Nigeria’s proposed windfall tax on foreign-currency revaluation gains of Nigerian banks could generate up to 0.3% of the country’s Gross Domestic Product (GDP) in 2024, offering a temporary fiscal boost amid ongoing economic challenges.
This is according to American-based credit rating agency, Moody’s Investors Service (Moody’s), which warned that such a tax is a credit negative for the banks.
Moody’s noted: “For the government, we estimate the windfall tax may yield revenue of as much as 0.3% of 2024 GDP. Although this is not negligible given the government’s small tax intake of around 9% of GDP in 2023, it remains marginal and only a temporary revenue measure.”
Announced on 17 July 2024, the one-off 50% tax aims to raise funds for infrastructure and other critical spending, contributing to a N6.2 trillion ($4 billion) addition to the national budget.
The windfall tax has sparked concerns within the banking sector due to its potential to significantly reduce the profits available for provisioning against problem loans and for transfers to retained earnings, which are essential components of regulatory capital.
According to Moody’s Investors Service, “the tax will significantly reduce the profits available to banks for problem-loan provisioning and transfers to retained earnings, which form part of regulatory capital, both credit negative for the sector.”
This is particularly concerning for banks operating close to regulatory capital thresholds.
In 2023, Nigerian banks reported record profits largely driven by the naira’s devaluation of 37% in June, resulting in substantial foreign-currency revaluation gains.
Eight of the nine banks rated by Moody’s recorded aggregate pre-tax profits exceeding N3.5 trillion in 2023, compared to N1.1 trillion in 2022.
About one-third of these profits stemmed from foreign-currency revaluation and trading gains. However, the exact portion of these gains subject to the windfall tax remains uncertain, according to Moody’s.
Moody’s noted, “we estimate that over a third of the profits were from foreign-currency revaluation and trading gains. It is unclear, however, what proportion of the revaluation gains will be taxed, given the differences between trading and revaluation gains.
“Additionally, the 2023 revaluation gains include unrealized gains, which may affect how the tax is applied, particularly as the government has not been clear how the 50% windfall tax will be achieved.
“The severity of the negative effect of the tax on banks’ foreign-currency-related profits is also not yet known because details are not yet available. Given banks have already been subject to the standard 30% corporate income tax rate for 2023, in a less aggressive scenario a surplus tax of 20% on the foreign-exchange gains would equate to the total 50% windfall tax.
“It is also possible the government may pursue an additional 50% windfall tax on banks’ foreign-currency revaluation gains, which we estimate would equate to as much as 6% of the aggregate equity (shareholders funds) of banks rated by us.”
