Thread by @ooyeboade

I stumbled upon the Key Audit Matters (KAM) in Dangote Cement's 2017 Financial Statements. One that caught my attention is the KAM on tax liabilities on income expected to be on tax holiday (Pioneer).

What are tax holidays? A government incentive program that offers a tax reduction or elimination to businesses. Tax holidays are commonly used by governments in developing countries to help stimulate foreign investment. See details here: goo.gl/cn4iMM

Section 10 (2)(a)(b) of the Industrial Development (Income Tax Relief) Act expatiates on the tax relief period:

"The tax relief period of a pioneer company may at the end of the three years be extended by the President,

for a period of one year and thereafter for another period of one year commencing from the end of the first period of extension; or for one period of two years" This means that a pioneer company can enjoy up to 5 years of this tax holiday.

So let's talk about how this applies to Dangote Cement Plc (DANGCEM)
DANGCEM's production lines in question are in two categories:
1. Ibese production lines 1 & 2 and Obajana Production line 3
2. Ibese production lines 3 & 4 and Obajana Production line 4

Ibese production lines 1 & 2 and Obajana Production line 3 have already enjoyed holidays for three years which expired on 31 Dec 2014 and 31 Dec 2015 respectively. This means Ibese 1 & 2's tax relief could be extended for a maximum of two years till 31 Dec 2016 after which

the lines will be out of tax relief.
Obajana line 3 has also enjoyed tax relief for 3 years, however, this could be extended for 2 years till 31 December 2017.

The total income tax for these three lines after the expiration of first 3 year tax relief are as follows:

2015: N27.8 Billion
2016: N24 Billion
2017: N8.3 Billion
Total: N60.1 Billion

According to the Auditors (@DeloitteNigeria ), the N60.1 Billion was not recognised in the financial statements because DANGCEM's Directors' (supported by the company's legal counsel) view is that the Company has complied fully with the requirement of the PSI and it

is entitled to the two years extension.

My view on this is that DANGCEM's tax liabilities may have been understated by N60.1 Billion. The question I will like to ask is why has there been delay since 2015 to get the approval for an extension?

For all these lines, if the approval is received today, it expires almost immediately.

In spite of all these, do I think DANGCEM will get an extension?

I am almost 100% certain that it will. Why? .............................................

For Ibese lines 3 & 4 and Obajana line 4, the Directors are also of the strong view that there is no reason why tax relief for the first 3 years will not be granted. However, tax liabilities of circa N134.1 Billion for these periods have been recognised in the books.

It is important to note that DANGCEM, even with the tax relief, has decent effective tax rate of 29.5% in 2017. CIT rate in Nigeria is 30%. With no tax relief, effective tax rate would have been 32%.

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