Case Examples
Mike recently “sold a piece of Land” he inherited from his father for ₦20M. On filing his taxes he was asked to remit a 5% Vat on the “sale of the land”.
XYZ Oil and Gas Ltd has also been mandated to pay VAT on an Oil Mining License they recently resold to DEF Ltd for ₦1b.
Question: Are they all liable to charge and remit VAT?
In Theory
Vat like we all very well know is a tax on sale of goods and services. In Nigeria it’s a 5% tax on all goods and services that are not listed as exempt or zero rated. Therefore the Inland Revenue will typically expect that you pay VAT on any business transaction that involves exchange of money for value acquired provided that value is not on the list of items that are exempted. Based on this, tax payers and tax collectors have been at logger heads on whether to pay vat on transactions mentioned in our case study above;
What is not “goods or services”
Unfortunately the VAT Act did not define the phrase “goods and services”. A proper definition of goods and services will help explain what can actually qualify as exempt and what is not. For example, if an item like blood donation is not a good and neither is it a service, then exempting or not exempting it from the list of votable items is irrelevant and null & void for the simple reason that it is not a good or service.
In Practical
Practically each of the examples in our case study will more often than not result in Vat not being paid depending on who you meet at the Federal Inland Revenue Service and how you are able to argue your case to your favour. When a Law is not clear on a matter involving trade then it always leaves room for contention. As such the FIRS always remain open to negotiations when tax related issues are not clearly solvable by simply reading VATA.
Is Sale of Land Vatable?
The General Concensus amongst professionals is that Land does not qualify as a good or a service and as such is not “vatable”. If the provisions of Section 1 & 2 of the Land Use Act is anything to go by, then Land by Law belongs to the State and not to any one individual. That is why Land is always classified in the Balance Sheet of companies as a “Leasehold” rather than a “Freehold”. What you actually own is right to occupy that land for a 99 year period 0r less depending on the unused leasehold of the land. For Mike, he has therefore sold the right to the occupancy of that land to someone else for a value of ₦20M. Is that right therefore a “good or service”? Most Tax Consultants and indeed Lawyers will say no in reference to the dictionary which in its definition implies a right being intangible is not a good and certainly not a service. Further enquiries from Tax Consultants and staff of the FIRS seem to buttress this view.
My Take : Proceeds from “Sale of Land” is generally not subject to Value Added Tax.
Is Sale of an Oil Mining Lease Vatable?
This question is easier to answer thanks to an already decided Case between CNOOC and the FIRS over proceeds of an Oil Mining Lease sold by the Plaintiff to another party. The Court had ruled that Vat was not chargeable on that transaction as the rights “do not constitute either good or service”. Therefore XYZ Oil and Gas is not expected to charge and remit vat on the proceeds of the sale of the lease.
My Take: By Judicial Precedence, tax should not be paid on transfer of right to an Oil Mining Lease. Indeed it should not be paid on lease on a transfer of right to mine any natural resource in Nigeria.
Is Rent on Residential Property and Commercial Property subject to VAT?
This is another issue that is contentious and one which the FIRS has taken a decision based policy. The FIRS in their schedule of exempted items, included proceeds from rent paid on Residential Property as an exempted item. Therefore, by inference proceeds from rent on a commercial property is subject to Vat. Whether “rent” can be considered a service by definition is another issue and one that may be explored in the courts.
My Verdict: By Policy inference, Vat is currently payable on proceeds from rent of commercial properties. As per diplomats, the law is quite clear, they are exempted from paying VAT. Vat is also not payable on proceeds from rent of a residential property.
Other things to consider
Whilst VAT may not be payable on sale of a right to the ownership of a land, what about the sale of property? For example a real estate firm that is into the business of developing and selling property units, should the proceeds on the sale of that property be subject to VAT? In this case, property units may be considered by some as a merchandise for the company and as such may in substance may be referred to as a good and therefore subject to VAT. But a merchandise in its definition is also referred to as a moveable item which a house certainly is not. Therefore, shouldn’t it for that reason also be excluded from transaction that are subject to VAT?
That is why proceeds from sale of some moveable fixed asset items such as plant and machinery, computer equipments, furniture and fittings, industrial equipments are subject to a 5% VAT. Even intangibles such as proceeds on sale software licenses are subject to Value Added Tax in most cases.
Finally
It is almost certain that the Value Added Tax Act (VATA) will be amended in due course to address some of the confusion and controversies surrounding the current act. For now, reason over policy is a safer route to winning arguments that may arise as to what should be subject to VAT and what should not.