Bankers and other experts in the Nigerian financial sector have urged the Federal Government to reconsider the proposed 70 percent foreign exchange (forex) windfall levy on banks, noting that it could scupper banking sector recapitalisation and government reforms.
They asked President Bola Tinubu to withhold assent to the Finance Act (Amendment) Bill 2024 as passed by the National Assembly, calling for a reconsideration of the forex windfall levy by the legislature and the executive.
President Tinubu had last week submitted a supplementary budget proposal to the National Assembly. The bill seeks to increase the 2024 budget by N6.2 trillion from N28.7 trillion to N34.9 trillion. As part of the funding plan for the N6.2 trillion supplementary budget, the government seeks an amendment to the 2023 Finance Act to include a 50 percent, one-off tax on forex revaluation gains by banks during the 2023 business year. The levy on forex revaluation gains, otherwise known as windfall, will be used to finance ‘The Renewed Hope’ infrastructure projects, education, healthcare, and other initiatives.
On Tuesday, the National Assembly increased the forex windfall levy to 70 percent, with retroactive application from January 1, 2023.
“Any bank that fails to pay the windfall profit levy to the Service (Federal Inland Revenue Service), and has not executed the deferred payment agreement as at the time of commencement of the regime, shall be liable to pay the windfall levy withheld or not remitted in addition to a fine of 10 percent of the levy withheld or not remitted per annum and interest at the prevailing Central Bank of Nigeria minimum discount rate,” the bill states.
The Chartered Institute of Bankers of Nigeria (CIBN), the umbrella body for bankers, said that the implementation of the levy could lead to reduced investment, decreased liquidity, and increased costs, negatively impacting Nigeria’s economic growth and development.
In a statement signed by Pius Olanrewaju, CIBN president, the institute noted that the forex windfall tax could exacerbate currency volatility due to reduced market participation, with the potential to destabilise the economy.
CIBN noted that the forex windfall tax could amount to double taxation as banks have already paid 30 percent income tax when they filed 2024 tax returns.
“Will this not amount to double taxation? Or will the tax already paid be deducted from this new imposition? This proposed tax will violate fairness and equity in taxation as banks are the only entities singled out for this payment. This is discriminatory. What about other sectors or businesses that have recognised the same foreign exchange gains in their books in 2023? In countries where such windfall tax has been imposed, there is always a corresponding incentive to cushion the effect on the affected entities but nothing to that effect has been stated in the proposed bill,” CIBN stated.
Olatunde Amolegbe, former president of the Chartered Institute of Stockbrokers, said the forex windfall levy could be counterproductive and have a negative effect on the ongoing banks’ recapitalisation, which was intended to boost the government’s $1 trillion economic agenda. According to him, imposing such a levy in the middle of ongoing banking recapitalisation may send wrong signals to investors and impinge on the ability of banks to raise much-needed capital.
“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,” Amolegbe, managing director of Arthur Steven Asset Management, said.
Rasheed Bolarinwa, president of the Association of Corporate & Marketing Communication Professionals of Banks (ACAMB), said banks have shown enormous support for the government’s economic agenda and should not be burdened with a new levy that would be counterproductive at this time. He underlined the need for further extensive consultation on the levy, urging the president to withhold assent to the bill. He noted that, with the ongoing recapitalisation, which is also aimed at supporting the government’s $1 trillion economic agenda, banks need more monetary and fiscal incentives now.
“We shouldn’t kill the goose that lays the golden eggs. Government should have a rethink. We think further consultation is needed in this case. We know the President has a listening ear, as demonstrated on many occasions, and we expect banks should be given a fair hearing on this,” Bolarinwa said.
A senior banker who preferred to remain anonymous said the forex windfall levy has further compounded the inconsistencies in the Nigerian policy environment. “There are a lot of inconsistencies now, and this forex windfall levy is another manifestation. Monetary policy is saying one thing, fiscal policy is saying another. Also, and more importantly, the levy will be on realised gains and most banks have unrealised gains as profit is different from cash,” the banker said.
David Adonri, managing director of HighCap Securities, said the forex windfall levy amounts to 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.
According to him, it is unfair to deny shareholders, who would have borne the brunt in the event of losses, of direct benefits from forex gains on one hand, and for the government to seek to appropriate such on the other hand.
The 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,” CBN had stated.
However, the fiscal side has moved in the opposite direction.
According to KPMG, though it may be understandable why the government has opted for the windfall tax on realised forex profits, the government needs further consultation to secure the necessary buy-in of the banks. “We do not think this is late though. We, therefore, recommend that the government engage with the CBN and the Bankers’ Committee to agree on possible changes as soon as possible,” KPMG stated.
Experts at KPMG noted that there are many issues that the proposed implementation of the windfall levy will trigger, calling for careful examination of these issues before the enabling law is enacted.
KPMG said it is always important that any proposed change in tax law or policy be subjected to a period of technical consultation. This will provide the government with the opportunity to obtain feedback from all stakeholders and timely address unintended consequences.
“We are not aware that any consultation of this nature has been held. We suggest that such consultation be carried out before the enactment of the proposed amendment,” KPMG stated.
