70% windfall tax policy against Nigeria’s tax policy philosophy – CIoD

The Chartered Institute of Directors Nigeria (CIoD) says the 70 per cent windfall tax on profits generated from foreign exchange transactions by banks from 2023 to 2025 is against the overriding philosophy of Nigeria’s Tax Policy.

Mr Bamidele Alimi, Director-General, CIoD, said this in Lagos on Thursday in reaction to the National Assembly’s approval of Windfall Tax from an initial 50 per cent proposed by President Bola Tinubu to boost the nation’s coffers.

Alimi noted that the Nigerian Tax Policy grounded in the principles of equity, efficiency, and simplicity, was geared towards creating an enabling environment for businesses to thrive and promoting investment.

He said the windfall tax successful implementation in some advanced countries was not enough reason for a wholesome application in Nigeria at the moment, because it negates the overriding philosophy of Nigeria’s Tax Policy.

Alimi stated that having to remit windfall tax for the 2023 financial year when audited reports had been submitted and dividends allocated to shareholders was ill-timed.

He added that banks were currently engaged in recapitalisation to meet the Central Bank of Nigeria’s (CBN) minimum capital requirements.

According to him, the imposition of such a high tax could divert essential funds away from these efforts, hampering banks’ ability to strengthen their capital bases.

“The financial year of banks ends in December 2023 and expectedly, banks are to submit their Audited Reports to the Central Bank of Nigeria (CBN) and other stakeholders by 31st of March 2024 and publish not later than 21 days after submission.

“This implies that all the banks must have done this to avoid sanctions and dividends allocated to shareholders so to have them remit the 2023 windfall tax on foreign exchange transactions, after all these activities, is nothing but retroactive.

“This is particularly concerning given the strict definitions of paid-up share capital, which leaves banks with limited options for raising necessary funds. A high windfall tax could lead to a decline in share prices, further complicating their financial stability,” he said.

The CIoD D-G said another significant concern with the high windfall tax was its potential to reduce the lending capacity of banks.

He noted that while financial institutions played an important role in providing loans to individuals and businesses, an excessive tax burden on banks could lead to reduced available capital for lending, thereby slowing economic activities.

Alimi added that the development may negatively affect Nigeria’s appeal to foreign investors in the banking sector, make them competitively disadvantaged and could lead to reduced Foreign Direct Investment (FDI).

“Finally, the high windfall tax could also negatively impact shareholder returns as shareholders expect dividends and returns on their investments, which are largely dependent on the profitability of banks.

“While we recognise the urge to rejig the economy on record time and the importance of this tax policy in fostering economic stability, we believe that the windfall tax is ill-timed, excessively high, and not fit for purpose given current economic realities,” he said.

Alimi instead advised the government to lower the windfall tax rate gradually over the years to give banks time to adjust, and implement a threshold below which the windfall tax would not apply, protecting smaller banks and fostering competition.

He called for tax credits or exemptions for banks that invest in innovation, technology, and financial inclusion initiatives and the exploration of alternative revenue sources to reduce reliance on windfall taxes.

“While the intention behind the Bank Windfall Tax policy may be to generate additional revenue for the government, the potential negative implications for the banking sector and the broader economy are significant.

“We urge the government to reconsider the policy, to find a balance that ensures both revenue generation and the continued growth and stability of the banking sector,” he said.