THE current revenue challenges being experienced by government and the need to enhance debt sustainability have triggered a lot of revenue mobilization drives like windfall tax, mop up of Dormant Accounts and unclaimed balances among other policies that are closing the window of free monies hitherto used by Deposit Money Banks in playing their financial mediation roles.

Bankers have been reacting to the latest directive by the CBN, requiring Deposit Money Banks to transfer funds from Dormant Accounts, unclaimed balances above 10 years for onwards investment in Nigerian Treasury Bills (NTBs) and other government securities.

This is according to the newly released “Guidelines on Management of Dormant Accounts, Unclaimed Balances, and Other Financial Assets in Banks and Other Financial Institutions in Nigeria,” by the CBN.

This guidelines shall take effect from the date of issue and may be reviewed from time to time by the CBN it said.

The debate began when the Finance Act 2020 was signed into law by former president Muhammadu Buhari.

The Federal Government said then, that any unclaimed dividends of a public limited liability company quoted on the Nigerian Exchange Limited (NGX) and any unutilised amounts in a dormant bank account maintained in or by a deposit money bank, which has remained unclaimed or unutilised for a period of not less than six years from the date of declaring the dividend or domiciling the funds in a bank account, shall be transferred immediately to Unclaimed Funds Trust Fund.

But a Federal High Court sitting in Abeokuta blocked the federal government from taking unclaimed dividends.

These monies if left with the banks may form part of their loanable /investable funds.

According to the Securities and Exchange Commission, the value of unclaimed dividends was N190 billion as of August 2023. Also, in March 2022, the House of Representatives ad hoc committee investigating unclaimed funds in commercial banks has said it uncovered N300 billion unclaimed funds in some commercial banks.

The funds being targeted by the CBN are all dormant accounts and unclaimed dividends both estimated to over N490 billion.

According to the new guidelines, the CBN will create and manage a dedicated account called the “Unclaimed Balances Trust Fund (UBTF) Pool Account” to warehouse unclaimed balances.

The new guidelines define eligible accounts as those that have remained dormant for ten years or more.

This is coming few days after President Bola Tinubu requested for the approval of additional N6.2 trillion which raised the 2024 budget from N28 trillion to N34tillion.

To fund the budget, the federal government is also planning to tax foreign exchange gains of banks.

The Federal Government of Nigeria is seeking to tax the realized profits from all foreign exchange transactions of banks in the 2023 financial year. This measure is contained in the Finance (Amendment) Bill 2024.

The Bill provides for a one-off tax of 50 percent on such realized profits. The Federal Inland Revenue Service (FIRS) will assess and collect the amount due, though the banks have the option to settle the windfall tax in installments.

However, the FIRS must approve such installment plan on or before 31 December 2024. Where a bank has not executed an installment plan or paid the additional tax due, such bank will be guilty of an offense and shall, on conviction, be liable to pay the tax due plus a penalty of 10 percent per annum and interest at the prevailing Central Bank of Nigeria’s minimum rediscount rate.

The principal officers of such defaulting bank may also face imprisonment for a period of not more than 3 years.

According to the Partner and Head, Tax, Regulatory and People Services KPMG Nigeria, Wale Ajayi, Nigeria’s tax policy frowns at retroactive application of tax laws, but the government has chosen to implement this windfall taxes retroactively. Moreover, many of these banks have submitted their tax returns for the 2023 financial year and have settled the resultant liability. The impact of this retroactive application may raise constitutional concerns as it may violate the principle of legitimate expectations.

“It will, therefore, not be surprising if the implementation leads to legal disputes and challenges. Retroactive tax laws can discourage investment as potential investors may perceive the Nigerian tax system as unpredictable.

“The uncertainty will make it challenging for businesses to anticipate their tax obligations and may be suspicious that the tax will be repeated in future. Today, it is the banking sector. Who says that it cannot be extended to other sectors tomorrow.

“The proposed law imposes 50 percent tax on realized forex gains of banks. However, in their 2024 tax returns, these banks would have paid 30 percent income tax on such profits. The question, therefore, is whether such banks would only pay additional 20 percent on such profits. This needs to be clarified to avoid unnecessary disputes and double taxation; otherwise, the same income would be taxed twice.

“Any business that holds monetary assets in foreign currency would have earned realized forex profits if such assets were settled during 2023. The question is why are only banks singled out for this treatment?

“One of the fundamental principles of the National Tax Policy is equity and fairness. The Tax Policy requires the Nigerian tax system to be fair and equitable and devoid of discrimination. Why would we need a tax policy that we cannot uphold?

“Currently, banks are embarking on a recapitalisation drive to meet the minimum capital requirements stipulated by the CBN in respect of the various banking licences. Given the strict definition of paid-up share capital, banks have very limited options for meeting the new capital requirements. “Thus, the threat posed by the proposed windfall tax is an unnecessary distraction that the banks do not need at this time. It is, therefore, important that the Ministry of Finance engage with the CBN and the banks to critically evaluate the implications on the ability of the banks to raise capital. “It is likely, that in the short term, the share price of these banks may be adversely affected, “ Ajayi regretted.

He noted that there are many issues that the proposed implementation of the windfall tax will trigger, and these should be carefully examined before the enabling law is enacted.

These include the following:It is always important that any proposed change in tax law or policy be subjected to a period of technical consultation. This will provide government with the opportunity to obtain feedback from all stakeholders and timely address unintended consequences.

His words: “We are not aware that any consultation of this nature has been held. We suggest that such consultation be carried out before the enactment of the proposed amendment.

“Various reports have indicated that Government may realize about N6.2trillion from the windfall tax. However, there is no publicly available policy-costing document on this. This lack of transparency has been the bane of policy formulation in the country. It is always important that the public be presented with tax expenditure statement showing how much will be generated from the introduction of a new tax. It will also afford the public the opportunity to review the reasonableness of the assumptions underpinning the revenue target.”

Interestingly, available reporting also indicates that about 50 percent of the amount to be generated will be spent on recurrent expenditure!

One thing that is missing from the Amendment Bill is tax relief for the banks that will be subject to the windfall tax.

Available evidence shows that anywhere a windfall tax has been introduced, it makes sense to introduce some form of tax relief, such as investment allowance, to cushion the impact. This will encourage the banks to spend and, in turn, accelerate economic growth.

These are coming at a time when some bankers have expressed the opinion that while the Central Bank prefers banks to retain most of their earnings to reinforce their capital base, it should not concurrently prevent them from counting these undistributed earnings as part of their capital.

In accounting terms, retained earnings are considered a component of a company’s equity because they represent profits that have not been distributed as dividends but are instead reinvested in the bank

According to the Chief Executive of ADRAC Professional Services Consulting, Dr Adedeji Awobotu in a position paper gave reasons why retained earnings should be considered for Capitalisation.

According to him, retained earnings represent a bank’s accumulated profits that have not been distributed to shareholders but retained for reinvestment. Utilizing these earnings can strengthen a bank’s capital base, enhancing its stability and solvency.

“Using retained earnings for recapitalization signals to investors that the bank has generated enough profits to support growth plans, bolstering market confidence in its ability to operate profitably.

“Utilising retained earnings for recapitalization preserves existing shareholders’ ownership stakes, maintaining confidence and protecting their interests during the process, “ he stated.

Overall, including retained earnings in Nigerian banks’ recapitalization efforts is deemed justified, providing a stable source of internally generated capital that enhances financial strength, market confidence, and shareholder value preservation.

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