Unsettled Debate on Nigeria’s FX Windfall Tax
The introduction of the FX Windfall Tax in Nigeria is generating significant controversy as stakeholders weigh the potential economic benefits against fears of reduced investment and competitiveness, writes Festus Akanbi
The controversies triggered by the introduction of a 70 per cent windfall tax on banks persisted last week with analysts and stakeholders in the nation’s banking industry weighing the pros and cons of the new tax policy.
On July 17, the National Assembly said President Bola Tinubu requested the amendment of the 2023 Finance Act to impose a one-time windfall tax of 50 per cent on banks’ FX gains last year.
Tinubu said the windfall tax will be used to finance infrastructure projects, education, and healthcare, among others.
The National Assembly passed the bill on Tuesday and increased the windfall tax to 70 per cent, with retroactive application from January 1, 2023.
The tax follows record profits declared by banks in 2023, largely because of foreign currency-revaluation gains related to the Nigerian naira’s massive devaluation of 37% in June 2023.
The tax is in line with the Central Bank of Nigeria’s September 2023 policy prohibiting banks from using foreign currency-related profits for operational expenses and dividends.
Analysts say a chain of actions including the upsurge in the nation’s inflation rate, eleven straight interest rate hikes from monetary authorities, the corresponding increase in banks’ interest rates, and two devaluation rounds executed between June 2023 and now, have caused assets held by banks in foreign currencies to balloon to record levels.
They explained that the current revenue challenge being experienced by the government and the need to enhance debt sustainability have triggered this windfall tax response despite its initial commitment not to introduce new taxes.
According to them, the question that has always arisen is how the government would fund the initially projected deficit of N9 trillion (4% of GDP) considering the inability of the government to even meet the specified minimum crude oil production of 1.78 million barrels per day.
As of June, the daily production was 1.5 million barrels, inclusive of 220,000 condensates (which does not form part of the OPEC quota).
The irony of the situation is that while bank vaults are brimming, many businesses including multinationals are shutting down their Nigerian operations as a result of pressures from currency devaluation and their exposure to foreign-denominated loans.
As expected, opinions are divided over the appropriateness of the FX Windfall Tax, as analysts weigh the pros and cons of the new legislation.
Redistributing Gains
For example, on Wednesday, Magnus Onyibe, a THISDAY columnist, justified the windfall tax by stating that tougher laws and policies may be required to meet the issues created by the banks’ enormous earnings. According to him, this could be why an excessive profit or windfall tax has been introduced through the amendment of the Finance Act 2023.
Managing Director/Chief Executive Officer, AD&D Capital Management Limited, Mr. Idakolo Gabriel Gbolade, who shared Onyibe’s view, described the FX windfall tax as a policy aimed at boosting the revenue of the federal government due to the FX policy implemented to deregulate the FX market.
He insisted that the policy greatly increased banks’ profit position and that the banking sector was a major beneficiary of the policy.
However, he told THISDAY that by international best practices, increased revenue/profit due to favourable government policies can be subject to taxation.
“The windfall tax will assist the federal government in shoring up its revenue profile and redirecting needed attention to infrastructural development, education, healthcare, and other related activities to boost the economy. The banking sector has profited from the unexpected windfall and is reluctant to tax their tremendous profits,” he said.
Although he admitted that “This windfall tax is coming at a period when the banks are preparing for recapitalisation and increased profits would have helped them to easily navigate the recapitalisation hurdle”, he nevertheless said that the windfall tax is a legitimate demand by the government and that the banking sector as a responsible corporate citizen needs to contribute its quota to assist the country to overcome the various economic challenges affecting the nation.
Some analysts believe that the FX Windfall Tax will do more harm to the banks than good given the circumstances they have found themselves.
Between Legitimacy and Timing
Speaking with THISDAY last week, a development economist and a faculty member of the Pan Atlantic University, Dr. Bongo Adi, said although the federal government is justified in its bid to redirect excess profits from the banking sector to the economy, it is unfair to slam such a tax on banks which are doing all things possible to meet the new capital threshold put in place by the regulatory authorities.
“Banks are facing the issue of recapitalisation, which is a big issue for them. It doesn’t make sense to ask banks to look for money for a new capital base and at the same time attempt to take away the ones they have, It’s like a punishment,” he said.
He said the focus on banks’ gains from currency devaluation is going to be a discouragement to investors.
According to him, “for the sake of economic growth, the CBN will need to rethink the policy. It should be arrived at by all the stakeholders.”
The university lecturer agreed that banks do make big profits which can be described as extraordinary, however, he blamed the authorities for encouraging banks to take advantage of their customers.
He wondered why the authorities could not checkmate banks from excess charges saying rather than go after their extraordinary profits, the CBN should change the regulation and put in place an institutional process to prevent banks from frustrating their customers with excessive charges and deductions.
BDAN: 70% Windfall Tax Burdensome
Interestingly, the banks’ Board of Directors Association of Nigeria (BDAN) adopted a conciliatory stance last week, calling for a dialogue with the government to arrive at a mutually acceptable position on the issue of FX Windfall Tax.
A statement from the association after its board meeting on Monday said that while they respect the intentions of the government in making the decision, it had concerns about the magnitude of the levy, its timing and the ambiguities surrounding its implementation.
The chairman of the association, Mustafa Chike-Obi, who signed the statement said, “While the imposition of this windfall tax appears to be a response to the current economic climate, we suggest that a 70 per cent tax rate is excessively burdensome and ill-timed, particularly considering the ongoing bank recapitalisation efforts. Such a high levy has the potential to stifle growth and innovation within the banking sector, ultimately affecting the quality of services we provide to our customers and the broader economy.
“Moreover, we believe that it is vital for all stakeholders in the banking sector to have been consulted before the enactment of such significant changes in the Finance Act 2023. Open dialogue and negotiation are essential to ensure that policies are both equitable and effective.”
The association said its primary concern lies in the ambiguities of the language in this amendment which leaves critical questions unanswered, “such as, whether the windfall tax will be implemented as a Total Tax charge on banks, incorporating other taxes already levied such as Company Income tax, Tertiary Education Tax, National Information Development Levy etc. We also request clarification on what constitutes ‘FX transactions’ to be taxed and the treatment of banks that may incur losses rather than gains during this period. We urge the government to provide clear guidelines to avoid further uncertainty.”
The truth is that the success of any government policy, however beneficial to the economy, will largely depend on the ability to carry all the stakeholders along, hence the need for dialogue between the government and the banking community stakeholders over the 70 per cent FX Windfall Tax imposed on banks.
