In 2023 over weak naira Nigeria earns from foreign taxes nearly doubled

Nigeria has experienced a significant upsurge in tax revenues generated from foreign companies, with figures nearly doubling within a year.

This substantial fiscal boost can be attributed to the depreciation of the naira, which has elevated the value of foreign transactions concerning non-import Value Added Tax (VAT) and Foreign Company Income Tax (CIT) payments in the local currency.

According to the latest data from the National Bureau of Statistics (NBS) for 2023, Nigeria's revenue from foreign-related Value Added Tax (VAT) surged by 61%, reaching N824.6 billion, a notable increase from N510.8 billion in 2022.

More strikingly, there has been a 107% surge in Corporate Income Tax (CIT) from foreign entities, soaring from N1.14 trillion in 2022 to N2.38 trillion in 2023.

Collectively, the total tax revenue from these sources increased by 93%, from N1.66 trillion in 2022 to N3.21 trillion in 2023.

While the rise in tax revenue is a positive development for Nigeria's finances, it also underscores the country's vulnerability to exchange rate risks.

The current uptick in tax earnings is largely driven by the depreciation of the naira, which, though beneficial in the short term, may obscure underlying weaknesses in the economic framework.

Foreign payments accounted for 49% of the 2023 CIT earnings Nigeria's Company Income Tax (CIT) collections witnessed a remarkable 73.14% surge in 2023, totaling N4.9 trillion. This substantial growth underscores the significant contribution of foreign firms to Nigeria's economy, with nearly half of this amount, precisely 49%, attributed to foreign CIT.

Conversely, Value Added Tax (VAT) collections presented a slightly different picture. While still significant, the impact of foreign firms on VAT was less pronounced compared to the CIT sector. Foreign entities contributed 23% to the total VAT collections, which amounted to N3.64 trillion for 2023.

This financial landscape highlights the crucial role played by international businesses in bolstering Nigeria's tax revenue, particularly in the CIT sector.

Additional Insights

In June 2023, the Central Bank of Nigeria (CBN) announced the unification of all segments of the forex market, consolidating all windows into one. This was intended to enhance liquidity and stability in Nigeria's forex market but seemingly led to further instability. Nairametrics previously reported a 68% devaluation of the naira, indicating a significant downturn since the implementation of the foreign exchange unification policy. The depreciation of the naira has resulted in broad economic ramifications, including increased import costs, rising inflation rates, diminished purchasing power, and a deterrent effect on investment inflows.

Despite this, the Governor of the CBN, Mr. Yemi Cardoso, asserted that the naira is undervalued. He mentioned that the apex bank is committed to achieving real price discovery in the foreign exchange market in 2024. Cardoso recently attributed the undervalued state of the naira to market distortions and FX speculation. Furthermore, analysts from Goldman Sachs have projected a substantial appreciation of the exchange rate to N1,200/$ within 12 months, representing a significant recovery from its perceived undervalued state.

However, the Economist Intelligence Unit (EIU) has highlighted the significant liquidity crisis faced by the CBN in supporting the naira, as approximately $20 billion of its $33 billion in foreign reserves is tied up in various derivative deals. Nevertheless, the central bank has been actively addressing the FX issue in Nigeria through reforms such as clearing the backlog of forex obligations, which the CBN expects to fully clear within a few days.

Additionally, the CBN plans to establish a single foreign currency (FCY) gateway bank to centralize all correspondent banking activities and provide incentives to individuals holding foreign currencies outside the formal banking system. Other measures include investigating and resolving FX backlogs, restricting forex allocation for overseas education and medical trips, increasing the minimum share capital for Bureau de Change operators, and targeting FX market speculators.