Finance institutions to pay 50% of windfall
Experts caution on timing
The proposed one-off tax on 2023 foreign exchange (forex) gain by banks may fetch the Federal Government not less than N2trillion, it was learnt at the weekend.
President Bola Ahmed Tinubu hinted at his administration’s plan to tax the banks’ gain in the proposed amendment to the 2023 Finance Act before the National Assembly.
Also before the National Assembly is an Executive Bill on the 2024 Supplementary Budget seeking to raise N6.2 trillion to fund infrastructure.
The tax on banks’ forex windfall in 2023 is meant to raise part of the funding for the supplementary budget.
The levy on forex revaluation gains, otherwise known as a windfall, will be used to finance “Renewed Hope” infrastructure projects, education and healthcare, among others.
A review of audited reports and accounts of banks and independent analysts’ reports yesterday estimated forex revaluation gains at about N4 trillion in 2023, half of which the government is seeking to appropriate for national budget funding.
For instance, three of Nigeria’s five biggest banks – Guaranty Trust Holdings Company (GTCO), Zenith Bank and United Bank for Africa (UBA), made forex revaluation gains of about N700 billion last year 2023, with GTCO accounting for about two-thirds of the total gains by the big three.
GTCO recorded a forex revaluation gain of about N442 billion in 2023, followed by Zenith Bank and UBA with N229 billion and N27 billion respectively.
If passed into law, the government will receive about N350 billion in one-off payments from the three banks.
Five other banks, including the First City Monument Bank (FCMB) Group, Fidelity Bank, Stanbic IBTC, Access Holdings, and Sterling Financial Holdings, recorded estimated forex revaluation gains of about N176 billion during the year.
The 2023 Finance Act amendment stipulates that “there shall be levied and paid to the benefit of the Federal Government of Nigeria a tax of 50 per cent on the realised profits from all foreign exchange transactions of banks within the 2023 financial year.
“The Federal Inland Revenue Service – (a) shall assess the realised profits, collect, account and enforce payment of tax payable under section 30 in accordance with the powers of the Service under the Federal Inland Revenue Service (Establishment) Act 2007.”
The amendment proposes a penalty of an additional 10 per cent for banks that have not remitted the assessed forex gains or gotten approval for instalment payment from the CBN by December 31, 2024.
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Also, principal officers of defaulting banks would face imprisonment of up to three years.
Most experts have faulted the timing and the nature of the windfall tax, noting that it could indirectly undermine the ongoing banking recapitalisation.
They said it was unfair to deny shareholders of direct benefits from forex gains on one hand, and for the government to seek to retroactively appropriate such on the other hand.
The Central Bank of Nigeria (CBN) had directed banks not to utilise their forex revaluation gains to pay dividends or for other operational expenses, but rather to save the funds as a hedge against any future volatility.
“Banks are required to exercise utmost prudence and set aside the foreign currency revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the forex rate in this regard.
“Banks shall not utilise such forex revaluation gains to pay dividends or meet operating expenses,” the apex bank had stated.
Experts at Afrinvest West Africa said while the government is constitutionally empowered to impose taxes, including on windfall gains, to strengthen fiscal accounts, the timing of the policy’s announcement is problematic.
Faulting the timing, they argued that it would create a sense of uncertainty and unpredictability among investors and industry practitioners.
Afrinvest said: “For instance, Italy in August 2023 announced a one-off 40.0 per cent windfall tax on increase in banks’ net interest margin for the fiscal year 2023.
“Although the plan was eventually modified, the announcement was made during the 2023 operating year – in contrast to the abruptness of the proposed tax on Nigerian banks, which is to be applied outside of the 2023 fiscal year.
“Unsurprisingly, the banking index shed a total of 3.0 per cent in the final trading sessions of the week, following the announcement.
“In summary, lingering concerns about uncertainty around the sector could present some headwinds amidst the ongoing recapitalisation process.
“Furthermore, there is a need for clarification on the wind-fall tax adjustments to be made for banks that already remitted income tax for 2023.
“Given the five-month window for compliance, the federal government should provide a clearer template that would take into consideration some of the nuances around implementing the tax.
“There is the issue of fairness from the perspective of capital owners, given that the CBN already barred access to foreign currency earnings via dividend payments.
“The Federal Government is seeking access to 50.0 per cent of the same profit.
“In the light of the ongoing recapitalisation, the broad steps by the regulator and the Federal Government to tighten the noose around forex income for banks might disincentivise new capital inflow into the sector, thereby prolonging the current episode of lack-lustre foreign capital inflows into the country.”
Managing Director, Arthur Steven Asset Management, Mr. Olatunde Amolegbe, said the introduction of the windfall tax in the middle of ongoing banking recapitalisation may send wrong signals to investors and thus negatively impact the ability of banks to raise the much-needed capital.
Amolegbe said: “We also have to be very mindful of the impact on the liquidity ratio of these banks, many of which are finding things tough due to the tight monetary stance of the CBN. There is a need for caution here.
“In business, as in life, timing is everything. It will appear we are moving one step forward two steps backward.”
His counterpart at HighCap Securities, Mr. David Adonri, said the 50 per cent windfall tax amounts to an expropriation of shareholders’ wealth.
“It defeats the purpose of making banks strong enough to support the envisaged $1 trillion economy, an objective that is compelling banks to recapitalise,” Adonri said.