Going Concern Risk (Part 1) – Senegal’s Amtc

Nov7 Publications

Going Concern Risk

The fundamental accounting principle of the Going Concern assumption assumes that, a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future (12 months). This series of papers will analyze the main going concern threat within our local environment which in my opinion is the usurious nature of fiscal legislations. This first part will focus on the latest amendment of the Alternative Minimum Corporate Tax (AMCT) or Impot Minimum Forfaitaire (IMF)
. Senegal, small and medium sized enterprises (SMEs) represent over 90% of companies and account for the generation of over 85% of all jobs in the country. This can be considered the motor of the Senegalese economy. As the Minister of local governance, development and decentralized functions stated during a radio address on March 25th, 2015 « The Senegalese budget is dependent at 85% on taxes », 

 he flaw in this
legislation which is very unpopular in the business world as well as with members
of the fiscal administration stems from a cultural misunderstanding of the
difference between turnover and Profit AND the definition of a SME. With no
intentions to offend anyone, it is widely known that anytime a person in
Senegal hears that a company or even an individual has made an annual turnover
of over 1 billion, the assumption is that that company or that individual is
doing very well. What most people are ignoring in their train of thought is
that there are expenses which are incurred in order to generate those revenues.
It is important as a country that we dissociate turnover with profit.

the most important which are income tax withholdings from salaried employees and corporate taxes. If SME’s make up the majority of registered companies in Senegal, an assumption can be made that they contribute to more than half of the Senegalese budget. Now I would like to ask one question? How is it that we as a country are working towards « emergence » through Le Plan Senegal Emergent while slowly asphyxiating the driving force (SMEs) of our economy through thoughtless legislations such as the latest amendment to the Alternative Minimum Corporate Tax (AMCT).

The definition of smes is something that both the local population and legislators struggle to understand. The universal definition is ignored. 

The most flagrant example figures in our Tax Code. According to the Senegalese Tax Code, all company which realize an annual turnover of more than 1 billion XOF shall depend to the fiscal center dedicated to large entreprises Centre des Grandes Entreprises (CGE). In other words, a large enterprise based on the tax code is defined by any company with a yearly turnover or 1 billion consequently, all companies realizing less than the stated threshold is categorized as a SME. This definition greatly differs from the rest of the world’ definition.

Based on the European Union Commission and the United States International Trade Commission (USITC) There are three main criteria in determining if a company is a large company or a SME. The number of employees is the driving factor, then the annual revenues and lastly the total balance sheet. As stated in the 2010 published report from USITC Small and Medium-Sized Enterprises: Overview of Participation in U.S. Exports « There is no universally accepted definition of an SME… In recognition of these differences, using the number of employees and annual firm revenue as basic classification criteria » should be the norm. The number of employees differ between the European definition and that of the Americans as they are set at less than 250 and less than 500 respectively. This is understandable given the size of the American Economy compared to most economies of countries in the European Union. Maybe it is time that we incorporate the number of employees into our local definition of categories of companies. 250 might be too much of a number for us for the simple reason that not too many companies in Senegal have that many employees.

Now that we have addressed the fundamental issues  leading to ineffective fiscal legislations, it is important to understand the Alternative Minimum Corporate Tax (AMTC) and its purpose.

Now that we have addressed the fundamental issues leading to ineffective fiscal legislations, it is important to understand the Alternative Minimum Corporate Tax (AMTC) and its purpose. This tax ensures that all registered companies regardless of its profit or loss pays a minimum tax for the fiscal period. The tax is meant for companies which incur losses or those which have a profit that does not allow them to pay more than the calculated AMTC. Such a legislation exists in almost every country. In the United States the Alternative Minimum Tax is imposed both on Corporation and on Individuals’ income tax. It is only fair that a company which is in place and runs its activities for an entire year and uses local resources and other benefits must at least contribute its fair share to the local economy. But wait, that sounds familiar! the Patente is exactly such a tax; The municipal tax which is imposed on every company based on their turnover for the year as well as 19% of their annual rental expense. Business leaders gripe about this tax as they find it unfair and have dubbed it the « Mere Existence Tax ». How is it that in the same country, within the same Tax Code we have two types of taxations which serve similar purposes? Sounds like double taxation to me.

Anyways, back to the AMTC where a brief history is needed. In the Tax Code passed in 2004 (Law 2004 -12) at its section 24, the AMTC due is broken down in three categories based on turnover. From 0 to 250 Million, 500 000 XOF; From 250 Million to 500 Million, 750 000 XOF; anything over 500 Million, the AMTC due is 1 Million XOF. This law was in effect until it was amended in 2012, with the introduction of the new Tax Code which took effect on the first day of 2013. At its Section 40, the following is stated « The AMTC is due on the turnover net of taxes realized on the year preceding that of payment, at 0.5%. In no way, can this amount be inferior to 500 000 XOF nor superior to 5 million XOF. » Suddenly those companies who had turnovers over 1 billion, their AMTC went from 1 million to 5 million which represent a 400% increase. Now let us fast forward 22 months after the Tax Code took effect, on the amended budget for 2014 Loi de Finance Rectificative passed in October 2014, the ceiling of 5 million was changed to 20 million for tax fairness reasons « pour des raisons d’équité fiscale. »

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Just like in every country, Senegal’ business landscape is scattered with companies from various sectors, we have the traders which make up the majority of companies, those companies in the services industry and the farm workers. The sector which is most affected by the AMCT legislation are the traders. Trading is in the Senegalese’ DNA as there is a reason why Senegal’s last name is NDIAYE. The history of the common last name is important. Briefly it is « Ndiay » or « diay » which can be translated as selling. The founding fathers of this nation were traders and that tradition is upheld to this day. As Thomas Friedman described in his New York Times bestseller The World is Flat, technology has made it such that people from around the globe can compete on any market which in turn have a negative impact on profit margins. Let’s take those in the commodity (rice, flour, etc.) trades, in order to generate enough gross profit to break even and cover their operating expenses, they rely on selling large volumes. When you sell large volumes, your turnover easily balloons up. This turnover does not reflect the financial health of a company and therefore should not be the basis for taxation.As a Certified Public Accountant, my job is to police the economy at its base where we ascertain that companies are conducting financial transactions in compliance with standards in place. I believe that our job is also to protect those very same companies from legislations we believe spell their extinction. We are in the audit season at the moment, and what we have witnessed in our various engagements is the negative impact this new legislation is having on the financial health of many of our clients which represent a small sample but yet a snapshot of the business landscape.As Benjamin Franklin stated many centuries ago « Nothing is certain except death and Taxes. » Hate it or love it, it is one’s responsibility as a citizen to pay taxes, but those taxes must be fair. Companies are not asking for a handout or to be exempt from paying taxes, all they are asking is for legislators to take into account the truths of the « real world » when they pass laws which impedes their ability to pursue their activities. It is our responsibility as legal auditors to alert stakeholders when there is a going concern issue discovered during our engagement (ISA 570). Here is an alert to the biggest stakeholder in companies in Senegal (The Internal Revenue Service), that your companies are at risk of closing shop if certain provisions of the Tax Code are not revised.When the cost of being compliant outweighs its benefits, companies might opt for operating in the black market rather that in the light. It should be a concerted effort to put in place fiscal legislations which encourages social responsibility through a fair and coherent taxation system.—————————————————–UPDATE——————————————————30/10/2015Since publishing the current article, there is an update on the subject. The raise in the Alternative Minimum Corporate tax which I criticized in this very paper has been revised. The minimum tax which had its ceiling raised to 20 million has now been reduced to 5 million. This news will be welcomed with a sense of relief for many companies which have been having nightmares over having to fork over 20 million XOF for the fiscal period 2015.This change I believe is a WIN for all stakeholders as it pumped new life to companies which faced certain death which would have added a bigger burden on a job market that was already struggling.

Now I ask, what tax fairness? The manager who for 10 months during 2014,

had provisioned a Corporate Tax Liability of 5 million suddenly finds him/herself with a potential tax bill of 20 million with only two months left in the year. How is that fair to companies which are the fabric of our society, which have the Senegalese economy on its back with their fiscal contributions in many forms (Income Tax, Patente, Corporate Tax, Tax on Vehicles, Tax on advertisement, and many other fiscal expenses). With the heavy toll of taxes on business, companies have been bending but not breaking, but I believe that this latest amendment to the AMTC might just be that straw that breaks the camel’s back.