Nigeria plans to introduce a new tax on money banks make due to the changing value of foreign currencies. This tax could add up to 0.3% to Nigeria’s Gross Domestic Product (GDP) in 2024. This helps the country get more money to address current economic challenges.
This information comes from Moody’s Investors Service, an American company that rates the creditworthiness of businesses. However, Moody’s thinks this tax is bad news for banks.
Moody’s said: “For the government, this new tax might bring in revenue equal to 0.3% of the GDP in 2024. While this may seem small, it’s significant since the government collected only about 9% of GDP as tax in 2023. But remember, this is a one-time thing.”
On July 17, 2024, Nigeria announced this 50% tax to raise money for important projects and to add N6.2 trillion ($4 billion) to the national budget.
Banks to Lose Some Profits
The new tax has made banks worried because it might reduce their profits. This could mean less money to cover bad loans and lower the amount banks can save. Both are important for the health of banks.
Moody’s explained, “The tax will take away from bank profits needed for bad loans and savings, which affects their financial health.”
This is particularly concerning for banks already struggling to meet financial standards.
In 2023, banks in Nigeria made a lot of money because the value of the Nigerian Naira dropped by 37% in June. This led to big gains in foreign currencies.
Eight out of nine banks rated by Moody’s made a total pre-tax profit of N3.5 trillion in 2023, compared to N1.1 trillion in 2022.
A third of these profits came from the money they made due to the change in value of foreign currencies.
Moody’s said, “We estimate over a third of the profits came from foreign-currency revaluation. However, it’s unclear how much of these gains will be taxed since the government’s rules are not clear yet.”
“These 2023 gains include unrealized ones, meaning some profits are on paper only. So, how the tax will be applied is still a guessing game. Considering banks already paid a 30% corporate income tax for 2023, a less harsh 20% extra tax on these gains would complete the 50% windfall tax.”
“But if the government decides on another 50% tax, it could take away up to 6% of the total equity (shareholders’ funds) of the banks we rate.”
What This Means
- President Bola Tinubu previously asked the senate to change the 2023 finance act to include a one-time tax on banks’ foreign exchange gains for the 2023 financial year.
- If banks do not pay the tax, they could face a penalty of 10% plus interest at the Central Bank of Nigeria’s (CBN) minimum rate, and key officials could go to jail.
- The new tax has sparked discussions about its timing and legality, with major tax experts weighing in.
- KPMG Nigeria criticized the 50% windfall tax, saying it could lead to legal challenges because Nigeria’s tax system does not support retroactive taxes.
- PwC Nigeria warned that this unpredictable tax on reported profits for 2023 could scare away investors.
- Lawyer Olisa Agbakoba said the proposed amendment is poorly thought out and beyond the authority of the National Assembly. If passed, he believes banks’ customers will ultimately bear the cost.
- On Tuesday, the Nigerian senate not only passed the amendment for the 2023 Finance Act but also increased the windfall levy on banks’ foreign-currency gains from 50% to 70%.
- Additionally, the senate extended the tax’s application from the end of 2023 to all profits from foreign exchange transactions from the new forex policy’s start to the 2025 financial year, as mentioned in clause 2 of the amendment.