PwC Warns Nigerian Government’s Proposed Windfall Tax Could Deter Investments

PricewaterhouseCoopers (PwC), a global tax and advisory services firm, has raised concerns over the Nigerian government’s recent proposal to tax the already reported FX windfall profits of banks in 2023.

In its reaction to the proposed amendment of the Finance Act and the introduction of a one-time windfall tax on commercial banks’ foreign exchange revaluation gains, PwC warned that this move could have far-reaching negative implications for investment in the country.

The proposal, which aims to impose a 50% tax on the foreign exchange gains reported by commercial banks for the entire year of 2023, is the main reason for a push for the amendment of the 2023 Finance Act by President Tinubu’s administration. This amendment seeks to address revenue generation for capital infrastructure development, education, healthcare access, and public welfare initiatives.

However, the implications of such a tax are being widely debated. The government anticipates that this move could generate over N3 trillion, but analysts caution that the long-term negative impact on the economy might outweigh the immediate financial gains.

PWC’s Analysis and Concerns

In its report titled, “The Windfall Tax Conundrum: Navigating the Fiscal Impact on Nigerian Banks,” PwC highlighted several key concerns. The firm argues that by taxing already realized and reported profits, the government may be perceived as unpredictable.

The PwC notes the following in its report:

This unpredictability could deter future investment and destabilize financial markets, making Nigeria a less attractive destination for both local and foreign investors.

Furthermore, the practical implementation of the windfall tax might present significant legal and perceptual challenges. These challenges pertain to the principles of equity, fairness, and constitutionality.

The retroactive nature of the tax is particularly contentious, as it undermines the principle of legitimate expectations for businesses that have already settled their tax liabilities.

The firm also pointed out that the proposed legislation could deter investors by introducing uncertainty into the fiscal environment. A stable and predictable tax regime is crucial for attracting and retaining investment, and any perception of arbitrariness or retroactive taxation can severely damage investor confidence.

Additionally, the proposed windfall tax rate of 50% on foreign exchange gains stands in stark contrast to the conventional 30% company income tax rate. This discrepancy poses confusion for banks regarding the allocation of expenses from different revenue streams.

According to some analysts, banks might find themselves in a situation where they need to apply different principles for allocating profits to tax-exempt income, leading to administrative challenges and potential disputes.

The Debate Continues

Although the federal government said the revenue generated from this tax would be critical for funding key public sectors such as infrastructure, education, and healthcare, it has sparked significant debate among stakeholders and economic analysts.

Notably, KPMG has also criticized the move, suggesting it could lead to legal disputes due to its retroactive nature.

The firm noted that Nigeria’s tax policy traditionally avoids retroactive taxation. Thus, imposing a windfall tax after banks have already settled their 2023 tax liabilities could lead to a constitutional crisis.

Also, KPMG noted that this retroactive application contradicts the principle of legitimate expectations, wherein businesses plan their finances based on existing tax laws and expect stability and predictability in the fiscal environment.

The concerns raised by PwC and KPMG are reflective of broader fears within the financial sector and the investment community. Economists and stakeholders are particularly worried that the proposed windfall tax could have several negative consequences.

Analysts argue that the unpredictability and retroactive nature of the tax could deter future investments, both foreign and local. This is because investors seek stable and predictable environments, and any perception of fiscal unpredictability can lead to capital flight and reduced investment inflows.

This means the proposed tax could destabilize financial markets by introducing uncertainty and reducing investor confidence. Also, banks and other financial institutions may face challenges in planning and managing their finances, leading to broader economic instability.