Introduction

On July 17, 2024, the Federal Government of Nigeria sent a letter to the National Assembly proposing, among other things, an amendment to the Finance Act, 2023. The executive bill titled, “A Bill for an Act to Amend the Finance Act, 2023 to impose and charge Windfall Tax on Banks and Provide for the Administration of the Tax and for Related Matters” (the “Bill”) was passed by separately by the Senate and the House of Representatives and is currently awaiting the assent of the President.

The Bill essentially seeks to amend the Finance Act, 2023 to provide for the imposition of a windfall tax, assessment and review of profit declarations and deferred payment agreements for financial institutions by the Federal Inland Revenue Service (the “FIRS”).¹ The Bill seeks to generate additional revenue for crucial projects in Nigeria. It is a one-time windfall levy aimed at addressing the substantial gains made by Nigerian banks as a result of changes in exchange rates.

The Proposed Tax on Foreign Exchange Gains: Changes to note

Section 2 of the Bill introduces new sections 30 to 33 to the Finance Act, 2023 which provide as follows:

1. The proposed section 30 provides for a levy of 70% to be paid on the realised profits from all foreign exchange transactions of banks within the 2023 to 2025 financial years to the benefit of the Federal Government of Nigeria. It extends the tax’s applicability from the end of 2023 to all profits from foreign exchange transactions through 2025 and applies from 1 January 2023.
2. The proposed section 31 provides that the FIRS shall assess the realised profits, collect, account and enforce payment of tax payable under section 30 in accordance with its powers under the statute establishing it; and enter into a deferred payment agreement with the assessed banks, provided that such deferred payment agreement is executed on or before December 31, 2024.
3. The Bill further provides in section 32 that any bank that fails to pay the windfall tax to the FIRS and has not executed a deferred payment agreement before 31 December 2024, commits an offence and shall, upon conviction, be liable to pay the tax withheld or not remitted in addition to a penalty of ten percent (10%) of the tax withheld or not remitted per annum and interest at the prevailing Central Bank of Nigeria minimum rediscount rate. The principal officers of such bank will also be liable to imprisonment for a period not exceeding three (3) months.
4. The proposed section 33 defines “financial year” for the purpose of the amendments to the Finance Act to mean, “either the year commencing from 1st January, 2023 to 31st December, 2023 or/and 1st January, 2024 to 31st December, 2024 or any period within the financial years not aligned with the calendar year comprising twelve calendar months of the bank’s financial activity”, while “bank” has been defined as, “any bank licensed to carry out exchange transactions under the Banks and other Financial Institutions Act, 2020 and all other relevant Nigerian laws”.

Potential implications

The proposed levy introduced by the Bill raises several concerns and may have the following implications:

1. The levy may amount to double taxation, given that it is paid on the realised profits from all foreign exchange transactions of banks which are usually reported as part of the banks’ income for which relevant taxes are paid.² It is not clear whether the obligation to pay the levy will supersede the banks’ obligation to pay income tax under section 9 of the Companies Income Tax Act on profit realised from foreign exchange transactions in each year. It remains to be seen if the FIRS clarifies this point before the levy is implemented.
2. Given that banks have filed their tax returns for 2023 and may have paid the relevant income tax as assessed which invariably includes the income realised from foreign exchange transaction, it is not clear how the provisions of the Bill will be implemented for the year 2023.
3. It is well known that enactments do not operate retrospectively under Nigerian law, unless the enactment states in clear words that its provisions should take effect from an earlier date.³ This is to prevent uncertainty and maintain fairness. As such, given that the proposed section 32 of the Finance Act, 2023 provides that the levy shall apply from January 1, 2023, the banks will be obligated to pay the levy from the said date irrespective of the date on which the Bill is signed into law.
4. It may also be argued that the provisions of the Bill run contrary to the principles of equity, fairness and legitimate expectations in taxation. The National Tax Policy requires the Nigerian tax system to be fair, equitable and devoid of discrimination. Horizontal equity demands that person in equal circumstances should pay the equal taxes. There are other businesses that hold monetary assets in foreign currency and who would have earned realised forex profits if such assets were disposed in 2023 or will be settled in before the end of 2024. It is therefore arguable that, it is inequitable for the Bill to limit the levy to banks. Additionally, in relation to profit from realized foreign exchange transactions in 2023, since the banks have carried on business and filed their returns based on the law as of 2023, it may be contrary to the doctrine of legitimate expectation to amend the tax law in a manner that requires them to pay an additional levy.⁴
5.  Given the speed with which the Bill was passed by both houses of the National Assembly, it is unlikely that there was any form of consultation with stakeholders or that a public hearing was conducted on the Bill. Moreso, the Bill does not provide for any incentive which ought to encourage banks to pay the levy. It is international best practice for the Federal Government of Nigeria to provide tax incentives where it imposes windfall taxes.

Conclusion

Windfall tax specifically targets the significant profits banks made due to the Naira’s devaluation in 2023. The rationale behind this levy is to capture excess profits made from FX transactions, which are considered extraordinary profits arising from market conditions rather than core banking operations. If the windfall levy extends beyond the banking sector it could end up directly affecting other sectors of the economy such as the petroleum industry and telecoms industry and could see an increase in their tax burden. This in turn could have a down-stream effect on the consumer due to price-hikes in goods and services to makeup.

1. See the Explanation Memorandum to the Bill as passed by the House of Representatives.
2. By section 9 of the Companies Income Tax Act (CITA), companies, including banks, are mandated to pay tax on their worldwide income, which invariably includes profits realised from foreign exchange transactions for the relevant year.
3. See Section 6(1)(b) and (c) of the Interpretation Act as well the decision of the Court of Appeal in Eze v. Governor of Abia State (2010) LPELR-4133 (CA)and the Judgment of the Federal High Court in Accugas Limited v. FIRS, Suit No.: FHC/ABJ/CS/1289/2020.
4. Although contrary statutory provisions may limit the doctrine of legitimate expectation, it may be argued that such provisions must be in existence at the time the expectation was created. For newly enacted statutes with retrospective application, there is already a legitimate expectation on the part of the taxpayer based the provisions of the extant law at the time of business.