By Kadiri Abdulrahman
The Federal Government has taken formal steps to impose and charge 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 after a 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.
Senate passes bill increasing windfall tax on banks to 70%, CIBN kicks
The push is part of the government’s plan to boost public finances in the face of a cost of living crisis in Nigeria.
The proposal stems from the robust profits these institutions have been generating, often at a time when other sectors and the general populace are grappling with economic challenges.
The idea is to tap into these extraordinary profits and channel the revenue towards national development projects.
The Executive Bill from Tinubu to the legislature stated that 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 fron FX reevaluation 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, which was marked with a major devaluation of the Naira against other foreign currencies, the proposed tax was also informed by budget deficits and the need to find alternative revenue streams.
The Federal Government needed to devise additional source of revenue to close the estimated N9.18 trillion budget deficit in the 2024 budget.
One way to fund the deficit is through additional borrowing. However, the Federal Government is already grappling with a huge debt profile.
Another way is through taxation, but the macro-economic realities show that productivity has slowed in several industries and impacted the tax collected in real terms.
The windfall tax, though a novelty in our climes, is not an entirely new concept of taxation.
In May 2022, the United Kingdom 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 windfall taxes.
Some stakeholders, like bank directors and shareholders associations, have opposed the idea of taxing FX transactions of banks.
But the Association of National Accountants of Nigeria (ANAN) and the Chartered Institute of Taxation of Nigeria (CITN) commended the proposal.
The FIRS says that 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.
Adedeji reiterated that the windfall tax had been introduced in countries like the UK, USA, Spain Italy, among others.
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.
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.
According to him, windfall tax is the way to go.
Mr Femi Otedola, a Businessmen and Chairman of FBN Holdings, expressed support for the windfall tax on Nigerian banks.
He 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.
“The core values of banking, trust, integrity, and service, must be upheld.
“I am particularly critical of the culture of flamboyance, especially the ownership and operation of private jets.
“Nigerian banks are spending an estimated 50 million dollars annually just on maintaining private jets, with over 500 million dollars gone into purchasing nine private jets by four banks, ” 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.
“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 aapplication 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 aawait operation of the Finance Bill, 2024, and the effective implementation of the windfall 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.
With careful planning and execution, the windfall tax could be a powerful tool for transforming Nigeria’s development landscape, ensuring that the prosperity generated by the banking sector contributes to the nation’s broader economic and social goals.
