In a significant policy shift, the Nigerian Federal Government is set to collect over N425 billion from seven major banks as a one-time windfall tax on their foreign currency revaluation gains for the 2023 financial year. This development follows the Senate’s approval of President Bola Tinubu’s request to amend the Finance Act to impose this new tax on banks’ foreign exchange profits.
A windfall tax is typically levied by governments on sectors or businesses that have enjoyed extraordinary profits due to favourable market conditions. In this case, the move targets the substantial foreign currency gains reported by Nigerian banks in 2023.
According to findings, the annual reports of the financial institutions filed with the Nigerian Exchange Limited revealed that the seven banks recorded about N851 billion in foreign currency gains at the end of the review year. These banks include Guaranty Trust Holding Company (GTCO), United Bank for Africa (UBA), Access Holdings, FCMB Group, FBN Holdings, Zenith Bank, and Fidelity Bank Plc.
The banks’ foreign exchange gains were notably significant. For instance, GTCO reported a staggering foreign exchange revaluation gain of N441.79 billion in 2023, a 662 per cent increase from the N57.94 billion reported in 2022. Similarly, Zenith Bank posted a foreign currency revaluation gain of N228.98 billion, marking an 808.58 per cent rise from N25.20 billion the previous year.
The Central Bank of Nigeria’s adoption of a more liberal foreign exchange management system in 2023 resulted in a significant shift in the naira exchange rate against the US dollar, impacting the banks’ foreign currency-denominated assets and liabilities. This revaluation contributed to the substantial foreign exchange gains for the year.
President Tinubu’s letter to the Senate outlined the need for the windfall tax to fund capital infrastructural development, education, healthcare access, and public welfare initiatives, which are essential components of his Renewed Hope Agenda. The proposed tax will impose a one-off 50 per cent levy on the realised foreign exchange profits of the banks, to be assessed and collected by the Federal Inland Revenue Service (FIRS).
However, the decision has sparked considerable debate and concern within the financial sector. Wale Ajayi, KPMG Partner and Head of Tax, Regulatory and People Services, raised constitutional concerns about the retroactive application of the tax, which could lead to legal disputes and discourage investment due to the perceived unpredictability of the Nigerian tax system.
Olusoji Oluwole, President of the Association of Senior Staff of Banks, Insurance and Financial Institutions, criticised the move as a “knee-jerk approach” and highlighted the potential negative impact on investors in banks. He also questioned why banks were specifically targeted when other institutions had similar revaluation gains.
Anthony Abakpa, President of the National Union of Banks, Insurance, and Financial Institutions Employees, echoed these sentiments, warning that the windfall tax could deter business and investment in the sector.
Financial analysts at Afrinvest also expressed concerns about the timing and abruptness of the policy announcement, which they argued creates uncertainty and unpredictability among investors and industry practitioners. They called for clearer guidelines and a nuanced approach to implementing the tax, particularly regarding adjustments for banks that have already remitted income tax for 2023.
The Senate’s swift passage of the bill, which mandates compliance within a five-month window, underscores the urgency with which the Federal Government seeks to implement this new tax policy. As the debate continues, the financial sector and investors await further clarifications and potential adjustments to mitigate the impact of this significant fiscal measure.