Tag: forex windfall levy

Bankers and finance experts yesterday called on the Federal Government to reconsider the imposition of a 70 per cent foreign exchange (forex) windfall levy on banks.

They called on President Bola Tinubu to again demonstrate his listening ear by withholding assent to the Finance Act (Amendment) Bill 2024 as passed by the National Assembly, to allow for further consultation and dialogue on the issues.

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 sought amendment to the 2023 Finance Act to include a 50 per cent, 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 “Renewed Hope” infrastructure projects, education and healthcare among others.

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The National Assembly, on Tuesday, in passing the Bill, increased the forex windfall levy to 70 per cent, with retroactive application from January 1, 2023.

“Any bank that fails to pay the windfall profit levy to the Service (Federal Inland Revenue Service), 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 per cent of the levy withheld or not remitted per annum and interest at the prevailing Central Bank of Nigeria, minimum discount rate,” the amended Bill stated.

Stakeholders including Chartered Institute of Bankers of Nigeria (CIBN), Moody’s, KPMG, Association of Corporate & Marketing Communication Professionals of Banks (ACAMB) and others cautioned that the forex windfall levy might be counterproductive considering critical contributions of banks to the ongoing economic reforms and the current banking recapitalisation exercise.

Latest data from the Central Bank of Nigeria (CBN) had indicated that banks’ credit to the private sector (CPS) rose by 65.9 per cent or N29.52 trillion to N74.31 trillion in May 2024 compared with N44.79 trillion recorded in comparable period of 2023.

The Chartered Institute of Bankers of Nigeria (CIBN), the umbrella body for bankers, stated that the implementation of the levy could exacerbate currency volatility due to reduced market participation, with a potential to destabilise the economy.

In a statement signed by its President, Professor Pius Olanrewaju, CIBN pointed out that the levy could lead to reduced investment, decreased liquidity, and increased costs and negatively impact Nigeria’s economic growth and development.

President, Association of Corporate & Marketing Communication Professionals of Banks (ACAMB), Rasheed Bolarinwa, said banks have shown enormous supports for government’s economic agenda and should not be burdened with a new levy that obviously 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 government’s $1 trillion economic agenda, banks needs more of 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 listening ear, as demonstrated on many occasions, and we expect banks should be given fair hearing on this,” Bolarinwa said.

Global rating agency, Moody’s stated that the forex windfall levy would have negative effects on banks, describing the proposed levy as “credit negative for the sector”.

“The windfall tax will have a particularly negative effect on banks whose capital adequacy is close to regulatory thresholds. The tax follows record profits declared by banks in 2023, largely because of foreign-currency revaluation gains related to the naira’s massive devaluation of 37 percent in June 2023,” Moody’s stated.

The rating agency noted that the levy would significantly reduce banks’ profits available for problem-loan provisioning and transfers to retained earnings, a crucial component of regulatory capital, thereby posing a challenge to banks’ financial stability.

Moody’s estimated that the tax could yield revenue of up to 0.3 per cent of 2024 GDP for the government’s small tax intake of around nine per cent of GDP in 2023.

KPMG stated that while it may be understandable the reasons why the government has opted for the windfall tax on realized forex profits, 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 government engages with the CBN and the Bankers’ Committee to agree 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.

CIBN stated that the forex windfall tax could amount to double taxation as banks have paid 30 per cent income tax when they filed 2024 tax returns.

“Will this not amount to double taxation? Or 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 entity 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.

Olanrewaju noted that imposing taxes on forex gains may deter foreign investors and negatively impact Nigeria’s investment landscape especially at a time when banks are required to raise capital and they may be looking towards foreign investors.

“The CIBN recognises the need for improving government revenue which is one of the reasons for proposing levy on forex gains of banks. As an institute, we advocate careful consideration and thorough analysis before imposing taxes on forex gains by banks. We would, therefore, propose for stakeholders’ consultations comprising the Ministry of Finance, the Central Bank of Nigeria, the banks, and other relevant stakeholders where all the parties would do a holistic review of the implications of the proposed levy on the banks. The proposed imposition of levy on realised forex gains of banks may not be the best way to address the forex position of banks at this time,” Olanrewaju said.

A former President of Chartered Institute of Stockbrokers (CIBN), Mr Olatunde Amolegbe, said the forex windfall levy could be counterproductive and have negative effect on the ongoing banking recapitalisation, which was intended to boost government’s $1 trillion economic agenda.

According to him, imposing such 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.

A senior banker who craved anonymity said the forex windfall levy has further compounded the inconsistencies in the policy environment.

“There is 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.

Managing Director, HighCap Securities, Mr. David Adonri, 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 recapitalize,” Adonri said.

According to him, it was 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 government to seek to appropriate such on the other hand.

The Central Bank of Nigeria (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 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 utilize such forex revaluation gains to pay dividends or meet operating expenses,” CBN had stated.

According to KPMG, it is always important that any proposed change in tax law or policy be subjected to a period of technical consultation. This will provide 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.

KPMG noted that Nigeria’s tax policy frowns at retroactive application of tax laws, expressing surprise that the government has chosen to implement the windfall taxes retroactively.

KPMG pointed out that many of the banks have submitted their tax returns for the 2023 financial years and have settled the resultant liability, thus the impact of the retroactive application may raise constitutional concerns as it may violate the principle of legitimate expectations.

“It will, therefore, not be surprising if the implementation leads to legal disputes and challenges. Retroactive tax laws can discourage investment as potential investors may perceive the Nigerian tax system as unpredictable. The uncertainty will make it challenging for businesses to anticipate their tax obligations and may be suspicious that the tax will be repeated in future. Today, it is the banking sector. Who says that it cannot be extended to other sectors tomorrow!” KPMG stated.

“Any business that holds monetary assets in foreign currency would have earned realised forex profits if such assets were settled during 2023. The question is why are only banks singled out for this treatment? One of the fundamental principles of the National Tax Policy is equity and fairness. The Tax Policy requires the Nigerian tax system to be fair and equitable and devoid of discrimination. Why would we need a tax policy that we cannot uphold?

“Currently, banks are embarking on a recapitalisation drive to meet the minimum capital requirements stipulated by the Central Bank of Nigeria (CBN) in respect of the various banking licences. Given the strict definition of paid-up share capital, banks have very limited options for meeting the new capital requirements. Thus, the threat posed by the proposed windfall tax is an unnecessary distraction that the banks do not need at this time. It is, therefore, important that the Ministry of Finance engage with the CBN and the banks to critically evaluate the implications on the ability of the banks to raise capital. It is likely, that in the short term, the share price of these banks may be adversely affected.

“One thing that is missing from the Amendment Bill is tax relief for the banks that will be subject to the windfall tax. Available evidence shows that anywhere a windfall tax has been introduced, it makes sense to introduce some form of tax relief, such as investment allowance, to cushion the impact. This will encourage the banks to spend and, in turn, accelerate economic growth. We, therefore, suggest that this be considered before the law is enacted.

“It is important that there is proper monitoring and implementation of the windfall tax to ensure that the defined objectives are met. This will enable a review of the policy and necessary and timely adjustment when required. Otherwise, it will be business as usual,” KPMG stated.

Experts at Afrinvest West Africa said while the government is constitutionally empowered to impose taxes, including on windfall gains, to strengthen fiscal accounts, the timing of the policy’s announcement is problematic.

They said the abruptness of the timing naturally creates a sense of uncertainty and unpredictability among investors and industry practitioners.

“For instance, Italy in August 2023 announced a one-off 40.0 per cent windfall tax on increase in banks’ net interest margin for the fiscal year 2023. Although the plan was eventually modified, the announcement was made during the 2023 operating year – in contrast to the abruptness of the proposed tax on Nigerian banks, which is to be applied outside of the 2023 fiscal year. Unsurprisingly, the banking index shed a total of 3.0 per cent in the final trading sessions of the week, following the announcement. In summary, lingering concerns about uncertainty around the sector could present some headwind amidst the ongoing recapitalisation exercise.

“Furthermore, there is need for clarification on the wind-fall tax adjustments to be made for banks that already remitted income tax for 2023. Given the five-month window for compliance, the federal government should provide a clearer template that would take into consideration some of the nuances around implementing the tax.

“Lastly, there is the issue of fairness from the perspective of capital owners, given that the CBN already barred access to foreign currency earnings via dividend payments, meanwhile the federal government is seeking access to 50.0 per cent of the same profit. In light of the ongoing recapitalisation, the broad steps by the regulator and the federal government to tighten the noose around forex income for banks might disincentivise new capital inflow into the sector, thereby prolonging the current episode of lacklustre foreign capital inflows into the country,” Afrinvest stated.

•Confident of government’s support for economic growth

Representatives of leaders of Nigeria’s banking sector have met with President Bola Tinubu at the State House, Abuja, to seek clarifications on the recently imposed windfall levy.

Minister of Finance and Coordinating Minister of the Economy, Wale Edun, the team, including the Chairman of the United Bank for Africa (UBA), Tony Elumelu, and the Group Chief Executive Officer (GCEO) of the First City Monument Bank (FCMB), Ladi Balogun, to the President.

Speaking to journalists after the meeting, the Minister of Finance, Edun, disclosed that the bankers sought insight into the tax regime, particularly the Windfall Levy, passed by the National Assembly.

He said the Chairman of Federal Inland Revenue Service (FIRS), Zacch Adedeji, explained the government’s intention to simplify the tax regime, focus on taxing profits, and leave companies’ capital alone to grow.

The discussion centered on the banking system’s windfall profits and the government’s decision to distribute wealth across Nigerian society.

Edun described the meeting as amicable, knowledge-based, and data-driven, with President Tinubu, an accountant and financial expert, actively engaging in the discussion.

The bankers are expected to share their perspective on the outcome, which included assurance on all sides and support for the President’s macroeconomic reforms.

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“Two top bankers, Mr. Tony Elumelu of UBA and Mr. Ladi Balogun of FCMB wanted to have with Mr. President in company of, amongst others, the chairman FIRS, and special advisor to Mr. President on revenue, Mr. Zacch Adedeji. And we sat and we talked about the importance of the banking system and the importance of the financial system as a whole at this critical time for encouraging investments, portfolio investments, into the stock market and government securities, as well as foreign direct investment.

“Of course, we know at this time that the banking system is raising money. They’re selling shares, they’re giving people opportunity to participate in their wealth, and that includes foreign investors. So it’s against that background that Mr. Elumelu and Mr. Balogun wanted some clarifications,  particularly on the windfall levy that has just been passed by the National Assembly.

“Chairman of FIRS gave some insight, particularly into the fact that under President Bola Ahmed Tinubu, the idea is to simplify the tax regime, as much as possible, make it more efficient and less costly for people to even file their taxes and critically to focus on the wealth that’s created, not to focus on the companies that maybe are not doing so well, or to focus on their capital, to leave their capital alone, to grow and make sure that the emphasis is on taxing and levying only the returns, only the profits.

“In this particular case, as we know, the banking system has enjoyed some, what we’ll call windfall or on hand profits and in the interest of distributing wealth across the Nigerian society, the government has stepped in to take some of that wealth on behalf of Nigerians.

“So that was what the discussion was all about. It was very amicable and it was very knowledge-based and data-driven discussion, which Mr. President as a financial man, as an accountant, easily understood, followed, and appreciated.

“I think the bankers themselves will give what they see as the outcome because it wasn’t just one item, it was assurance on all sides. They explained the extent to which Mr. President’s macroeconomic reforms are being supported and are being accepted by, not just Nigerian investors, but the international community. So on that note, over to the bankers”, Edun said.

Also speaking, Elumelu expressed the need to democratize prosperity for Nigerians, ensuring access to a good life for all, expressing support for the government’s Windfall Levy, which he said is aimed at alleviating poverty.

He stressed the importance of mutual prosperity, where businesses thrive, jobs are created, and investors – both foreign and local – benefit, ultimately leading to a happier society.

Elumelu believes the meeting achieved its objective of creating a prosperous perspective for all Nigerians, and he looks forward to a better future.

“We believe in prosperity. We believe in creating jobs and employment for our people. We believe in making sure that we democratize prosperity and that Nigerians have access to good life. So today we spoke about the Windfall Tax. We support the government.

“We believe that where extraordinary income has made a part of, it should go towards helping to alleviate poverty in the country, which is what the government intends to do.

“We support that and we just believe that we should make sure that no one segment suffers and that the government is able to continue to create jobs and that businesses are also able to do well because we need mutual prosperity.

“Prosperity of the business owners, prosperity of the ordinary, Nigerians perspective of the investors – foreign and local, so that everyone is happy. So I’m happy that the meeting has gone very well.

“The ultimate objective is to make sure that we create perspective for everyone in Nigeria and I think that has been achieved on the meeting and we hope to see a better and happier society going forward”, he said.

The FCMB boss, Balogun, expressed confidence that the current administration will continue to support all stakeholders in the economy, promoting growth and investment.

He emphasized the importance of aligning the banking sector and investment community with the government’s reform agenda.

He also highlighted the banking industry’s role in channeling gains back into the economy, demonstrating their commitment to supporting economic growth, praising the administration’s pro-investment and pro-growth stance, evident in their willingness to listen to industry concerns.

“As mentioned by the Honorable Minister, the purpose of the meeting was really to ensure that the reform agenda of this government is well transmitted to  not only the banking sector, but the investment community. We sought to ensure that we are all on the same page. I believe we are in the banks and the government.

“We also sought to ensure that we are also playing our role as a banking system, as an industry, to be able to channel back some of the gains that we have made into the general economy. Now we believe that this government and this administration is very much pro-investment, is very much pro-growth and they demonstrated that in listening to the concerns of the industry.

“We believe that what we are seeing is a government that will continue to support all stakeholders in this economy and promote growth in the economy. I believe that was the strongest message that came out today”, Balogun said.