MTN’s 740bn foreign exchange loss and the ensuing tax matters

Whenever I find the headspace, I review the published accounts of few companies operating in Nigeria to get a sense of the impact of macroeconomic indices on businesses. Afterall, when macroeconomic variables are at their brutal best (more like worst), our collective prosperity is threatened. In this regard, MTN’s annual report is one of the few that I look forward to.

MTN belongs to an elite club of businesses with revenues exceeding one trillion naira. Based on a report (Nairametrics 2023), Dangote Cement, Airtel Africa and Access holdings, along with MTN NG, complete the quartet of this prestigious club.

The headline news announcing MTN’s 2023 performance, follows the path of Nestle and PZ with reported shareholders fund obliterated due to the effect of, you already know- foreign exchange losses. From telecommunications to manufacturing, the proverbial Fx breakfast, drawing from the Nigerian street lexicon, is of comparable taste and temperature. Only the portion, differs. For instance, Lafarge and Dangote incurred NGN21billion and NGN164billion Fx losses compared to MTN’s staggering NGN740bn Fx loss.

A deep dive into MTN’s annual report revealed that the lease cost of its tower cell site (mast) contributed, in part, to its towering Fx loss. See what I did there? MTN disclosed that its tower lease costs, though payable in naira, is indexed to the dollar. Consequent to the devaluation of the naira, MTN was forced to remeasure its liabilities and recognize increased cost of its foreign denominated obligations including, but not limited to, tower lease costs.

It gets interesting, I promise. Stay with me.

MTN NG leases its towers from IHS. MTN SA (or MTN group) owns 26% equity in IHS, thus qualifying transactions between MTN NG and IHS NG as related parties’ transactions. In 2014, IHS Holding Limited (IHS) acquired 9,151 of MTN’s mobile network towers in Nigeria. At the time, MTN said the transaction will reduce its operating costs, drive network efficiencies and further expand its voice and data capacity. According to the terms of the transaction, the towers will be transferred to a new company which will be jointly owned by MTN and IHS.

I have read some views expressing cynicism regarding MTN’s Fx loss given that a portion of its Fx loss resulted from related party transaction (leased towers) with IHS, especially when you consider that these leased towers were originally owned by MTN.

Aggressive tax structuring, one might argue. If the towers had remained in MTN’s books, it would only have enjoyed tax deductions, via capital allowances, to the limit of its capital expenditure plus initial allowance on the towers. However, by selling the towers to its related party and leasing them back, MTN would perpetually enjoy tax deductions for actual (annual) lease paid for the use of the towers. Sales and leaseback arrangement is perfectly legal in business. Similarly, related party transactions proven to the satisfaction of the tax authorities, to have been carried out at arm’s length, would create no tax exposure. Regardless of the history and motive behind the lease arrangement, it is my open-to-debate view that MTN NG has done nothing wrong and should, like other businesses, enjoy our sympathy on the devastating effect of naira devaluation or Fx liberalization.

Notwithstanding the above, I am keen to see how FIRS would approach the dollar-indexed lease arrangement in a transfer pricing audit, given what must now be an astronomical increase (at least three times multiple of pre-devaluation cost) of MTN’s tower lease cost. At the intersection of my knowledge of finance and tax, I opine that the unit lease cost of a given tower site should not (materially) differ from the ammortised CAPEX of a given tower site (as with Globacom, for instance).

However, I expect that IHS NG would report Fx gains arising from the remeasured lease costs. To this extent, and where IHS does not have a tax profile that causes it to pay less tax, FIRS may not be keen to make any TP adjustment as it would create a net zero effect on its tax revenues.