The Chartered Institute of Directors Nigeria (CIoD) has raised concerns over the newly approved 70% windfall tax on profits from foreign exchange transactions by banks, calling it both ill-timed and excessively high.
The CIoD Director-General, Mr. Bamidele Alimi reacting to the National Assembly’s approval of the tax, which was increased from an initial 50 per cent proposed by President Bola Tinubu, expressed worries about its impact on the banking sector.
Speaking in Lagos on Thursday, Alimi warned that the high tax could significantly reduce banks’ lending capacity, as the increased tax burden might limit the capital available for loans, thereby slowing down economic activities.
Alimi further cautioned that this development could diminish Nigeria’s attractiveness to foreign investors in the banking sector, placing banks at a competitive disadvantage and potentially leading to a decline in Foreign Direct Investment (FDI).
He said, “Finally, the high windfall tax could also negatively impact shareholder returns as shareholders expect dividends and returns on their investments, which are largely dependent on the profitability of banks.”
“While we recognise the urge to rejig the economy on record time and the importance of this tax policy in fostering economic stability, we believe that the windfall tax is ill-timed, excessively high, and not fit for purpose given current economic realities,”
Provision of tax credits for investments in innovation and technology
Alimi suggested that the government should consider gradually reducing the windfall tax rate over time to allow banks to adjust, and also recommended setting a threshold below which the tax would not apply.
This approach, he argued, would protect smaller banks and promote competition within the sector.
He also advocated for tax credits or exemptions for banks that invest in innovation, technology, and financial inclusion initiatives, as well as exploring alternative revenue sources to reduce the reliance on windfall taxes.
Alimi emphasized that the windfall tax contradicts the core principles of Nigeria’s tax policy, which is founded on equity, efficiency, and simplicity.
He noted that the policy aims to create a business-friendly environment and encourage investment, and warned that the wholesale adoption of windfall taxes, even if successful in advanced economies, does not align with Nigeria’s current economic realities.
Windfall tax could affect banks’ efforts to raise capital
Furthermore, Alimi criticized the timing of the windfall tax, noting that requiring banks to remit the tax for the 2023 financial year, after audited reports have been submitted and dividends allocated to shareholders, is particularly problematic.
He pointed out that banks are currently focused on recapitalization efforts to meet the Central Bank of Nigeria’s (CBN) minimum capital requirements, and that imposing such a high tax could divert critical funds away from these efforts, weakening banks’ ability to bolster their capital bases.
Backstory
- The Federal government in an effort to raise revenue for critical capital projects introduced an amendment to the Finance Act which stipulated a 50% windfall tax on banks’ foreign exchange revaluation gains for 2023.
- However, the National Assembly during deliberation increased the windfall tax rate from 50% to 70%.
- The Chairmen of major Nigerian banks have come out to support the windfall but banks’ directors have raised concerns about the tax.