Punishing banks with windfall tax, ignoring naira policy failure

In an unprecedented move that reeks of desperation, President Bola Ahmed Tinubu, on Wednesday, July 17, 2024, through a letter, requested the Senate to approve the imposition of tax on the gains made by banks owing to the Naira floatation policy of the Central Bank of Nigeria (CIBN). The Senate, most expeditiously, approved the President’s request which seeks to amend the Finance Act “to impose a one-time windfall tax on banks’ foreign exchange profits in 2023.”

The letter which was presented as an Executive Bill before the Senate, stated in part: “Furthermore, the proposed amendments to the Finance Act 2023 are required to impose a one-time windfall tax on foreign exchange gains realised by banks in their 2023 financial year to fund capital infrastructure development, education and healthcare access as well as public welfare initiatives to give sound and solid footing to the Renewed Hope Agenda…

“Finally, I believe that all the proposals in this Bill are laudable and will enhance the critical needs of the citizens of this country,” the letter said. Six days after the receipt of Mr. President’s letter, exactly on Tuesday 23 July 2024, the Senate passed the amendment bill of the 2023 Finance Act and increased the windfall tax on banks’ foreign exchange revaluation gains from 50 percent as proposed by the President, to 70 percent. And the timeline to cover 2023 to 2025.

According to Investopedia, “a windfall tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience significantly above-average profits. Windfall taxes are primarily levied on companies in the targeted industry that have benefited the most from the economic windfall, most often commodity-based businesses.” While this kind of tax is known to have been levied at some point in time on some oil and gas companies in Europe, it is strange in the Nigerian and, indeed, African clime.

For one, the windfall tax is to be levied retroactively: meaning that it is after banks have closed their books for 2023, all properly audited, and held their annual general meetings and paid dividend to their shareholders. The banks have also paid the relevant taxes (especially, the Company Income Tax, CIT) in 2023 and met all their corporate social responsibility (CSR) obligations.

As if the banks are being punished for benefiting from the fallouts of the naira floatation, the Senate unilaterally elected to extend the life of the new tax by two years; and tied punitive penalties around it. Specifically, the Senate approved that: “the levy shall be 70 percent of the realised profits of all exchange transactions from banks. Any bank that fails to pay the windfall profit levy to the Service (FIRS), and has not executed the deferred payment agreement by 31 December 2024 shall be liable to pay a windfall levy withheld in addition to a fine of 10 percent of levy withheld or not remitted per annum and an interest at the prevailing CBN minimum discount rate.”

It must be stated here, for clarity, that the so-called windfall profit by banks arose due to the failure of the naira floatation policy of the CBN put in place mid-June 2023. Among other objectives, the policy was intended to unify exchange rates in the foreign exchange (FX) market. This was to checkmate round tripping and other arbitrage activities that were believed to be prevalent in the market up until the emergence of the Tinubu administration in May 2023.

However, rather than these objectives being achieved, the full floatation of the national currency crashed its exchange rate against the dollar and other hard currencies. Consequently, banks that had dollar denominated assets reaped the multiplier effect of the scenario in geometric proportions in terms of naira equivalent/income. In other words, only banks that had more dollar assets (than liabilities) and positioned themselves strategically, reaped bountifully from the failure of the currency floatation. Many made very little or no gains! 

Therefore, the immediate import of the windfall tax is a direct punishment for many deposit money banks (DMBs) for effectively playing their transmission mechanism role. This is true because their huge profit made on the backdrop of the collapsing naira was just an outcome of the CBN policy. Had the Naira gained strength against the dollar, as the currency floatation intended, the profit story of the banks would have been different. Perhaps, most DMBs would have reported huge losses; and the government wouldn’t have bothered to compensate them.

The story of many multinational companies that pulled out of Nigeria in the past one year amply show the scary negative impact of naira floatation. And so, the DMBs that fared well in the face of the policy really deserve nothing than encouragement for more contribution to Nigeria’s economic development. Unfortunately, the windfall tax is being applied as a clampdown on the DMBs for having their head above water in an environment where not a few businesses have either sunk or are sinking.

Wittingly or otherwise, by enforcing the windfall tax on the DMBs, the Federal Government of Nigeria has sent a bad signal to the entire world: that your prosperity as a business in Nigeria could be peremptorily cut short via contrived taxes and levies. This is why this novel punitive tax on the banks in Nigeria could be counterproductive for a government that lays claims to wooing investors — local and foreign.

There is also the issue of fairness from the perspective of capital owners (shareholders of banks), given that the CBN already barred access to 2023 FX earnings via dividend payments. And now the federal government in cahoots with the apex bank has unilaterally empowered itself to appropriate 70 percent of the same profit.  

The full harm of the new tax gets even more worrisome when it is realised that practically all the DMBs are now in the market, locally and globally, seeking for funds to meet the new minimum capital requirement of the CBN. The so-called windfall tax policy at this point in time, therefore, amounts to a de-marketing of the banks by the Federal Government of Nigeria. The message to the world is that the money the banks have in their coffers do not belong to them, but to the government that will now forcefully ‘seize’ them. It also means that the banks are not as buoyant as they appear/claim. Investors now look askance at the DMBs!

Concomitantly, the government’s resort to ‘easy money’ at this time by retroactively taxing the DMBs exposes the unhealthy financial profile of the country. Rather than portraying creativity, the imposition of the new tax shows desperation for revenue; it is anti-business. And which is why some or all of the DMBs might opt to legally challenge the new tax legislation. The windfall tax obviously gives a new but ugly and uncertain outlook to the banking system.

All said, the government must not play down the fact that it was the failure of its monetary policy that led it to taxing the DMBs. Now that the policy failure has given rise to unintended benefits to the banks, should the government turn around to be a key beneficiary? Would the huge income to be mopped up via the windfall tax indirectly not amount to an encouragement of the CBN and other government agencies to continue to be reckless in dishing out ill-digested policies? Or, has the naira floatation really made any appreciable positive impact on the Nigerian economy?

Rather than resorting to taxing the DMBs in outright desperation, the federal government should urgently consider ‘monetizing’ so many of its ‘solid’ assets lying fallow across the country. This is why the job of the Bureau of Public Enterprises (BPE) is properly carved out for it at this point in time. Now, therefore, is the most auspicious time to sell such public assets like the four publicly-owned refineries that have for years been moribund in Port-Harcourt, Warri and Kaduna. They should be sold on an “as-is-where-is” basis, to enable serious private investors to take over and run them.

Today, in Nigeria, local refining in commercial quantities is critical to jumpstarting the economy and attaining meaningful growth and development. The amount of scarce FX currently being spent on the importation of Premium Motor Spirit (PMS), for instance, is quite huge and constitutes a drag on Nigeria’s economic progress. Also, like the refineries, the old giant Federal Secretariat buildings at Ikoyi, Lagos, have for too long been left fallow. The earlier those buildings are sold to private investors, the better for all. Many of such properties are in other locations nationwide.

Government should therefore not look stranded in terms of sources of funds, and embark on a likely suicidal mission of retroactively levying taxes on existing businesses in the country. And for banks, in light of the ongoing recapitalisation, the broad steps by the CBN and the federal government to tighten the noose around FX income might dis-incentivize new capital inflow into the sector. This will definitely prolong the current trend of low foreign capital inflows into the Nigerian economy. Unfortunately!

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