The Nigerian government’s recent decision to impose a 50% windfall tax on banks’ foreign exchange revaluation gains recorded in 2023 has sparked a variety of responses. This move, aimed at addressing the country’s revenue challenges, has drawn significant criticism from global tax and advisory service firm, KPMG Nigeria, among others.
KPMG Nigeria has strongly opposed the new tax, highlighting several potential issues. The firm argues that Nigeria’s tax policy does not support retroactive taxation, and implementing this tax on banks after they have settled their tax liabilities for the 2023 financial year could lead to legal disputes and constitutional challenges.
“Nigeria’s tax policy frowns at the retroactive application of tax laws,” the report states. “It is, therefore, surprising that the government has chosen to implement these windfall taxes retroactively. Many of these banks have submitted their tax returns for the 2023 financial years and have settled the resultant liability.”
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KPMG warns that the retroactive nature of the tax might violate the principle of legitimate expectations and could discourage foreign investment due to the unpredictability of Nigeria’s tax laws. This unpredictability is seen as a significant deterrent to foreign businesses, particularly, as Nigeria is in desperate need of Foreign Direct Investment.
Call for Stakeholder Consultation
The firm also emphasizes the need for proper technical consultation with stakeholders before the bill is enacted into law. Such feedback is crucial to prevent unintended consequences that could arise from the tax.
Additionally, KPMG criticizes the government’s plan to use 50% of the projected N6.2 trillion funds generated from the tax for recurrent expenditure.
President Bola Tinubu has sought Senate approval to amend certain provisions of the 2023 Finance Act to impose this 50% tax on foreign exchange gains recorded by commercial banks in Nigeria for the full year 2023.
In his letter to the Senate, the President explained that the funds generated from this tax would be used to support capital infrastructure development, education, healthcare access, and public welfare initiatives.
The financial statements of seven listed commercial banks in the country show that around N3.37 trillion was recorded as profit from foreign exchange revaluation in the full year of 2023 and the first quarter of 2024.
KPMG is also questioning the timing of this tax, as commercial banks are currently seeking to raise funds to meet the Central Bank of Nigeria’s (CBN) new capital requirements.
Major banks such as Fidelity, Access Bank, and GTCO are among those approaching the capital markets to raise funds, with an estimated N4 trillion needed in fresh capital over the next 18 months.
Double Taxation Concerns
Another critical point raised by KPMG is the issue of double taxation. Banks already pay 30% of their overall profit, including profits from foreign exchange transactions, as Company Income Tax (CIT). The advisory firm seeks clarification on whether banks would be required to pay an additional 20% on top of their existing 30% tax, or if they would need to pay a fresh 50% on foreign exchange profits.
The absence of any form of tax relief to cushion the effects of such retroactive taxes is also lamented. In other jurisdictions where retroactive taxes are imposed, it is customary to provide some form of tax relief, which is not evident in the amendment to the finance bill.
Why Only Banks?
KPMG questions why banks are being singled out for this tax, suggesting that they are likely not the sole beneficiaries of foreign exchange revaluation gains. The report notes that any business holding foreign currency assets would have profited from transactions settled in 2023.
“Singling out banks contradicts the tenets of the National Tax Policy, which hinges on equity and fairness,” the report asserts.
While the government sees the windfall tax as a necessary measure to boost revenue for critical public projects, growing criticism, especially from major financial organizations such as the KPMG, is signaling that the move will be controversial.
Thus, concerns about retroactive application, potential legal challenges, and the broader impact on the banking sector and foreign investment highlight the need for careful consideration and wider stakeholder engagement before the 2024 Appropriation Act is reviewed to include the FX windfall tax.