Nigerian Government introduces a windfall tax at 70%

The Nigerian government, under President Bola Tinubu’s administration, has proposed an amendment to the Finance Act, 2023, aimed at imposing a one-time windfall tax on the foreign exchange gains realized by banks within the 2023 financial year. This proposal, contained in the Finance (Amendment) Bill, 2024, seeks to levy a 70% tax on these gains, with provisions for assessment, deferred payment agreements, and retroactive application

What is Windfall Tax?

Windfall taxes are specialized levies imposed on entities that experience sudden and substantial financial gains, often referred to as “windfalls.” These unexpected profits can result from various factors, such as significant changes in market conditions, the discovery of natural resources, or shifts in government policy.

Historically, several jurisdictions have introduced windfall taxes with varying degrees of success and controversy. These taxes are typically applied prospectively, ensuring businesses can plan for them, although there are instances of retrospective application.

1. Legal Challenges:
   Applying the windfall tax retrospectively raises legal concerns.
2. Foreign investments: The Windfall Tax can discourage foreign investments, as investors can view the Nigerian economic system as unpredictable and unstable.
3. ⁠Liquidity Challenges: Banks may face liquidity challenges, which may in turn affect the ability of businesses to finance their operations.
4. ⁠Administrative Challenges: The implementation and collection of the Winfall Tax is the responsibility of the FIRS, this can put a strain on the Revenue service manpower and available resources.

Conclusion

It is understandable that generation of revenue through the Windfall Tax on foreign exchange gain is the Government objective, a more balanced and inclusive approach is encouraged to achieve the government objectives without suddenly affecting economic activities.