Banking & Finance

Tax Governance as an index for your investment decisions

Sometime ago, I was daunted by the headlines of some newspapers that a bank has commenced winding up proceedings against a large oil marketing company in Nigeria over unpaid loans relating to certain transactions. This was not the disturbing bit of the news. Tucked in somewhere towards the end of that article was the information that the owner of the company (who is merely the majority shareholder; the owners being the investing public as this company is publicly traded) lives like a sheik, and owns several elite properties in highbrow Ikoyi, a collection of posh cars, private jets, and expensive ponies and appears not to be feeling the pains of the company.

That a company is haemorrhaging while its owners or management live like lords should ordinarily not be disconcerting (I should not begrudge hardworking men and women their success), but it is, for me, because this scenario pervades the Nigerian corporate world. Sometime ago, some of us were shocked to our bone marrows when the chief executive of a bank that was bailed out by the Central Bank of Nigeria (CBN) willingly forfeited over 150 billion naira in assets and cash.

The question we ask our corporate “legislators” is: How do you manage to earn so much from your company? ‘We work very hard,’ is what they are likely to tell you. I agree that the role of a CEO is especially tasking but I am still unable to tie the published financial statements to the known wealth of these executhieves.

There are basically only two ways to take out money from a company (even where you own it 100%). These are: as your share of the profits in the form of dividends and as fees, and salaries paid to you in exchange for services rendered to the company. Appropriating a company’s cash outside any of the above would be akin to theft. It baffles me when several dierectors kill their own companies by not adhering to these basic principles. They simply appropriate the company’s cash and assets!

Today, the concept of corporate governance is pervasive and a code of corporate governance has been prescribed by most regulators to the players in the market. Yet it is not corporate governance adherence alone that the wise investor should pay attention to in assessing a potential investment. The concept of ‘tax governance’ is an emerging concept that is gaining ascendancy because of the work done by the big firms on the subject. KPMG in particular has a lot to say on the subject.

If we synergise the various definitions that exist for tax governance, then the term will come to mean the totality of the board of directors’ responses and attitude in relation to their company’s tax affairs. The question is: How does the board respond to its tax responsibilities and opportunities for the benefit of their shareholders?

The rating you give a company as it relates to tax governance can very well be an unmatched barometer in determining the safety and sanctity of your investment in the medium term.

A company that is alive to its tax responsibilities would consider the tax consequences of its significant actions especially as it relates to executive compensation. Also, the tax question will come to the fore in crafting a dividend policy.

Just as a prudent investor would seek to know the auditors of the companies in his or her portfolio, the diligent investor should similarly seek to know who the tax advisers to his companies are. As the auditor renowned for compliance and thoroughness elicits trust in every account he signs so does the scrupulous tax advisor engender trust in the tax affairs of the companies he is associated with. This is why investors should pay attention to tax governance.

The lessons of tax governance are not only relevant to small investors, large group companies that are closely held by a few individuals need to entrench tax governance as an integral part of their corporate governance policies. The story of Yukos and Mikhail Khodorkovsky in Russia is particularly apt here.

In 2004, Mikhail Khodorkovsky was the wealthiest man in Russia and one of the top 20 wealthiest men in the world. Yukos was one of the biggest and one of the most successful Russian companies in 2000-2003. Yukos was one of the world’s largest non-state oil companies, producing 20% of Russian oil which equates to about 2% of world production in 2004. From 2003 to 2004, following a series of tax reassessments, (these actions were condemned by the US House of Representative and the Council of Europe as being politically motivated), the Russian government presented Yukos with a series of tax claims that amounted to about $27 billion. The Russian Government subsequently broke up Yukos and sold it to recover its taxes thus eliminating the wealth of Mikhail Khodorkovsky. Do not think this can only happen in Russia. In this era of politicking, a vindictive government can deal with its perceived enemies in several ways. The tax route is one of the simplest ways to do this and it can have devastating consequences.
Little wonder the EFCC are beginning to intimidate companies by asking for tax records dating back several years (according to Nigerian Employers Consultative Association- NECA-), even though the law vests these powers on the Revenue Authority.

Please pay attention to the tax governance of companies you are targeting. It is the only way to secure your investment in the long term.

Eben Akinyemi, an Associate of the Institute of Chartered Accountants of Nigeria and the Chartered Institute of Taxation of Nigeria, is a partner at the transactions advisory firm Stransact Partners.

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