By Kadiri Abdulrahman
The Federal Government has moved to introduce a Windfall Tax on Nigerian banks through the Finance Bill, 2024.
President Bola Tinubu wrote to the Senate on July 17, asking lawmakers to amend the 2023 Finance Act to accommodate a windfall tax on the Foreign Exchange (FX) gains.
This is as the devaluation of the Naira bloated revaluation gains for banks holding assets in foreign currencies.
A windfall tax is a levy imposed by the government on companies that have benefited from economic conditions that have allowed them to realise profits far exceeding the norm.
While the president sought approval for 50 per cent of banks FX gains to be charged as windfall tax, senators increased the rate to 70 per cent.
The push is part of the government’s plan to boost public finances in the face of a cost of living crisis in Nigeria.
Tinubu’s Executive Bill says the intendment of the tax is to fund capital infrastructure development, education and health care access including other public welfare initiatives.
The Bill was subsequently passed by the Senate on July 23.
It imposes a windfall tax of 70 per cent on profits of foreign exchange transactions within the 2023 financial year.
Recent development, however, suggest that the assessment period has been revised to commence from the effective date of the FX unification policy (June 14, 2023) to December 31, 2025.
Nigerian banks have consistently recorded substantial profits, even during periods of economic downturns.
According to the financial statements of seven listed banks, N3.37 trillion was recorded as profit from FX revaluation in 2023.
This resilience sparked discussions about the role these banks should play in national development, particularly in a country where infrastructure, healthcare, and education are in dire need of revitalisation.
The windfall tax promises to redistribute these unexpected gains.
It will channel funds into important public services, including infrastructure development, healthcare and education.
This redistribution is expected to improve public amenities, support the quality of education and healthcare, and address economic disparities.
This proposal is designed to drive national development while avoiding additional tax burdens on ordinary citizens.
The Bill provides that the Federal Inland Revenue Service (FIRS) shall assess, collect, account, and enforce payment of the tax.
Nigerian banks that are liable to pay the tax may enter into a deferred payment agreement with FIRS, which must be executed on or before Dec. 31.
Nigerian banks that fail to pay the tax to FIRS and have not executed a deferred payment agreement before December 31 shall be liable to pay the tax, plus a penalty of 10 per cent of the tax not paid per annum.
The defaulting banks will also pay interest at the prevailing Central Bank of Nigeria minimum rediscount rate.
Apart from huge profits generated by Nigerian banks during the 2023 financial year, the proposed tax was also informed by budget deficits and the need to find alternative revenue streams.
The Federal Government needed to devise additional revenue sources to close the estimated N9.18 trillion deficit in the 2024 budget.
Tinubu met with Bank Chief Executives at the Presidential Villa, Abuja, where he briefed them on the new tax.
Speaking during the meeting, Wale Edun the Minister of Finance and Coordinating Minister of the Economy, said: “As we know, the banking system has enjoyed some of what we’ll call windfall or unearned profits.
“In the interest of distributing wealth across the Nigerian society, the government has stepped in to take some of that wealth on behalf of Nigerians.
“We know at this time that the banking system is raising money. They’re selling shares, giving people the opportunity to participate in their wealth, and that includes foreign investors’’, Edun said.
The windfall tax, though a novelty in our clime is not a new concept of taxation.
In May 2022, the UK introduced a windfall tax of 25 per cent on energy profits. This was further increased to 35 per cent in January 2023.
Also, on August 8, 2023, Italy imposed a windfall tax on profits earned by banks from high interest rates to assist mortgage holders.
France, Germany, Spain and Hungary are also among several other European countries that introduced different forms of the windfall tax.
The Federal Inland Revenue Service (FIRS) says the tax will be charged on banks’ profit on FX transactions.
According to Mr Zach Adedeji, the Executive Chairman of FIRS, It does not involve other companies.
He, however, said that it was not the duty of the FIRS to determine how the tax revenue would be expended.
“That is for the executive. Our duty at FIRS is to assess, collect and account for tax revenue.
“What we collect is part of what the three tiers of government share monthly at the Federation Accounts Allocation Committee (FAAC),’’ he said.
Mr Tony Elumelu, UBA Chairman, attended the Villa meeting and is excited about the new tax.
“We believe in prosperity, in creating jobs and employment for our people, in democratising prosperity, and in ensuring that Nigerians have access to a good life.
“So today, we spoke about the Windfall Tax. We support the government.
So was the Group Chief Executive Officer, First City Monument Bank, Ladi Balogun.
“We believe that where extraordinary income has made a part of, it should go towards helping to alleviate poverty in the country, which is what the government intends to do.
“We support that, and we just believe that we should ensure that no one segment suffers, that the government is able to continue to create jobs, and that businesses are also able to do well because we need mutual prosperity,” he said.
While the proposed tax has received the endorsement of chief executives, not all stakeholders in the industry are enthused. One of them is the Bank Directors Association of Nigeria.
An Economist, Dr Chijioke Ekechukwu, said that as a country battling with economic recovery, imposition of the windfall tax was in order.
“Firstly, these banks made unusual profit from FX, which is why, even in the midst of economic downturn,most banks were reporting huge profits.
“The government is saying: let us share from this huge profit opportunity which we created for you. The government can actually make a lot of revenue from this avenue; and also taxing private jet owners, as well as sin tax,’’ he said.
Mr Femi Otedola, a businessman and Chairman of FBN Holdings, expressed support for the tax.
Otedola said that the tax should be utilised in providing essential services, including education, healthcare, critical infrastructure and public welfare initiatives for Nigerians, and in reducing social inequality.
He accused bank officials of profligacy and extravagant spending, including the purchase and maintenance of private jets.
“A concerning trend has emerged where some bank chief executives prioritise personal gain over their duty to shareholders and customers’’, he said.
He said that this level of extravagance significantly eroded public trust in our financial institutions and diverts crucial resources away from vital areas such as operational efficiency, technological innovation, and customer service.
However, some stakeholders are not so enthused.
“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’’, said Mustafa Chike-Obi, the chairman of the group.
Chike-Obi, however, said with more consultation, the operators of the banking industry and government could agree on the best possible ways it could contribute to more the economy
“Open dialogue and negotiation are essential to ensure that policies are both equitable and effective”, he advanced.
“To regain the trust of the Nigerian public and fulfil its pivotal role in the nation’s economic development, the banking sector must realign its financial priorities.
“Investments should be channelled into areas that directly improve customer services and enhance technological infrastructure,” he said.
Analysts at KPMG Nigeria, a global network of professional firms providing audit, tax and advisory services, however, criticised the retroactive nature of the windfall tax.
According to them, Nigeria’s tax policy does not support retroactrive taxation.
They said that since most banks had settled their 2023 tax liabilities, it could lead to constitutional crisis.
“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,’’ they said.
They said that retroactive taxes such as the windfall tax could discourage investment from foreign businesses due to unpredictability of the country’s tax laws.
They called for dialogue with stakeholders on the impact of the tax before the bill is enacted into law.
As Nigerians await implementation of the new tax expectations are high that government will be able to boost revenue generation to bridge the yawning gap of critical infrastructure.
Stakeholders urge the Federal Government to brace up for challenges, including potential pushback from the banking sector.
They, however, call for transparent and efficient management of the tax revenue in a manner its burden would not be transferred to bank customers.
