These, they said are means to leverage the windfall tax to stimulate economic activities and to support vulnerable persons in the society.

They also urged the federal government to ensure transparency in the allocation of the anticipated income, stressing the importance of directing funds to vulnerable population.

The analysts unanimously agreed on this  at the virtual Economist Conference titled “Nigeria’s Windfall Tax – Moving Beyond Concerns to Governance,” organised by Proshare on Friday.

In his contribution, Johnson Chukwu, the group managing director, Cowry Asset Management Limited, said:

“For us to have effective use of fiscal policy including tax policies, we need to redefine our overall economic plan. We need to use this to support the vulnerable in society who are suffering from the component of an increase in exchange rate and there is no component of this tax going to them. the government is just looking at what is in it for them and that deviates from economic growth and development.

“Tax policy is a domestic economic policy; you don’t ever copy what happens elsewhere because economic conditions differ from other jurisdictions. If we don’t have a holistic economic development plan, we are going to use tax policies in silos, and as we try to benefit from one sector, the implications of losses or costs on other sectors may be more severe than the benefits we are gaining.

“The benefits of these earnings would be a cost to them when these loans become bad because you are going to see a major uptick in the non-performing loans of the banks because the debtors of those banks would not be able to pay back because of the shift in the exchange rate.”

Speaking further, he said:

“If the primary purpose of the federal government was to maintain economic stability, to make sure the economy continues to operate effectively, what we need to do is to pass that benefit as tax holiday or some level of subsidy to those who have suffered huge exchange rate losses. with that, you will ensure that the real sector continues to grow.”

For his part, Uche Uwaleke, a professor of capital market at the Nasarawa State University, recommended the expected revenue be allocated to support vulnerable individuals and small businesses, given Nigeria’s significant debt burden and high debt service-to-revenue ratio.

Uwaleke, also re-echoed the need for transparency in the allocation of the estimated N3.5 trillion windfall tax revenue.

He maintained that the levy should be tied to a particular project same as future borrowing which he noted had caused a trust deficit among the citizens

He added:

“People cannot pinpoint what loans are being used for that is what the trust deficit is about. I want to strongly recommend that any money we are raising especially given our huge debt burden and huge debt service-to-revenue ratio any money we are raising must be tied to specific projects.

“So, this windfall levy the government wants to get should be tied to specific projects, around N3.5 trillion is a rough estimate, and should also be tied to a particular project that should go to assisting vulnerable, individuals and small companies.

“The good news is that at the level of our committee, the fiscal committee of the federal government, we are not just recommending concerning taxes and revenues, we are making recommendations concerning spending. It is about fiscal policy which concerns spending and public debt. Our recommendations are comprehensive and by the time they are out and the government begins to implement them it is going to be a game changer.”

Also speaking, a financial analyst, Kalu Aja said:

“There is a trust deficit, people do not trust the government to manage money and they have got to manage that trust. “There has to be a framework, there has to be clarity, the economy needs certainty, it needs rules to be followed so we know how to invest and know how our government is thinking about our commonwealth.”

(Source: ThisDayLive.com)

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The Chartered Institute, in its assessment of the policy, said, it noted with concern the impact of the recent Federal Government policy, imposing a 70% windfall tax on profits generated from foreign exchange transactions by banks from 2023 to 2025.

Bamidele Alimi, director general/CEO, Chartered Institute of Directors Nigeria (CIoD), in a statement available to Techeconomy, said while they 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”.

Alimi said the policy is against the overriding philosophy of Nigeria’s Tax Policy, which is grounded in the principles of equity, efficiency, and simplicity, aiming to create a fair and transparent system that supports economic growth and development.

“The Nigerian Tax Policy is geared towards creating an enabling environment for businesses to thrive, promoting investment, and fostering economic diversification.

“While this Bank Windfall Tax may have been implemented successfully in some advanced countries, it is not enough reason for a wholesome application in Nigeria at the moment, because it negates the overriding philosophy of Nigeria’s Tax Policy.

Having to remit windfall tax for the 2023 financial year when audited reports have been submitted and dividends allocated to shareholders is ill-timed. The financial year of banks ends in December 2023.

“Expectedly, banks are to submit their Audited Reports to the Central Bank of Nigeria (CBN) and other stakeholders by 31st of March 2024 and publish not later than 21 days after submission.

“This implies that all the banks must have done this to avoid sanctions and dividends allocated to shareholders.

“To have them remit the 2023 windfall tax on foreign exchange transactions, after all these activities, is nothing but retroactive.

“Also, banks are currently engaged in recapitalisation to meet the Central Bank of Nigeria’s (CBN) minimum capital requirements.

“The imposition of such a high tax could divert essential funds away from these efforts, hampering banks’ ability to strengthen their capital bases.

“This is particularly concerning given the strict definitions of paid-up share capital, which leaves banks with limited options for raising necessary funds”.

According to CIoD, a high windfall tax could lead to a decline in share prices, further complicating their financial stability.

“Another significant concern with the high windfall tax is its potential to reduce the lending capacity of banks.

“Financial institutions play an important role in providing loans to individuals and businesses, driving economic growth and development”.

The Chartered Institute of Directors Nigeria also argued that excessive tax burden on banks could lead to a reduction in available capital for lending, thereby slowing down economic activities.

“This could have a ripple effect on various sectors of the economy, ultimately stalling growth and development.

“High windfall tax has the potential to inhibit the financial inclusion drive. Banks, like any business, may pass on the additional costs incurred from the windfall tax to their customers.

“This could result in higher fees for banking services, such as loan processing, account maintenance, and transactions. Increased banking costs may disproportionately affect small and medium-sized enterprises (SMEs) and individual customers, potentially leading to financial exclusion for some segments of the population.

“Moreover, the introduction of a high windfall tax may negatively affect Nigeria’s appeal to foreign investors in the banking sector and make them competitively disadvantaged.

“This could lead to reduced Foreign Direct Investment, (FDI), limiting the sector’s growth potential and access to international expertise. Consequently, this may lead to an uneven playing field within the financial services industry.

“This could disadvantage banks compared to other financial institutions not subject to the tax, potentially leading to market distortions and unfair competition.

“Finally, the high windfall tax could also negatively impact shareholder returns. Shareholders expect dividends and returns on their investments, which are largely dependent on the profitability of banks.

“A significant portion of the profits being diverted to taxes could lead to reduced dividends and lower returns on investments. This might discourage investment in the banking sector, leading to reduced capital inflows”.

>>>Continue Reading…click: Windfall Tax: CIoD Enumerates 8 Cautious Steps to ‘Balanced Policy’

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CIoD however noted that these drawbacks could have adverse effect on the economy.

In a statement on Thursday, signed by Bamidele Alimi, director general/CEO, Chartered Institute of Directors Nigeria (CIoD), he reeled out the Institute’s recommendation towards enabling a ‘balanced economic policy’, saying that the government should;

1. Reduce the Tax Rate Gradually – Lower the windfall tax rate gradually over the years to give banks time to adjust.
2. Introduce Thresholds for Tax Applicability – Implement a threshold below which the windfall tax would not apply, protecting smaller banks and fostering competition.
3. Offer Incentives for Investment in Innovation – Provide tax credits or exemptions for banks that invest in innovation, technology, and financial inclusion initiatives.
4. Conduct a Comprehensive Impact Assessment – Conduct a thorough impact assessment before finalising the tax policy implementation to understand its potential effects on the banking sector and the broader economy.
5. Encourage Stakeholder Consultation – Engage in extensive consultations with key stakeholders, including banks, industry associations, and economic experts, to design a more balanced tax policy.
6. Promote Alternative Revenue Sources – Explore alternative revenue sources to reduce reliance on windfall taxes, such as improving tax collection efficiency in other sectors.
7. Implement Varied Percentages for Sustainable Banking Practices – Vary percentage for banks that engage in sustainable and socially responsible banking practices.
8. Monitor and Review the Policy Regularly – Establish a mechanism for regular review and adjustment of the windfall tax policy to ensure it remains fair and effective over time.

“While the intention behind the Bank Windfall Tax policy may be to generate additional revenue for the government, the potential negative implications for the banking sector and the broader economy are significant. We urge the government to reconsider the policy, to find a balance that ensures both revenue generation and the continued growth and stability of the banking sector.

“The policy recommendation will ensure a more moderate approach to the windfall tax and could help mitigate the risks outlined while still achieving the policy’s objectives”, the statement by CIoD reads.

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This tax, announced yesterday, targets the substantial profits accrued by banks due to the significant foreign exchange subsidy provided by the government, which was mainly funded by the depletion of the nation’s foreign reserve.

In my opinion, this windfall tax is a fair and equitable measure, as the banking sector was the primary beneficiary of the government’s subsidy.

The FX gains in banks’ financial statements were not derived from their economic activities but rather from the unintentional creation of the Central Bank of Nigeria (CBN). By taxing these gains, the government is ensuring that the benefits of the subsidy are shared fairly.

According to reports, major commercial banks in Nigeria recorded N3.37 trillion in foreign exchange revaluation gains in FY2023 and Q1 FY2024. I also applaud the government’s strategic approach to this matter.

In September 2023, the CBN proactively managed investors’ expectations by announcing that FX gains in banks should not be distributed as dividends to shareholders and should be set aside. This move demonstrated foresight and prudent planning.

In hindsight, I believe the government’s plan for a 50% windfall tax on foreign exchange gains in banks’ reserves led to the recent CBN guideline that banks’ retained profits (other reserves) should not be included as part of meeting the new capital requirements.

This decision shows a deep understanding of the banking sector’s dynamics and a commitment to avoiding unintended consequences.

The windfall tax is expected to generate additional revenue, which will be channeled towards bridging the infrastructural deficit in Nigeria.

This move demonstrates the government’s ability to implement smart taxation policies that support the nation’s development goals without compromising the stability of the capital market.

Overall, the introduction of the windfall tax on foreign exchange gains in banks’ financial statements is a laudable move that showcases the government’s capacity for strategic thinking and effective policy implementation.

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