A tax function for the future – what it should look like (1)

In the recent past, corporate governance and risk management has been a top-line agenda for the board of thriving companies. This is partly as a result of regulatory requirements and partly as a requirement from the shareholders of these companies. Despite the benefits that companies have gained from good corporate governance and the significance of tax to companies’ bottom line, little attention has been paid to tax governance and risk management. While some companies have a dedicated tax department managing their tax affairs, some others have their tax affairs being managed by their finance departments on a need basis. In both instances, what remains important is the efficiency and effectiveness of such arrangement to the organisation.

For such organisations whose turnover run into billions of naira, it is advisable to have a department with significant focus on tax management. I usually look at it in this simple way: if for every N100 I make I have to pay N30 (i.e., 30 percent companies’ income tax) to someone (tax authority) who has the power to collect as much as N50 from me (if back duty arises), or even close down my business if I haven’t followed certain tax rules appropriately, then as a wise businessman, I would consider that person a significant factor to manage for the survival of my business.

Some companies have been put into serious panic in the past due to tax mismanagement and consequent back duty charges or unforeseen tax charges. One very good example that comes to mind is the case of a company striving so hard to break even in the market. After due consultation, it decided to invest heavily in the purchase of a fixed asset worth about N1bn with the hope that the asset would enhance its product and possibly spring the company to profitable position. A few years down the line, the company decided to dispose of the asset for about N700m. While the asset was in the company’s book, the company had computed capital allowances but it could not utilize it as it had no taxable profit from which to defray the capital allowances. The Companies Income Tax Act (CITA) provides that when a company disposes of an asset on which capital allowances have been claimed, the company is required to compute the necessary balancing adjustments (allowance or charge). To cut the long story short, the company was exposed to an unforeseen tax liability of about N300m due to balancing charge from this supposedly simple transaction. On investigation, what stood out clearly was that the company had barely considered the tax implication of the purchase of that fixed asset. In this particular case, the company had a tax department, yet tax planning was not considered at the point the transaction was initiated. There was also total disconnect between the organisation’s strategy and the tax strategy.

Fortunately, many companies realize the importance of the tax department and have made efforts to dedicate a team that ensures they comply with the requirements of the tax laws.  However, the responsibility of most tax departments I have seen has been limited to mere tax compliance. For the avoidance of doubt, compliance comprises computing and filing of income tax, Value Added Tax (VAT), Withholding Tax (WHT), Pay-As-You-Earn (PAYE) returns, etc and minor routine tax advisory. These activities are important and significant but they are more reactive in nature and may be done unsystematically if the appropriate mechanism is not set behind the tax team.

The truth is, many tax departments in this part of the world are still work-in-progress as they are not adequately equipped to move away from the grips of compliance drive. Some may currently be getting their acts right due to on-the-job learning and experience, i.e., they may have worked with the organisation for a long time so they understand the organisation’s issues. The challenge with such organisations is that they usually struggle to be tax-compliant in the event that key staff that understands the organisation resigns. A live example is the case of a company that assigned a single employee with the responsibility of managing their tax affairs. The tax authorities conducted an audit on the company and issued a liability which the company considered to be excessive and filed letters of objection. After several meetings with the company, the tax controller in his wisdom requested that the audit be re-conducted to satisfy all parties. Shortly after the audit commenced, the company’s tax man fell ill and was not able to coordinate the audit. Thinking this was a gimmick to delay the audit, the tax authorities issued a notice of refusal to amend the initial tax liability. The company ended up paying over N100m liability.

In more advanced economies, the focus of tax departments have evolved over time. Their responsibilities have increased as they are expected to deliver more value like tax cash savings, manage tax risks, reduce costs and more recently ensure transparency. In the United Kingdom (UK), for instance, tax transparency has been a front burner. With the passage of the Senior Accounting Officer (SAO) rules in 2009, large companies were required to establish and maintain appropriate tax accounting arrangements. The SAO, who would be a director (or similar position), is required to provide the tax authorities with an annual certificate stating whether the company had appropriate tax accounting arrangements throughout the year and if not, the steps it took to mitigate tax risks. In addition, the SAO is required to ensure that information submitted to the tax authorities is timely, complete and accurate. Failure to comply with this results in financial penalty to the company. This development catalysed the establishment and maintenance of proper tax governance frameworks guiding large companies operating in the UK. In these advanced jurisdictions, tax departments are also recently charged with the responsibility of managing their organisation’s tax affairs in a way that reputational risks are kept to the barest minimum. Perhaps this is due to the direct and immediate impact of bad media on the profitability of companies or the reputational damage caused by the headlines in the media.

Ikechukwu Ene