OUTSOURCED PAYROLLS: ONE SOLUTION FOR A DIFFICULT BUSINESS ENVIRONMENT

The communication company MTN, which currently operates in 22 African countries, has recently dominated the African media. Last week, the office of the Attorney-General of the Federation of Nigeria charged MTN with arrear taxes of $2 billion. This bombshell came in the wake of the allegations that the company had illegally transferred $8.1 billion out of the country between 2007 and 2015; albeit using authorised financial institutions such as Standard Chartered, Stanbic, Citibank and Diamond Bank. These recent developments follow the 2015/16 imposition by the Nigerian Communication Commission of fines totalling $5.2 billion for failing to disconnect unregistered SIM cards.

While one cannot immediately contend that MTN is being unjustly targeted, one must take cognisance of the fact that the company’s reputation has been discredited, with the direct result that the share price has collapsed by 72% since September 2014. MTN is however not the only international company which has been targeted in Nigeria:

  • In August 2018, Nigeria’s Consumer Protection Council used the courts to prevent MultiChoice1 from increasing DStv subscription fees by between 5.3% and 7.9%; recognising that the latest inflation rate in Nigeria is 11.1%, which is the lowest level in two years, this does not appear to be an exorbitant increase. The accusation levelled at the company, was that it was attempting to recoup losses made in other African countries.
1 MultiChoice operates in 49 countries across Africa and is a subsidiary of Naspers.
  • In August 2018, the National Agency for Food and Drug Administration and Control shut down an outlet of Krispy Kreme, alleging that the company was using products which were past their expiry date. The outlet was soon reopened after the authorities concluded that the company was compliant with all relevant health standards.

Surely, a country with declining oil revenues and which emerged from a recession in 2017, would welcome international companies who have invested heavily in them? Surely, a country which is struggling to balance its fiscal deficit would welcome international companies into their tax net? Surely, no country would act in this indiscriminate manner and jeopardise foreign investors’ perception of a stable and business friendly environment?

While political posturing for next year’s election may be a contributory factor, most African countries (and in particular the oil producing countries) have crippling debt and rapidly widening fiscal deficits. The result is that much needed “social spending” cannot occur which in turn leads to dissatisfied and disgruntled voters.

The conventional methodology to balance a budget is to increase taxes, however, several countries have attempted this which has proved unpopular amongst citizens and further exacerbated the levels of voter dissatisfaction.

For example, Kenya, has addressed a revenue shortfall of just over $5.5 billion, by introduced a 16% Value Added Tax on fuel effective on 1 September 2018. This was not well received and an application to the High Court of Kenya lead to the temporary suspension of the tax. In the 2018/19 budget, it was announced that the excise duty payable by money transfer service providers, would increase from 10% to 12%. Furthermore, MP’s recently rejected plans by the government to legislate that 0.5% of workers’ salaries be paid to the National Housing Development Fund and that a 0.05% tax on bank transactions above KSh 500,000 be levied.

Uganda, Zambia and Benin have introduced taxes on social media. Uganda also increased the excise duty payable by money transfer service providers from 10% to 15%. Tanzania and Rwanda have introduced capital gains tax on the sale of companies. Ghana proposes to tax church’s commercial activities and Cameroon has increased the airport tax by a significant 250%.

All these measures are unpopular and result in dissatisfied and disgruntled voters.

As such, international companies are considered a much easier target.

There is a myriad of preventative action plans which an international company can introduce to ensure that they are not unjustifiably targeted by the authorities. One popular action plan adopted by many international companies, is to ensure good governance by ensuring that the company’s payroll is run correctly and is compliant with all relevant taxes and statutory deductions.

Many companies are reticent to outsource their payroll and prefer to run them in-house. In our recent article, “Why Should I Outsource my Company’s African Payrolls” (http://www.axiomatic.co.za/news/i-outsource-companys-african-payrolls/) we highlighted some of the difficulties experienced by in-house payrolls in achieving compliant status:

Whether the payroll is situated in one African country, or multiple African countries, a different (and higher) level of expertise is required to ensure that the correct tax and statutory deductions are made, as well as the successful implementation of a control mechanism to ensure that these deductions are paid timeously to the relevant authorities.

Managing legislative compliance requires robust policies and procedures along with significant compliance capabilities. Managing the good governance of the company and ensuring it maintains the mantle of a “good corporate citizen” in the country is a vital component of any payroll function. This can best be achieved by using the correct outsourcing partner - simply due to their specialisation and enhanced capabilities in this field.

Further, our article, “How to Achieve Legislative Compliance in Pan-African Payrolls” (http://www.axiomatic.co.za/news/how-to-achieve-legislative-compliance-in-pan-african-payrolls/) expanded on the inherent risks:

Where the payroll department is processing payrolls in multiple jurisdictions, the problems, and the likelihood of errors, are exacerbated. This risk amplification is crucial given the dictatorial and hard-line attitude adopted by most revenue authorities and should be highlighted as “high-risk” when the compliance audit is conducted. The only method to mitigate such risk, is to complete a comprehensive review of the tax and social contributions embedded within the system. This should be done irrespective of the assurances of the services providers that the said calculations are correct and compliant. This places an onerous burden on companies who do not have the necessary tax expertise available given this is not their core competency.

There is little doubt that outsourcing the company’s payroll is a cogent and effective methodology to guarantee good governance, manage potential reputational risk and to mitigate the possibility of becoming a target of the authorities.

Should you want to know more about Axiomatic’ s outsourced service offering in 37 African countries, please contact William Taggart on William@axiomatic.co.za