FIRS Boss Pushes For 50% Windfall Tax On Banks, Says It’ll Balance Reduced Tax Revenue From Manufacturing Sector

On Monday, Finance Minister Wale Edun and Federal Inland Revenue Service (FIRS) Chairman Zacch Adedeji appeared before the Senate Committee on Finance to support a proposed amendment to the Finance Act 2023. The bill seeks to impose a 50 per cent tax on foreign exchange gains reported by commercial banks in Nigeria for 2023.

Adedeji began by disclosing that Nigeria’s manufacturing sector suffered a total loss of N1.7 trillion last year due to severe foreign exchange (forex) challenges, leading many companies to halt operations.

This significant loss impacts tax revenues, as current laws prevent tax collection from companies until they recoup their losses. That could potentially defer tax collection for up to a decade, even if companies return to profitability in subsequent years.

His words: “I don’t know anybody that followed in the last one year, all manufacturing entity in Nigeria, they declared a total of 1.7 trillion in loss just as a result of forex. (This) concerns the government because by our laws we will not be able to collect any taxes from them until they recover all those losses – till next 5, 10 years”.

The departure of foreign manufacturers, a trend that has accelerated under the administration of President Bola Tinubu, has worsened the economic strain. Major corporations like GlaxoSmithKline, Procter & Gamble, Sanofi, and Equinor have ceased operations in Nigeria.

Numerous others, like MTN Nigeria,  Nestlé Plc, and TotalEnergies, reported huge losses from operating in Nigeria. These firms cited forex issues, naira devaluation, insecurity, or reduced revenue.

Adedeji stressed that these exits have severely impacted tax collection, so fiscal strategies must be recalibrated. He said the manufacturing sector has made a N1.7 trillion loss due to the FX; based on that, the agency cannot tax them.

“So, it is not that we are going after the profit, it is that we are recovering the losses that we have from the other side of the economy. So I want us to look at it from that perspective. It is not only that we are focusing on the bank, manufacturing which by law should pay us taxes, suffered because of the activities that are not as a result of their own ineptitude”, he said.

He claimed that failing to enforce tax obligations could undermine investor confidence in the government’s economic management. Finance Minister Edun also supported the windfall profit levy on banks. According to him, banks profited significantly from forex transactions due to government policy changes, not their ingenuity.

How Windfall Tax Will Deter Future Investments

Despite the positive outlook of government authorities, the proposed legislation has raised serious concerns. Tax firm PricewaterhouseCoopers (PwC) warned that taxing already reported profits could deter future investments and destabilise financial markets.

In its statement titled, “The Windfall Tax Conundrum: navigating the fiscal impact on Nigerian banks”, the firm said:

“By taxing profits already realised and reported, the government risks being perceived as unpredictable, which could deter future investment and destabilise the financial markets.”

The firm explained that implementing the windfall tax could face legal and fairness challenges. It could also scare off investors by creating uncertainty about taxes.

Additionally, the difference between the usual 30 per cent company income tax and the proposed 50 per cent windfall tax on banks might confuse banks about managing their expenses and profits.

As earlier reported, a shareholders’ association vehemently kicked against the levy, saying the government should instead focus on improving production.

KPMG also criticised the proposal, saying it could lead to legal issues. They argued that since most banks have already paid their taxes for 2023, imposing this tax now could cause a constitutional problem and go against the country’s tax policy, which is not supposed to be retroactive. In the context of tax policy, a retroactive tax would be one – such as Tinubu’s proposed windfall levy- imposed on income or activities that occurred before the tax law was enacted. This can create legal and fairness issues, suddenly changing existing tax laws.

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