Windfall tax to strain banks’ ability to raise foreign capital – Agusto & Co

Agusto & Co, a Nigerian credit rating company, has said the 70 percent windfall tax imposed by the federal government will strain banks ability to raise capital from foreign investors.

This was disclosed by the credit rating agency in a report titled; 𝗡𝗶𝗴𝗲𝗿𝗶𝗮’𝘀 𝗥𝗲𝘁𝗿𝗼𝗮𝗰𝘁𝗶𝘃𝗲 𝗪𝗶𝗻𝗱𝗳𝗮𝗹𝗹 𝗧𝗮𝘅: 𝗔 𝗦𝗵𝗼𝗿𝘁-𝗧𝗲𝗿𝗺 𝗙𝗶𝘅, 𝗟𝗼𝗻𝗴-𝗧𝗲𝗿𝗺 𝗥𝗶𝘀𝗸 on Tuesday.

According to the company, banks are currently grappling with the recapitalisation excercise mandated by the Central Bank of Nigeria (CBN) and the prospoed windfall levy is a distraction that could further strain them.

It said, “Moreover, the tax could negatively influence bank share prices in the short term, compounding the challenges faced by the industry.”

Last week, the senate amended the windfall tax on the realised foreign exchange gain to 70 percent from the proposed 50 percent.

However, analysts at Agusto said that the punitive levy targets the hefty profits (some of which grew three-fold) accrued by banks since the liberalisation of the naira in June 2023 and the subsequent sharp depreciation of 51 percent.

“The tax, retroactively applied to the 2023 financial year, threatens fines for non-compliant banks. This move underscores the government’s desperate bid to shore up its finances amid an increasingly precarious economic landscape. We estimate that banks earned circa ₦2.5 trillion from foreign currency-related income in 2023, positioning the expected revenue from the proposed tax at ₦1.75 trillion,” they said.

Retroactive taxation is a significant deterrent to investment as it creates a climate of uncertainty, making it difficult for businesses to accurately forecast their tax liabilities.

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The report disclosed that such unpredictability can erode investor confidence and discourage future investments.

It said that why banks have been singled out is still unclear, as any business that holds monetary assets in foreign currency is likely to have benefitted significantly from the weaker naira, albeit not as much as banks.

“Many now believe that the banking industry could merely be an initial target of this policy and there is a real risk that it could be extended to other industries in the future, further exacerbating investor anxiety. Despite the potential for protracted legal and constitutional challenges, we believe prolonged tussle is unlikely given the lack of a united front by banking industry, which limits its ability to mount a robust defense against the proposed tax.” It disclosed.

In a recent report, the Federal Inland Revenue outlined specific guidelines for accounting for foreign currency transactions referencing the International Financial Reporting Standards (IFRS).

“Generally, only expenses that are wholly, exclusively, necessarily and reasonably incurred in the production of a taxable income may be deducted in order to ascertain the assessable profits for the relevant year of assessment, in line with Sections 24(1) & 27 of the Companies Income Tax Act (CITA), Sections 20 & 21 of the Personal Income Tax Act (PITA) and Sections 10 & 13 of the Petroleum Profits Tax Act (PPTA),” FIRS said in a statement,

However, FIRS noted that these treatments may not align with Nigeria’s tax regulations but the statement aims to clarify the necessary adjustments for determining the tax implications of foreign exchange differences, ensuring accurate tax computation and compliance.