President Bola Tinubu has asked the Nigerian Senate to amend the 2023 Finance Act to impose a one-time windfall tax on the foreign exchange (FX) gains realized by Bank in their 2023 financial statements. This development is aimed at bolstering the nation's fiscal policy and a strategic effort to enhance government revenue amidst economic challenges.
Nine of Nigeria’s leading banks reported over ₦2 trillion in foreign exchange (FX) gains during the first nine months of 2023, following the Central Bank's decision to float the naira and unify the multiple exchange rate markets. In September 2023, the Central Bank of Nigeria (CBN) prohibited commercial banks from using these FX gains to pay dividends or cover operating expenses.
The proposed amendment would allow the government to tax the substantial FX revaluation gains recorded by Nigerian banks following the unification of the foreign exchange market in 2023. Data shows that major commercial banks listed on the Nigerian Exchange Group recorded FX revaluation gains totaling ₦3.37 trillion in 2023 and the first quarter of 2024.
The one-time windfall tax is also part of a proposed amendment to the Finance Bill, which the president aims to increase by ₦6.2 trillion, according to a letter sent to lawmakers on Wednesday.
Tinubu stated that the funds generated from this windfall tax would be used to support capital infrastructure development, education, healthcare access, and public welfare initiatives - key components of the administration's "Renewed Hope Agenda", which hopes to lift 100 million people out of poverty.
The Central Bank of Nigeria (CBN) had previously directed banks to stop using FX revaluation gains to pay dividends or finance operations, as the gains should be used as a buffer to mitigate exchange rate movements. However, the proposed tax aims to redirect these substantial profits towards the government's development priorities.
Key Points of the Proposed Amendment
- Scope of Taxation: The amendment aims to bring under the tax net the FX gains realized by banks, which have seen significant increases due to fluctuations in exchange rates and favorable market conditions.
- Revenue Generation: By taxing these FX gains, the government anticipates a considerable boost in revenue, estimated at ₦2 trillion. This revenue is expected to support various developmental projects and mitigate the fiscal deficit.
- Economic Equilibrium: The amendment is also intended to promote a fairer economic environment where all sectors contribute proportionately to the national coffers, ensuring a balanced distribution of the tax burden.
- Implementation and Compliance: The proposed changes will include detailed guidelines on compliance and reporting, ensuring transparency and accountability within the banking sector.
Government's Rationale and Strategic Objectives
President Tinubu emphasized that the amendment is part of a broader strategy to strengthen Nigeria's economy by leveraging domestic resources. By taxing the FX gains of banks, the government aims to tap into an underutilized revenue stream, thus reducing the reliance on external borrowing and enhancing fiscal sustainability.
Reactions and Implications
The banking sector's response to the proposed amendment has been mixed. While some industry stakeholders have expressed concerns about the potential impact on their profitability and operations, others have acknowledged the necessity of contributing to the nation's economic stability.
Financial analysts predict that the amendment, if passed, could lead to more cautious FX trading practices among banks. Additionally, it may prompt banks to explore innovative ways to optimize their profit margins while adhering to the new tax regulations.
Legislative Process and Outlook
The Senate has approved Tinubu's request to amend the Finance Act and impose the one-time windfall tax on banks' FX gains. The amendment will mark a significant shift in Nigeria's fiscal policy, reflecting the government's commitment to fostering a more equitable and sustainable economic environment.