Seplat recently declared blistering profits of N81.1 billion for the year ended December 2017. About N67.6 billion of this profit was from tax credits and this has got some folks wondering if the government is being altruistic with large corporates, who should be paying more taxes from their profits.
This is not the case and we will get to that in the course of this article.
But before that have you seen their share price lately?
In case you did not know, Seplat has been one of the best performing stocks in the last 6 months. This chart pretty much sums up how blistering the share price has risen:
Isn\’t that chart intimidating? Seplat share price has risen a whopping 52.6% since December and 90% in the last one year.
What is behind this rally?
- The reason is mostly fundamental.
- In its 2017 financial report, Seplat Petroleum Development Company Plc declared N81.11 billion ($452 million) as its Profit After Tax (PAT) for last year.
- This was mainly revenue driven and made possible by the 43 percent increase in Nigeria’s total oil production in 2017.
- Recall that Nigeria was producing 36,923 barrels of crude oil per day last year; a sharp increase from the 25,877 barrels per day produced in the preceding year.
Tax windfall explained
- Another reason was that Seplat also received a tax credit of about N67 billion in 2017. This helped boost the company\’s after tax profit to N81.1 billion.
- Seplat\’s tax credit was explained as thus:
Following a significant improvement in the financial position of the Company in 2017, the Company conducted an assessment of the its assessable profit based on a five (5) year business plan in order to determine the possibility of future profit making prospects for 2018 to 2022. As a result, the Group reviewed previously unrecognised tax losses and determined that it was now probable that taxable profits will be available against which the tax losses can be utilised. As a result, deferred tax assets of ₦68 billion, 2016: nil (US$224 million, 2016: nil) was recognised for those losses.
- In other words, due to prior year losses (of which 2016 was the only year it declared accounting losses) it is exercising an option that allows companies to recognize tax credits brought about by taxable losses.
- According to Nigerian tax code, companies that incur taxes losses can use those losses to offset future profits when they arise.
- You can only exercise such option, if there is a high probability that you will make future profits.
Does the company spend this tax credit?
- Not exactly. Tax credits are mere book entries and do not result in any new cash being generated by the company.
- See it as the government compensating you for when times were bad and allowing you to enjoy it when things become better.
- This is also why most well-run companies do not pay dividends when a huge portion of their profits arise out of tax credits.
- In fact, the government will apply a minimum tax rule when you pay dividends from such profits.
- Important to note is that Seplat did not pay dividends from the profits.