It’s 17:00 WAT Tweeps! It’s another episode of #TaxWiseNG. Episode 3 of our weekly tweetax session. Our focus today is on the level of attention that businesses pay to tax affairs. Let’s title this episode “Tax as a C-Suite conversation”.
C-Suite is a term used in referring to the most senior executives in an organisation. C stands for “Chief”. Call them the “Ogas at the top”. You know all the big offices are defined as Chief “Something”. Chef Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Information Officer, and the likes .
It’s interesting how we often pay more attention to less important things and overlook critical issues. This analogy is true in every spheres – whether social or business. I often wonder how organisations hire team of eloquent salesmen to market products and services to grow the top line.
The production department is manned by specialists and engineers with some working in shifts. Most companies have a purchasing or procurement department as part of everyday operations. Many of these departments and functions are well staffed with large headcount. Headcounts and pay-packs in these departments immediately tells you how important they are deemed to the business. If you ask the same organisation how many people they have in the Finance function, you’ll be amazed.
Think about it! You hire so many people to make the money and practically no one to manage the finance! As if that isn’t bad enough, many organisation would boast of having a “strong” finance team, but a low level officer looks after tax. Only very few companies have established a dedicated tax department to manage its tax affairs.
Many companies have turnover running into hundreds of millions and even billions, in whatever currency. Think about the portion of the business bottom-line that gets paid out in taxes! Why won’t enough attention paid to that? Take direct taxes for example. There is Company Income Tax (CIT) at 30% and Tertiary Education Tax (TET) at 2%. Assume, for simplicity, that the rates are applied on profit before tax (PBT) numbers. There are potential Capital Gains Tax (CGT) that may arise in the business at 10%.
As clients are billed and customers make payments, there is need to manage withholding tax (WHT) they deduct from invoices and fee notes. The profitability and cashflow impacts of deducting 5% or 10% from the invoice value is huge! The company is not only suffering deduction, it also have an obligation towards its vendors. The law requires that the companies withhold appropriate taxes from vendors’ invoices and payments.
Sometimes, the rule regarding what rate to apply may be unclear but the penalties for a wrong call or delay are certain. Should it 5% or 10% or will treaty benefits apply? God help you if you deduct 5% when it should be 10%. Penalty beckons. Deciding on whether the service qualifies for WHT deduction is even a task of its own. Wrong judgment creates a direct impact. Whenever the company makes a wrong judgment, there are potential penalties that hits the bottom-line.
Value Added Tax (VAT) can’t be ignored. VAT rate may be 5% but penalties for non-compliance can be multiples of that. I have seen huge cashflow burden been borne by companies through mismanagement of VAT. VAT becomes a huge cashflow burden without proper tax skills.
Employees-related taxes and social security deductions is another world of its own. Managing the various tax authorities. Many of these obligations require monthly filing and/or payment. VAT, WHT, PAYE tax are monthly obligations. With due dates and penalties for non-compliance. Besides, there are annual compliance obligations requiring adequate skills to ensure optimality.
All of these, as important as they are, are just a part of the operational sides of tax management. There is strategic tax planning and tax risk management which requires a lot more, in skill and resources. How could a company possibly have these obligation and assign an overseer on a “need basis”?
For every N100 profit, about N32 may get paid out in income and education taxes. For every N100 payable to a vendor, N10 may be potentially payable as WHT. Let’s even argue its N5. Tax payments are generally time-bound. Failure to meet deadlines or under-payment attracts interest and penalties.
Tax authorities are becoming more aggressive, more sophisticated, more demanding, sharing information and collaborating more The world of taxation has changed (and still changing) and there is no going back.
Corporate governance, risk management, business continuity planning, have all been top line agenda for many boards. Some of these may be regulatory-induced while some are prompted by the exigencies of the new business world. When will tax risk management get on the agenda at your C-Suite meeting? I am not talking about the traditional fire-fighting approach of canning the milk when it has already been spilled. What is required is a proactive measure involving long term, medium term and operational dimensions of tax risk management
Tax departments can no longer be viewed as just a part of the accounting and reporting roles Tax departments can also not be obsessed with compliance function. Compliance activities are important and significant but there is more to tax management. How about creating efficiency, managing tax risks, ensuring transparency, responsible taxation? There is a lot more to tax management than making sure that the right amount of tax is paid on time. Don’t get me wrong, these are key issues too. Every business function require strategic thinking.
It will amount to being kobo wise and naira foolish to isolate the tax function from strategic planning. Tax departments must play key role in strategic planning. Not just a compliance function. The practical approach to tax is to align a company’s tax strategy with the broader business strategy. A business of the future must develop a strategic tax policy with a well-resourced and functional tax team.
With the current economic realities in the country, tax authorities can only get tougher in pushing compliance. Tax responsibilities can no longer be seen as a role assigned to one junior officer who submits tax forms at tax offices at month-ends. This may be a good time for Companies to establish a fully-function tax department if none exist. It will also be helpful to assess the adequacy of the resources available for the tax role and tax function as a whole. The tax department should be adequately resourced and tasked with SMART goals.
Businesses should ask self-probing questions about its tax function. How often do we get cut in the web in tax authorities for non-compliance? How much is non-compliance costing the business? How often do we get told that a more tax efficient model could have been implemented for a business idea? How well are we deploying technology to create efficiency and predictability? Dow we have a standardized tax system? What value is the tax function putting on the table? Responses to these questions may suggest how far ta Company needs to travel to get its tax function running.
Let’s keep it at that for today and catch up next week. Our 60 minutes is up. Until next week, remain tax wise. Be sure to get your feedback across. Please share.
Thank You.
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