Banks, FIRS in tango over windfall tax

Nigerian banks are in a tango with the Federal Inland Revenue Service (FIRS) over how much should be paid in a one-off foreign exchange windfall tax, two weeks after an initial deadline elapsed.

President Bola Tinubu last July sought lawmakers’ approval for a 50 percent tax on banks’ realised foreign exchange gains following the naira devaluation in 2023.

Both chambers of parliament passed the bill seeking the one-off tax, with the Senate raising the rate to 70 percent. The banks were to be debited by the CBN on December 31 2024.

The banks and the FIRS however can’t seem to agree on the tax due, two weeks after the payment deadline.

“The banks are having a quiet tango with the FIRS on the windfall tax issue at the moment,” a source familiar with the matter said.

“The banks are arguing with the FIRS on the calculated sums of tax due and are reverting with their own calculations based on the same principles the FIRS is basing its numbers,” another source said.

“All banks were going to be debited on December 31 by the CBN based on FIRS numbers but the coordinating minister of the economy said no,” the source further said.

“Most of the banks now live in fear of being hammered anytime from now by the CBN based on whatever FIRS wants to do.”

The banks were big beneficiaries of Tinubu’s foreign exchange reform in 2023, which led to an initial 40 percent devaluation of the currency.

Four of Nigeria’s five largest banks recorded huge foreign exchange revaluation gains in 2023, with First Bank of Nigeria Holdings the only exception.

Access Bank, Zenith Bank, Guaranty Trust Bank and United Bank for Africa saw their combined gross earnings more than double to N8 trillion in 2023.

Profit before tax for the four banks jumped more than two-fold to N2.9 trillion, according to the results declared for the year.

Gains made from currency revaluation account for as much as a third or more of their entire profit for the year under consideration, according to the credit-rating agency Moody’s, which covers the top nine Nigerian lenders.

Problematic windfall tax

Windfall tax was always going to be problematic.

The windfall tax was always going to stir up controversy, according to Alicia Adefarasin, a senior legal counsel at a Lagos-based law firm.

“The levy may amount to double taxation, given that it is paid on the realised profits from all foreign exchange transactions of banks which are usually reported as part of the banks’ income for which relevant taxes are paid,” Adefarasin said.

“It is not clear whether the obligation to pay the levy will supersede the banks’ obligation to pay income tax under Section 9 of the Companies Income Tax Act on profit realised from foreign exchange transactions in each year,” Adefarasin noted.

The retroactive nature of the law was flagged by multiple experts even before the bill was passed.

Professional services firms, KPMG & PWC, both anticipated legal disputes from the proposed tax because it was retroactive and not in line with Nigeria’s tax system.

“Nigeria’s tax policy frowns at retroactive application of tax laws. It is, therefore, surprising, that the government has chosen to implement these windfall taxes retroactively,” Wale Ajayi, partner and head of Tax, Regulatory and People Services, said.

“Various reports have indicated that the government may realise about N6.2 trillion from the windfall tax. However, there is no publicly available policy-costing document on this. This lack of transparency has been the bane of policy formulation in the country. It is always important that the public be presented with a tax expenditure statement showing how much will be generated from the introduction of a new tax,” Ajayi added.

Government’s defence

The government defended the implementation of the windfall tax as both a strategic imperative and a standard practice among advanced economies, referencing examples from the European Union and the United Kingdom.

Some countries implemented windfall taxes on excess corporate profits of energy companies triggered by the COVID-19 pandemic. In the UK, the initial duration of the windfall tax was for 2 years, starting from January 2023 before it was extended.

Analysts suggest that the government rushed to secure the funds without conducting technical consultations with key stakeholders, a step that could have streamlined the process. Such consultations might have also bolstered public confidence in the fairness and justification of the tax.

“They should go and increase oil output. No country charges 75 percent corporate tax on anything,” a bank shareholder said.

“The idea of unearned income is communist,” the shareholder who did not want to be named said.

Pressed for cash

The Tinubu administration’s push for alternative revenue sources stems from the urgent need to stabilise Nigeria’s economy amid severe fiscal challenges.

Oil exports, traditionally the government’s primary revenue and foreign exchange earner, have faltered over the past three years due to persistent sabotage and large-scale theft along pipelines leading to export terminals. Since 2021, daily exports have averaged just 1.3 million barrels—well below the country’s OPEC quota of 1.78 million barrels and the 2 million barrels required to balance Nigeria’s budget for its population of over 220 million.

With oil revenues declining steadily since 2016, the previous administration under President Muhammadu Buhari resorted heavily to borrowing, resulting in a national debt of N134 trillion ($92 billion) and pushing the debt-to-GDP ratio to 50 percent, surpassing the official target of 40 percent.

Now facing a projected deficit of N13 trillion in the 2025 budget, the Tinubu administration is under pressure to bridge the funding gap. The proposed tax on banks is expected to generate up to N6.2 trillion, covering 47 percent of the deficit.