Nigeria: Federal Government to Collect Over N425bn from Banks through One-Time Windfall Tax

The Nigerian government is set to collect over N425 billion from seven banks through a one-time windfall tax on their foreign currency revaluation gains for the 2023 financial year. This move follows the Senate’s approval of President Bola Tinubu’s request to amend the Finance Act.

A windfall tax is a higher levy imposed on sectors or businesses that have benefited disproportionately from favorable market conditions. From the annual reports of financial institutions filed with the Nigerian Exchange Limited, these seven banks recorded approximately N851 billion in foreign currency gains at the end of the review year.

The affected banks include Guaranty Trust Holding Company, United Bank for Africa, Access Holdings, FCMB Group, FBNHoldings, Zenith Bank, and Fidelity Bank Plc.

In 2023, GTCO reported a foreign exchange revaluation gain of N441.79 billion, a significant increase from N57.94 billion in 2022, marking a 662% rise year-on-year. UBA reported a forex revaluation gain of N26.58 billion, up from N5.74 billion the previous year. Access Holdings’ total net foreign exchange gain stood at N17.25 billion at the end of December 2023, compared to N34.50 billion in 2022.

FCMB Group reported N83.96 billion in foreign exchange gains, a substantial increase from N4.29 billion in 2022. According to FCMB, the gain represents profits from the revaluation of foreign currency-denominated assets and liabilities held in non-trading books. This surge was influenced by the Central Bank of Nigeria’s adoption of a more liberal foreign exchange management system in 2023, which saw the naira’s exchange rate against the US dollar shift from N461.1/US$ in December 2022 to N951.79/US$ by December 2023.

FBN Holdings recorded N8.77 billion in foreign exchange trading gains, down from N23.33 billion the previous year. Zenith Bank posted a foreign currency revaluation gain of N228.98 billion, an 808.58% increase from N25.20 billion the previous year, while Fidelity Bank’s gains stood at N44.09 billion, up from N2.68 billion in 2022.

President Tinubu’s letter seeking the amendment of the Finance Act 2023 aims to impose and charge a windfall tax on banks to provide for the administration of the tax and related matters. The amendment seeks to levy a one-off tax of 50% on the realized foreign exchange profits of the banks. The Federal Inland Revenue Service (FIRS) will assess and collect the amount due, though banks may opt to settle the windfall tax in instalments with FIRS approval.

Banks that fail to execute an instalment plan or pay the additional tax will be guilty of an offence and liable to pay the tax due plus a 10% per annum penalty and interest at the prevailing Central Bank of Nigeria’s minimum rediscount rate. Defaulting banks’ principal officers may also face imprisonment for up to three years.

The tax revenue will be directed towards “funding capital infrastructural development, education, and healthcare access, as well as public welfare initiatives, all of which are essential components of the Renewed Hope Agenda,” Tinubu stated in his letter to the Senate, which was read by Senate President Godswill Akpabio. The bill was expedited through both the first and second readings and forwarded to the Senate Committee on Finance, which is to report back in one week.

The decision to impose a windfall tax has sparked reactions. Wale Ajayi, KPMG Partner and Head of Tax, Regulatory, and People, raised concerns about the retroactive application of the tax law, noting that it might lead to constitutional challenges and discourage investment due to perceived unpredictability in Nigeria’s tax system.

Olusoji Oluwole, President of the Association of Senior Staff of Banks, Insurance, and Financial Institutions, criticized the move as a “knee-jerk approach” to reviving the economy and highlighted the potential negative impact on investors in the banking sector. Anthony Abakpa, President of the National Union of Banks, Insurance, and Financial Institutions Employees, warned that the windfall tax could drive away business.

Afrinvest, in its weekly economic report, highlighted the timing of the policy’s announcement as problematic, creating uncertainty among investors and industry practitioners. It emphasized the need for clarification on the tax adjustments for banks that have already remitted income tax for 2023 and called for a clearer template to facilitate compliance.