Nigeria has witnessed a significant surge in tax earnings from foreign firms, with figures nearly doubling in the span of one year.
This significant fiscal boost is likely due to the weakening of the naira, which has increased the local currency’s value of foreign transactions for non-import (foreign) Value Added Tax (VAT) and Foreign Company Income Tax (CIT) payments.
The latest data from the National Bureau of Statistics (NBS) for 2023 indicates that Nigeria’s revenue from foreign-related Value Added Tax (VAT) rose by 61%, with figures reaching N824.6 billion, a significant increase from N510.8 billion in 2022.
More noteworthy is the surge in Corporate Income Tax (CIT) from foreign entities, which has seen a 107% increase, climbing from N1.14 trillion in 2022 to N2.38 trillion in 2023.
Cumulatively, the total tax revenue from these streams rose by 93%, from N1.66 trillion in 2022 to N3.21 trillion in 2023.
While the increase in tax revenue is a welcome development for the country’s finances, it also highlights the Nigerian economy’s exposure to exchange rate risks.
The current boost in tax earnings is significantly propelled by the naira’s weakness, which, while beneficial in the short term, may mask underlying vulnerabilities in the economic framework.
Foreign payments make up 49% of 2023 CIT earnings
Nigeria’s Company Income Tax (CIT) collections surged by 73.14% in 2023, amassing a total of N4.9 trillion. This remarkable growth underscores the significant contribution of foreign firms to the Nigerian economy, with nearly half of this figure, precisely 49%, being attributed to foreign CIT.
On the other hand, the Value Added Tax (VAT) collections painted a slightly different picture. While still noteworthy, the impact of foreign firms on VAT was less pronounced than in the CIT sector. Foreign entities contributed 23% to the total VAT collections, which stood at N3.64 trillion for 2023.
This financial landscape highlights the critical role that international businesses play in bolstering Nigeria’s tax revenue, especially in the CIT domain.
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- In June 2023, the CBN announced the unification of all segments of the forex market, collapsing all windows into one. This was part of an effort to drive liquidity and stability in the forex market in Nigeria. However, this seems to have had a counter-effect, as it triggered further instability in the market.
- Nairametrics earlier reported that the Naira lost about 68% of its value, marking a profound downturn since the implementation of the foreign exchange unification policy.
- The weakening naira has inflicted broad economic repercussions, including heightened import costs, surging inflation rates, diminishing purchasing power, and a deterrent effect on investment inflows.
- However, the Governor of the Central Bank of Nigeria (CBN), Mr Yemi Cardoso said that the naira is undervalued. He added that the apex bank will work towards real price discovery in the foreign exchange market in 2024. Cardoso recently blamed the undervalued state of the naira on market distortions and FX spectators.
- Also, Goldman Sachs analysts recently projected a significant appreciation of the exchange rate to N1,200/$ in 12 months. This amounts to a massive recovery from its perceived undervalued state.
- The Economist Intelligence Unit (EIU), however, said that the CBN faces a significant liquidity crisis in supporting the naira, as nearly $20 billion of its $33 billion in foreign reserves is tied up in various derivative deals.
- Regardless, the central bank has been actively addressing the FX issue in the country with some reforms, such as clearing the backlog of forex obligations which the CBN noted would be fully cleared in a few days.
- Also, the apex bank plans to establish a singular foreign currency (FCY) gateway bank that will centralise all correspondent banking activities and provide incentives to individuals who hold foreign currencies outside the formal banking system.
- Other measures include investigating and resolving FX backlogs, restricting forex allocation for overseas education and medical trips, augmenting the minimum share capital for BDCs, and targeting FX market speculators.
