Zenith Bank released its 2014 FY results beating estimates as earnings per share rose by 8.5% to close at N3.16. The company followed the impressive result with a proposed dividend of N1.75 per share same as what it paid it paid last year against 2013 results. Dividend this year will cost Zenith Bank another N54.9billion.
Whilst shareholders bask in the impressive result and huge dividend largesse, many are unaware of a significant cost attached to this huge pay out. Included at the bottom of its note to accounts 13 and under tax was this paragraph.
During the year, the Bank was liable to excess dividend tax of N16.48 billion, representing 30% of N54.9 billion dividend paid as the Nigerian tax laws requires companies to pay tax calculated at 30% of the higher of taxable profit and dividend paid. However, in the 2013 financial statements, the Bank only accrued for tax of N2.66 billion (see note 13a above) based on minimum tax rule, as the Bank did not have taxable profit and the dividend was not yet approved as at the reporting date. Therefore, total income tax paid in 2014 was N15.96 billion, which was net of tax credits amounting to N 0.521 billion. The difference between total tax paid and minimum tax accrued which amounted to N13.3 billion was charged as tax expense in 2014 financial statements.
What it means?
Basically, the excess dividend tax( EDT) basically means companies are liable to pay tax when their dividend payout is higher than the taxable profits declared as very well illustrated in an article we featured last year in this blog. This Zenith Bank report is therefore saying that the bank has incurred a whopping net excess dividend payment of N13.3billion because it paid dividends of N54.9billion last year. All this because that dividend was more than its taxable profits. Why should a bank expose shareholders to such a tax hit? Did the financial team of Zenith Bank not anticipate this huge tax risk? Couldn’t they have managed the taxes better and hence dividend expectations? Will they incur something similar next year, when they report 2015 earnings? Is this a one time charge and won’t repeat again especially as dividend is likely to cost them another N54.9billion? These are question we hope the bank can answer when they have their earnings call.