The Pains of A Windfall Tax: Appraising the NASS’s Financial Act Amendment

The power to tax is the power to destroy. – John Marshall

 Outline

• Preamble – The new Finance Bill Amendment and Windfall Tax
• Windfall Gains: Tacking A Back Swing at Taxes
• Between Realised and Unrealised FX Gains
• The Moves on Banks
• Windfall Tax on Revaluation Gains:  The Art of Social and Fiscal Balance

Closing Thoughts

If a person or organization has had a chequered career or history, they have had a varied past with both good and bad periods.

chequered adjective (GOOD AND BAD)

having had both successful and unsuccessful periods in your past: He’s had a chequered business career

Windfall taxes have a chequered global history. Nigeria has had sparing contact with such a tax; the first time a tax on windfall FX gains has been ordered in the last three decades has been the recent amendment of the Finance Bill to retrospectively impose a 50% levy (approved at 70% by the National Assembly) on foreign exchange (FX) gains posted by banks in their 2023 annual financial statements. The FX gains resulted from the government’s harmonisation of the country’s differential exchange rates. While justifiable by the design of a windfall tax policy, regulatory actions that precede the tax imposition (FX market liberalisation, order on non-distribution of FX gains, and cap on Net Open Positions, among others) suggest a deliberate design. Unlike oil sector windfall taxes, which are the outcome of external economic factors such as a major rise in international oil prices, the Nigerian FX windfall tax is the consequence of an internal decision by the government to harmonise the exchange markets and thereby devalue the domestic currency. The outcome has been a restatement of corporate comprehensive incomes for the previous year and a re-evaluation of Proshare’s Tier 1 capital report for the class of 2024. 

As passed by the House of Representatives on Tuesday, July 23, 2024, Section 2 subsection 31 (a) of the Bill on the ‘Assessment and Payment of Tax’ of the Finance Act (Amendment) Bill 2024 notes that the Federal Inland Revenue Service ‘shall assess the realised profits, collect, account and enforce payment of tax payable under section 30 in accordance with the powers of the Service under the Federal Inland Revenue Service (Establishment) Act 2007; and observes in section 31 (b) that ‘in the exercise of its functions in 31(a) above, may enter into a deferred payment agreement with the assessed banks, provided that such deferred payment agreement is executed on or before December 31 2024’. This suggests that Nigerian banks will pay tax arrears on liabilities for 2023, which would require a restatement of their accounts by the year-end of December 31, 2024. Additionally, subsection 30 has been revised to extend the implementation period to 2025 financial year. According to the subsection, there shall be levied and paid to the benefit of the Federal Government of Nigeria a levy of 70% on the realised profits from all foreign exchange transactions of banks with the 2023 to 2025 financial year. 

The punishment for non-compliance with the Act would be a further liability of 10% ‘of the tax withheld or not remitted per annum and interest at the prevailing Central Bank of Nigeria minimum rediscount rate and imprisonment of its principal officers for a period of not more than three years‘

Nigeria’s National Assembly (NASS) is not alone in legislating for a windfall tax or a surtax on businesses or industries that have benefited from certain economic conditions to redistribute the excess profits/gains from those businesses and industries to fund social or development projects. The Italian Windfall Tax for Banks at 40% for FY 2023 resulted from a government rate hike, which triggered higher Net Interest Margins (NIM) and yielded record profits for banks. The windfall tax was implemented as the cost of loans soared while lenders held off paying more on deposits. Similarly, the UK’s 25% energy profits levy was imposed as a windfall tax on oil and gas companies that profited from the increase in crude oil prices due to rising demand after Covid restrictions and the impact of Russia’s invasion of Ukraine to compensate households that faced higher energy costs. Within the Nigerian context, applying the tax to FX gains—particularly those resulting from government-led liberalisation and devaluation—introduces a novel precedent (not seen in any other country) with a vocal statement on the country’s FX management and direction. The tax aims to capture unexpected profits from revaluation gains to fund budget deficits without compensating the losers, which is the conventional practice with windfall taxes. This poses considerable risks, including reduced investor confidence and the challenges related to its retroactive application