Monday, May 16, 2016

Some unsolicited advice for Simon Perkins on Ncell tax controversy: please stop confusion and deception

Why would a buying party ask for an advance tax ruling (ATR) which should have been asked by the seller? Why would it ask it in a personal email to chief of IRD while ignoring repeated calls by the related authority, the Large Taxpayer's Office (LTO) making it clear that the taxes should be paid? Why would a responsible company go to politicians and unrelated bureaucrats looking for 'verbal assurances' about tax exemption in such a situation?

If you think the controversy around the payment of Capital Gain Taxes (CGT) to Nepal for the transaction of shares of Ncell's parent company, Reynolds Holdings between TeliaSonera and Axiata will end soon, you may well have to think again.

It is here to stay for quite some time. As Nepal's tax authorities are examining whether the nearly 10 billion rupees payed by Ncell (i.e. Axiata) amounts to what Axiata has claimed (15% out of 25% to be paid as CGT), the debate around whether the transaction itself involved an organized effort, or a scam, to evade taxes is raging among citizens.

You may then expect that the Axiata officials may be devoted to ending the controversy at the earliest and averting further damage to the Ncell brand. I doubt they are.

In an interview published in today's The Himalayan Times (THT), Simon Perkins, managing director of Ncell has further deepened the confusion on the matter. 

Answering the first question about the 'crisis of sorts' faced by Ncell, Perkins says this: 
But I guess you know that we made the decision (to pay the tax) even though it was not our responsibility, as capital gains tax should be paid by the seller, not the buyer.

Later in the interview, this is what the interviewer asked him: The first media statement issued by Telia after the change in ownership at Ncell clearly said ‘risks (related to tax claim) are covered in the agreement’ that Telia and Axiata signed. This shows Telia was well aware that the government would raise the tax issue, isn’t it?
And this is how Perkins answers the question: We will now fall back on that agreement to state our claim that Telia should reimburse us.
The first answer clearly implies that paying CGT to Nepal is not Axiata's obligation. The second answer is also in line of same argument: as Axiata has paid taxes on behalf of TeliaSonera, it will now seek the same payment from TeliaSonera. Quite logical.
What is baffling, however, is this: what does the 'risks (related to tax claim)' being 'covered in the agreement' between the two companies mean? 
If both companies were aware of such 'risks' and planned to cover them, why this confusion? Why not pay the taxes gently without making arguments like 'Nepal cannot tax offshore transactions'? Why is Axiata risking a significant dent in Ncell's brand value by failing to timely settle the issue?
Moreover, the April 21 press release from TeliaSonera made 'in response to incorrect information on a Swedish daily' says this:
Nevertheless, in the event a tax claim in Nepal would be presented, such risk, as well as other important commercial issues and risks are covered in the agreement between us and Axiata. In this case this means that the exposure of Telia Company regarding tax claims is limited. It can also be noted that since closing of the transaction with Axiata on 11 April, Telia Company no longer has any assets remaining in Nepal. 
If my understanding of English is to be accepted, this clearly means that the transaction between the two involves some clauses which oblige Axiata to pay any such amount in Nepal by getting a proportional amount from TeliaSonera for the purpose. 
 In the interview, Perkins goes on to say "But Telia has always said it doesn’t believe any tax is due in Nepal because of the offshore transaction." 
If Telia believed so, why would such a clause related to covering the risks be included in the deal? 
Perkins also seems to imply in the interview that the fact that Axiata asked for an advanced tax ruling (ATR) from Nepal's authorities and got no response somehow exempts Axiata from the responsibility of paying the CGT. By claiming to have got the verbal assurances from Nepali officials about exemption from CGT, he tries to portray Axiata as the innocent party in the whole affair. 
But why would a buying party ask for an ATR which should have been asked by the seller? Why would it ask it in a personal email to chief of IRD while ignoring repeated calls by the related authority, the Large Taxpayer's Office (LTO) making it clear that the taxes should be paid? Why would a responsible company go to politicians and unrelated bureaucrats looking for 'verbal assurances' about tax exemption in such a situation?
If Perkins happens to somehow read this piece, I have some unsolicited but potentially useful advice for him: first, stop looking confused, that is not good for brand that aspires to flourish. In fact, confusion is the mildest term possible. My harsher colleagues would call it deception. Don't try to deceive more.
Second, don't cry wolf if/when LTO's calculation of the CGT owed to the Nepal govt comes to up to four times your calculation. We, in the public, estimate the total tax revenue owed to the govt on the transaction to around 53.5 billion rupees. Please don't make a fuss again when Ncell will have to pay the remaining amount; Nepal's law doesn't care whether TeliaSonera pays it or Axiata pays it; and whether it is covered completely or partially in the deal between the two is not something to concern Nepal.
Finally, if Ncell's real valuation for the transaction and the disclosed valuation were significantly different, that fact will be eventually uncovered. When it does so, real problems will start for Ncell in Nepal. I'm not guessing or expecting that discrepancy to present itself at a certain time in future but I'm pointing to such a possibility and personally I would not rule it out. 
I wish otherwise, though. As Ncell is one of the biggest companies and biggest taxpayers in the country, I would like to see it as a good corporate citizen valuing fairness and transparency as much as profit. 

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