Banks’ FX Windfall Tax: Promoting Fair Share in Wealth Redistribution

Oluchi Chibuzor

The introduction of a new windfall tax on Nigerian banks has continued to generate debate. While some have argued that the policy could hurt financial institutions in the country, the truth remains that the novel idea would go a long way in helping to redistribute wealth and support the vulnerable in society.

Precisely, the policy entails a 70 percent tax or levy on the ‘windfall’ profit that accrued to commercial banks following last year’s significant devaluation of the Naira— a devaluation arising from a series of significant economic reform initiatives by President Bola Tinubu’s administration.

Essentially, a ‘windfall’ is a benefit companies get, not necessarily due to their hard work or investments, but because of external factors that they did not influence. Usually, a large amount of money is won or received unexpectedly. Windfalls are generally sudden and very substantial. The term is loosely derived from things “blown by the wind.

In Nigeria, the legislation was created through the Finance Act Amendment and has been extended to all profits from FX transactions of banks up to 2025. It also proposes that banks must enter into a deferred payment agreement with the Federal Inland Revenue Service and must complete the payments under the plan before 31 December 2024, otherwise, the banks would be liable to a penalty of 10 percent per year of default and interest at the Monetary Policy Rate (MPR) per annum.

The windfall tax targets banks’ substantial profits from foreign exchange (FX) transactions from 2023. This policy, which aims to capture excess profits generated by banks during periods of economic growth, has been implemented in various countries around the world with notable success.

Countries like the United Kingdom and the United States have implemented windfall taxes in the past, often during times of economic crisis.

For example, in the United Kingdom (UK), in response to massive profits in the energy sector, the UK implemented an Energy Profits Levy in May 2022, targeting oil and gas companies that saw significant profit increases due to rising energy prices exacerbated by the COVID-19 pandemic and the Ukraine conflict.

Initially set at 25 percent, the tax was raised to 35 percent in January 2023 and extended until March 2029. The government had projected it would raise £5 billion in its first year, but actual revenues were only £2.6 billion.

Also, during the global financial crisis of 2008, the UK imposed a one-off windfall tax on banks to help fund public services and stabilise the economy. This measure was widely seen as a fair and effective way to redistribute wealth.

Another notable example was in Australia, where in 2008, the country also introduced a windfall tax on banks to support economic stimulus measures. The tax generated substantial revenue, which was used to fund infrastructure projects and other government priorities. These examples demonstrate that windfall taxes can be a valuable tool for governments to address economic challenges and promote public welfare.

Furthermore, South Africa also introduced laws in 2013 that allowed for the taxation of fair value adjustments on certain financial assets and liabilities held by brokers and banks. For countries that introduce special rules to tax unrealised gains, the rationale behind such measures is that if shareholders can receive dividends based on valuation gains, or if these gains can be used as credible collateral, then the government should have a right to tax the perceived value.

This why in Nigeria, the federal government has continued to explain that the policy which is driven by the Federal Inland Revenue Service, aims to utilise the funds to fund masses-led programmes like fertilizers to farmers, and importation of food items directly to wholesalers to crash the prices of food, among other critical masses-led interventions.

Additionally, part of it would also be used to finance infrastructure development, education, healthcare, and other public welfare initiatives. It will also help drive economic revenue expansion push; potentially reduce socio-economic inequality and access to national wealth; provide governments with additional revenue for public services and social development; significantly redistribute excess profits in one area of the economy to raise funds for the greater social good of all; deliver timely sensitisation and strategic advocacy that promotes government’s policy for the greater good of all beyond rhetoric

Most significantly, the initiative shows the government’s strategic determination to deliver key people-centric programmes.

Indeed, it is a crucial step towards ensuring that the country’s financial institutions contribute their fair share to national development. This is because as banks have enjoyed significant profits due to favorable market conditions, this tax would generate substantial revenue that can be allocated to critical sectors such as infrastructure, education, and healthcare.

While the windfall tax aims to address the perceived unfairness of banks’ windfall profits, it could also generate significant revenue for the government, which would be used to fund public services and infrastructure.

The Founder/CEO at Inspire Group and a public policy analyst, Magnus Onyibe, justified the windfall tax, stating that tougher laws and policies may be required to meet the issues created by the banks’ enormous earnings.

For his part, Managing Director/Chief Executive Officer, AD&D Capital Management Limited, Mr. Idakolo Gabriel Gbolade, 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.

He pointed out 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.

While admitting that the policy came at a period when the banks are preparing for recapitalisation and that increased profits would have helped them to easily navigate the recapitalisation hurdle, he nevertheless said that the windfall tax remains 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.

Therefore, it is expected that the implementation of a windfall tax in Nigeria could yield several benefits, including generating significant revenue for the government, which can be used to fund essential public services such as education, healthcare, and infrastructure development as well as redistribute wealth to the poor and vulnerable sectors such as farmers.

Indeed, by capturing excess profits from banks, the windfall tax can help to reduce income inequality and promote a more equitable distribution of wealth. The tax can contribute to economic stability by discouraging excessive risk-taking by banks and mitigating the potential for future financial crises. The imposition of a windfall tax can help to restore public trust in the financial sector, particularly in the wake of economic challenges.

This is one policy where the government requires massive support from Nigerians, especially the masses as it would help in ensuring income redistribution, lower poverty and reduce inequality, if done properly. It would also go a long way to reduce social tensions arising from inequality and hardship experienced by the vulnerable due to income gaps and ensure that more resources are committed to the poor in society.

From the foregoing, while there may be concerns about the potential impact of the windfall tax on bank profitability and lending activity, it is important to note that the government can carefully calibrate the tax rate and structure to minimise negative consequences. By striking a balance between revenue generation and economic stability, Nigeria can leverage the windfall tax to achieve its development goals and tackle the hunger and hardship in the land.