Presiding over the financial division of a conglomerate like British American Tobacco Nigeria (BATN) can be overwhelming for some but not Anthony Copty, the Finance Director of BATN who comes with a rich wealth of experience in finance, negotiations, banking, audits and others in this area. Starting off with Arthur Anderson in 1996 before moving on to hold the position of Financial Controller in the biggest chain of department stores in Lebanon with French Affiliation from 2001 till 2003, Copty joined BAT in Beirut, Lebanon as Finance Manager for Levant / Yemen and his rise has been on the upswing. He moved to DRC as Finance Director in December 2005 where he spent 2½ years before taking up the position of Regional Operations Finance Manager for AME in April 2008. Anthony was appointed Head of Finance, North Africa in October 2010, a role he held for 3½ years before moving to West Africa Area in July 2014 as Finance Director.
Over lunch, the American University of Beirut graduate spoke to Tayo Adelaja about tax-related challenges affecting investors in Nigeria, what investors are expecting from the incoming administration in the area of tax policies that will support growth of the real sector and doing business in Nigeria.
Q- What are the tax-related challenges affecting investors in Nigeria. Also how will you describe BATN experience of the Nigerian tax system?
A – The Nigerian tax system has supported us positively in a number of ways. At the inception of our business, we were encouraged to set up a modern manufacturing facility in Nigeria to serve as the production hub for our products, which are now exported to about 12 countries in the West and Central Africa Area. Our leaf growing section also benefitted from the tax benefits associated with the pioneer status incentive law.
Tax compliance is fairly challenging in Nigeria with many tax legislations and compliance requirements at the Federal, State and Local government levels. According to a joint study by PwC (Price Water House Coopers) and World Bank, the average Nigerian company completes compliance processes in about 909 hours annually Based on the study, Nigeria’s position is 179 out of 189 economies that were surveyed on ease of compliance. These statistics provide data on a need for consolidation of the various tax laws, a simplification of the compliance requirements, and an automation of the compliance process and procedures.
Q – You mentioned tax compliance as one of the challenges, what other challenges can you mention.
A – Another challenge with tax administration in Nigeria is that most of the laws are no longer relevant to current business and economic realities. The Excess dividend tax rule, for instance, does not favour the often preferred holding structure adopted by investors and should have been reviewed or deleted. Unfortunately, there the tax authorities cannot address this directly, as it is a matter of legislation. We, therefore, continue to hope for more attention from legislators to the challenges these laws create for investors.
There is also the challenge with ambiguities in the laws, which in many instances requires companies to seek interpretation from consultants or the tax authorities. The FIRS (Federal Inland Revenue Service) does its best to issue clarifications, circulars and guidelines on knotty issues and this is based on requests. However, the concern here is that based on the Nigerian law, only the courts can interpret the laws; this means the opinion of the tax authority and consultants are indicative at best, and offers no reprieve if a matter is referred to the courts.
We have, therefore, seen cases where a different interpretation of a tax matter is adopted by the courts, or there is a change in the stance of the FIRS on a matter they have previously issued clarifications on, and these result in additional tax payments and penalties for tax payers. This erodes investor confidence in the tax application and arbitration systems.
Another issue is the inconsistency in the grant of incentives. For example, in the income tax Act, some income and profits are exempted from tax to encourage specific policy initiatives. However, this appears to be cosmetic when analysed in detail as the government claws back all the benefits derived through excess dividend tax when the profits are distributed as dividends. It is also important that when the government commits to grant an incentive, it should stay committed to it, as we have seen past governments backtrack on tax incentives. Businesses make investment decisions based on key features of a tax regime and it is important that there is an established trust that the government will uphold the law and its promises.
Q – Comparison of Nigeria’s tax administration with other BAT operations – how consistent and efficient is it? What are the conditions driving the differences in policies and implementation?
A – In most of the other countries we operate in, the tax laws are very dynamic and are continually reviewed to address new business and economic realities. The laws are also clearly articulated that makes compliance by taxpayers and implementation by tax administrators very easy and straightforward.
One clear challenge from a Nigerian perspective is lack of automation of tax administration. The process for submission of tax returns is still largely manual, requiring forms to be filled and submitted physically at the tax offices. This makes it time consuming to comply with tax payment and tax filing. It also increases cost of time and resources expended on interactions with the tax authorities for routine activities and increases opportunity for bureaucracy and fraud within the system. In the same vein, tax audit exercises are very tedious with a lot of paper work to review and due to inadequate manpower, the tax authorities wait for a 6 year period before auditing companies. This means that a lot of tax audit liabilities paid will result from lost records rather than from deliberate non-compliance.
It is noteworthy though, that some of the States and the Federal Tax Authority are addressing this already. The Federal Inland Revenue Service recently introduced the Integrated Tax Administration System (‘ITAS’). The aim of the project is to automate all key tax authority core processes around registration, payment, assessment, case management, audit and investigation, debt/credit management and returns filing. The e-filing system will enable tax payers to file tax returns electronically. We were privileged to be one of the pilot companies to launch the ITAS, and we have witnessed improved efficiency in the tax filing and remittance process. We look forward to continuous enhancement of the ITAS portal to completely transform tax administration in Nigeria.
In terms of conditions driving tax policies, there are trade bloc and other trade agreement affiliations that may provide for special considerations or harmonization of policies. In West Africa for instance, the ECOWAS (Economic Community of West African Countries) Common External Tariff which came into effect in January 2015 has set uniform import tariffs for its member states, a phenomenon which is very common with increased globalisation and leaning towards regional groupings as against individual countries.
There are also economic considerations and dependencies especially related to developing and under-developed countries which require aid from donor and other agencies. Most of these agencies use these transactions to push their social and economic agenda on these dependent countries, taking away their sovereign rights to determine their policies.
In addition, most governments revert to the traditional source of revenue – taxes – whenever they have a shortfall in their receipts or need additional funds for infrastructural development for instance.
Finally, there is also pressure from civil society organisations, sometimes driven by the wider agenda of donor agencies, to effect policies aimed at achieving some economic or social objectives. A clear example for us, the tobacco industry, is the push by anti-tobacco groups to increase taxes on our products.
While some of these conditions are valid, it is important that countries maintain their sovereign right to determine their tax and other fiscal policies based on their needs and peculiarities. Governments also need to realise that, when they tax legitimate operators beyond a certain level, they create opportunities and loopholes which illegitimate operators capitalise on; invariably undermining their revenue targets.
Q – Is there a level playing field for all investors? If not, how can this be achieved?
A – Credit must be given to the government for their sense of inclusiveness by listening to issues of concern in the private sector. Whenever the Organised Private Sector such as the Manufacturers’ Association of Nigeria, of which we are members, seeks the audience of the government, they have been very willing to listen and to take necessary action.
However, in the area of tax administration, there is some inequality in the assessment of taxpayers. The focus of the tax authorities in generating revenue from the limited tax base has resulted in a seemingly unfair squeeze on companies that are complying. This creates inequality in the system as the tax evaders, especially of the informal market, are left unattended. This trend and approach of selective tax administration is counter-productive for the country if it is to address the significant revenue gap from non-oil sources. Moreover, revenue generation drive should not be prioritised above fairness, professionalism, reasonableness and equity to the taxpayer.
In addition, to creating a level playing field for investors, it is important to have a system that is equitable to different investment activities. For instance, investments in states/cities that offer very little infrastructural support should be afforded a compensating tax regime that improves investments in urban areas with more infrastructure, port, storage and transportation facilities. With this more companies will be willing to invest in the hinterlands and will lead to an improved standard of living for most Nigerians.
Also, the process of granting tax incentives should not create inequality. For instance, the FIRS issued a circular confirming that the Excess Dividend Tax rule will not apply to banks that adopt the holding structure model; whereas, this same benefit was not extended to other holding companies outside the financial institutions.
We also realise that various agencies of government are sometimes at cross-purposes in the implementation of tax incentives/policies. For instance, while pioneer status is granted by the Nigerian Investment Promotion Commission, the FIRS on the other hand has queried companies who have received and utilised the Pioneer Status certificates. A similar situation is where Export Expansion Grants are issued by the Ministry of Finance, but Nigerian Customs Service does not allow fully and unfettered utilisation of the grants. It is important that all agencies of government are aligned and work in concert to achieve the government’s tax policy objectives.
Another area that impacts on investors is when they invest heavily to set up manufacturing facilities in the country and pay duty on raw materials to manufacture the final product but still have to compete with products that are smuggled and dumped into the country without appropriate taxes paid at the border. Smuggling at the border is a 2-pronged problem. Government loses out on legitimate revenue and cannot adequately regulate the quality of the products that are smuggled which could pose health and safety risks for citizens. This is why BAT Nigeria actively engages with the Nigerian Customs Service and other regulatory agencies in training, intelligence sharing and providing tools that will enable the service to be effective in dealing with issues at the borders.
Q – How can Nigeria get it right: integrate all taxable persons and entities into the tax basket; meet its revenue targets; reduce illicit transactions/trade, etc?
A – The Federal, State and Local tax authorities need to work in harmony, sharing a common database of information on taxpayers which may be obtained from financial institutions such as banks, insurance companies, brokerage firms and other regulatory agencies as well. Economic activities can be easily monitored by requiring a report of transactions to be submitted to the tax authorities, similar to the reports submitted by banks to the CBN.
The government also needs to introduce a mechanism for voluntary disclosure and tax amnesty. This process will allow companies to disclose taxes which they have underpaid in the past for any justifiable reason. At the moment, there have been instances where companies have had more issues when they voluntarily disclose areas of underpayment of taxes to the tax authorities. Tax amnesty could also be considered for smaller companies that seek to comply with taxes going forward. A uniform, and low deemed profit rate, similar to what is used for non-resident companies may be adopted for the informal market to encourage tax compliance. This would ease the burden on small businesses of engaging tax experts to determine taxes due to the government. A vast portion of the Nigerian economy is in the informal market, and this is an untapped reserve for tax revenue. Tied to this should be some incentive for compliance; to encourage those who are complying and also make it attractive for the non-compliant.
In terms of the tax laws, they need to be reviewed to make them relevant in relation to current realities. They also need to be revised to remove ambiguity and grey areas and make it simple to read and apply. Simplifying the tax laws will make it easier for new taxpayers to apply and for the tax authorities to administer.
There must also be a formal and legal system to receive binding private rulings from the tax authorities. This would create more certainty on how the tax authorities would deal with transactions and lead to more disclosure to the tax authorities of uncertain tax positions taken by companies.
Finally, the government must deal with smuggling and have a zero tolerance for illicit transactions. These must be dealt with at all levels of the value chain up to the retail outlets to eliminate the market for such goods and to ensure the safety of Nigerian citizens.
Q – What are investors expecting from the incoming administration in the area of tax policies that will support growth of the real sector?
A – A critical issue for the incoming administration to address is multiple taxation. It must be addressed through a review of the Constitution to clearly outline the powers of governments at different levels regarding imposition and collection of taxes. The review should also include a revision of the approved list of tax collection and mechanisms to ensure compliance by all the tiers of government.
A very good step to resolve most concerns of the current tax regime is to implement the National Tax Policy (“NTP”). The NTP was approved in 2010 and sets out the policy direction in terms of taxation for the country. Implementing the NTP would address multiple taxes at the Federal and State levels. Currently, companies have to deal with many types of taxes and revenue collection agencies without clear guidance on the legality of the taxes. Earmark taxes are being introduced arbitrarily in order to fund any new law or agency that is formed by the government. The problem is apparent considering that there are roughly 8 Federal Taxes, 11 State Taxes and 20 local government taxes. In practice, there are even more taxes outside the list that manufacturers have to deal with.
If these policies are implemented and the power issue is addressed, it would be a very positive achievement for the incoming administration from the perspective of the manufacturing sector.
We are also hopeful for an administration that will match its tax policies and legislation with current business realities. For instance, the tax provisions on Commencement rule, Excess Dividend tax, Commencement losses etc. should be reviewed. These provisions are not favourable to the sector.
On a final note, the incoming administration urgently needs to revamp the tax incentives available to companies in the real sector and dutifully implement them. The sector is currently comatose due to the infrastructural deficiency in the country and it is critical that the industry is supported by the government to ensure that we improve our capacity to produce, employ and export, – for example continuation of the Export Expansion Grant (EEG) will further revive the recent downward slump of about 33% experienced in the sector; as these are vital to the economic recovery that we hope to see in the nearest future.