Nigeria’s windfall tax on banks’ forex gains is credit negative: Moody’s

The proposed windfall tax on Nigerian banks by the government will significantly reduce the profits available to the lenders for problem-loan provisioning and transfers to retained earnings, which form part of regulatory capital, Moody’s said on Wednesday.

On 17 July, the Nigerian presidency announced a one-off 50% windfall tax on Nigerian banks’ foreign-currency revaluation profits in 2023 to raise funding for infrastructure and other critical spending as part of a N6.2 trillion addition to the 2024 budget.

The government expects the tax to be implemented as part of a bill amending the country’s Finance Act 2023, which has been sent to the legislature for approval.

“The windfall tax will have a particularly negative effect on banks whose capital adequacy is close to regulatory thresholds,” Moody’s said in a statement.

The tax follows record profits declared by banks in 2023, largely because of foreign-currency- revaluation gains related to the naira’s massive devaluation of 37% in June 2023. 

The tax is in line with the Central Bank of Nigeria’s September 2023 policy prohibiting banks from using foreign-currency-related profits for operational expenses and dividends.

Moody’s said: “Eight of the nine Nigerian banks we rate reported in excess of NGN3.5 trillion in aggregate pretax profits in 2023 versus NGN1.1 trillion in 2022, and 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 unrealised gains, which may affect how the tax is applied, particularly as the government has not been clear how the 50% windfall tax will be achieved.

The severity of the negative effect of the tax on banks’ foreign-currency-related profits is also not yet known because details are not yet available.

“Given banks have already been subject to the standard 30% corporate income tax rate for 2023, in a less aggressive scenario a surplus tax of 20% on the foreign-exchange gains would equate to the total 50% windfall tax. It is also possible the government may pursue an additional 50% windfall tax on banks’ foreign-currency revaluation gains, which we estimate would equate to as much as 6% of the aggregate equity (shareholders funds) of banks rated by us.

“For the government, we estimate the windfall tax may yield revenue of as much as 0.3% of 2024 GDP. Although this is not negligible given the government’s small tax intake of around 9% of GDP in 2023, it remains marginal and only a temporary revenue measure.

“The central bank has yet to make a public statement about the tax, but we believe it may gain approval before the end of July once the appropriate legislative approval has been secured. Banks would need to fully comply with the windfall tax directive by 31 December.”