necessity of maintaining investor confidence and supporting economic growth will be crucial in ensuring the long-term stability and prosperity of the Nigerian economy. The financial sector, particularly banks, will have to adapt to these new challenges while continuing to play a pivotal role in the country’s economic development.

QUOTES

“PWC has highlighted the practical challenges posed by the windfall tax, noting that it complicates the allocation of expenses between different revenue streams. The retrospective application of the tax on profits from the financial year 2023, which were already filed and paid in June 2024, adds to the complexity. Banks must now navigate new compliance requirements and potential disputes with tax authorities.”

“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 similar principle was supported by the courts in the case between Accugas Ltd and the FIRS where it was ruled that taxes should not have retroactive application. By taxing profits already realised and reported, the government risks being perceived as unpredictable, which could deter future investment and impact confidence in the financial markets.”