FG’s forex gains tax to impact bank’s credit rating, says Moody
Moody’s Investors Service has issued a warning that the federal government’s proposed one-off 50 per cent tax on banks’ foreign-currency revaluation gains may negatively impact the credit ratings of banks, despite offering a temporary fiscal boost amid Nigeria’s ongoing economic challenges.
According to Moody’s, 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, making it a credit negative for the sector.
The global credit agency also stated that the planned tax could generate up to 0.3 per cent of the country’s GDP in 2024.
“For the government, we estimate the windfall tax may yield revenue of as much as 0.3 per cent of 2024 GDP. Although this is not negligible given the government’s small tax intake of around 9 per cent of GDP in 2023, it remains marginal and only a temporary revenue measure,” Moody’s stated.
Announced on July 17, 2024, the one-off 50 per cent tax aims to raise funds for infrastructure and other critical spending, contributing to a N6.2 trillion addition to the national budget.
The windfall tax has raised concerns within the banking sector due to its potential to significantly reduce profits available for provisioning against problem loans and for transfers to retained earnings, which are essential components of regulatory capital
In 2023, Nigerian banks reported record profits largely driven by the naira’s 37 per cent devaluation 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.
“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 per cent windfall tax will be achieved,” Moody’s noted.
President Bola Tinubu had earlier written to the Senate seeking to amend the 2023 Finance Act to introduce the payment of a one-time windfall tax on the foreign exchange revaluation profits of banks in the 2023 financial year.
The amendment specifies that if banks fail to remit the required amount to the appropriate authority, they will, upon conviction, be required to pay the withheld tax along with a 10 percent penalty and interest at the Central Bank of Nigeria’s (CBN) minimum discount rate. Additionally, key principal officials may face imprisonment.
The proposal has sparked debate about its timing and legality, with major tax and advisory bodies weighing in.
KPMG Nigeria criticized the 50 per cent windfall tax on the banks’ foreign exchange revaluation gains recorded in 2023, suggesting it could lead to legal disputes.
The firm highlighted that Nigeria’s tax policy does not support retroactive taxes. PwC Nigeria expressed concerns that the unpredictability of the windfall tax, applied to already reported profits for 2023, could discourage investments.
The Nigerian Senate recently passed the amendment bill of the 2023 Finance Act, increasing the windfall levy on banks’ foreign exchange revaluation gains from 50 per cent to 70 percent.
The timeline for the application of the windfall levy was also extended from the end of 2023 to all profits from foreign exchange transactions from the beginning of the new forex policy to the 2025 financial year, as stipulated in clause 2 of the amendment.
