Andersen Tax| Introduction

The increase in information technology and e-commerce activities has introduced some novel issues on the appropriate treatment of Value-Added Tax (VAT) on cross-border transactions. Sadly, the Nigerian legislative framework has not evolved in the same proportion to effectively address the taxation of services where the suppliers of such services are not resident and registered for VAT purposes in Nigeria.

The Federal High Court, on 19 December 2017, ruled in the case between Vodacom Business Nigeria Limited (Vodacom) and the Federal Inland Revenue Service (FIRS) that the supply of satellite network bandwidth capacities by a non-resident company (NRC) to a Nigerian company for a consideration is subject to VAT in Nigeria, thereby affirming the decision of the Tax Appeal Tribunal on the matter. In delivering the judgment, the Judge relied on the provisions of Section 2 of the VAT Act.

However, it is necessary to critically evaluate the validity of the Judge’s submissions given the attendant controversies on the applicability of VAT on services and intangibles that are supplied by NRCs to Nigerian companies. We have examined some of the Judge’s submissions vis-à-vis the relevant provisions of the VAT Act as well as the applicability of the reverse charge mechanism in other jurisdictions in this volume of our newsletter.

This newsletter provides some analyses of the Judge’s submissions vis-à-vis the relevant provisions The increase in information technology and e-commerce activities has introduced some novel issues on the appropriate treatment of Value-Added Tax (VAT) on cross-border transactions. Sadly, the Nigerian legislative framework has not evolved in the same proportion to effectively address the taxation of services where the suppliers of such services are not resident and registered for VAT purposes in Nigeria.

The Federal High Court, on 19 December 2017, ruled in the case between Vodacom Business Nigeria Limited (Vodacom) and the Federal Inland Revenue Service (FIRS) that the supply of satellite network bandwidth capacities by a non-resident company (NRC) to a Nigerian company for a consideration is subject to VAT in Nigeria, thereby affirming the decision of the Tax Appeal Tribunal on the matter. In delivering the judgment, the Judge relied on the provisions of Section 2 of the VAT Act.

However, it is necessary to critically evaluate the validity of the Judge’s submissions given the attendant controversies on the applicability of VAT on services and intangibles that are supplied by NRCs to Nigerian companies. We have examined some of the Judge’s submissions vis-à-vis the relevant provisions of the VAT Act as well as the applicability of the reverse charge mechanism in other jurisdictions in this volume of our newsletter.

Background

VAT is a transaction tax charged at 5% on supply of goods and services in Nigeria. The thrust of the controversies on VAT treatment for transactions between Nigerian companies and NRCs is hinged on the peculiar nature of services when compared with goods because services and intangibles typically generate some uncertainties on the actual location of supply as well as appropriate taxing jurisdictions.

Interestingly, the submissions of the Judge in the Vodacom case contradict the position of the TAT in a similar case between Gazprom Oil &Gas Nigeria Limited (Gazprom) and the FIRS. In that case, Gazprom had argued that the nature of services, which were advisory and research in nature, were fully performed in the country of residence of the consultants. Hence, VAT was not applicable to the transaction in Nigeria. The TAT upheld this argument and further held that a foreign company which is not registered for the purposes of VAT in Nigeria cannot charge VAT.

Besides the seemingly contradictory position of the FHC in the Vodacom vs FIRS case with the provisions of the Value Added Tax Act, it is also a clear deviation from previous practice by taxpayers.

Details of the case

Vodacom executed a contract with New Skies Satellites (NSS), an NRC based in the Netherlands for the supply of bandwidth capacities for Vodacom’s use in Nigeria. The bandwidth was received in Vodacom’s base stations in Nigeria. The FIRS issued additional VAT notice to Vodacom on the transaction– an assessment which Vodacom objected to, on the ground that it had no obligation to remit VAT as the receiver of the service. Vodacom also contended that NSS was not under any legal obligation to register for VAT in Nigeria based on the provisions of the VAT Act. Thus, it posited that VAT liability could not have arisen from the transaction.

Vodacom filed an appeal at the TAT but the case was decided in favour of the FIRS. Dissatisfied with the ruling of the TAT, Vodacom appealed to the FHC. The FHC held that all supplies made within and/or into Nigeria for consideration are liable to VAT in line with Section 2 of the VAT Act to the extent that they are not expressly exempted by the Act.

Specifically, the Court stated that the following three questions were crucial in ascertaining whether a transaction is liable to VAT in Nigeria:

(a) Whether the transaction gave rise to a supply of either goodsor services;

(b) Whether the transaction was for a consideration; and

(c) Whether the supply was within the “supply of goods and services exempted by the VAT Act”.

The FHC, in arriving at its judgment,applied the destination principle which suggests that VAT should be levied in the consumer’s jurisdiction rather than the supplier’s jurisdiction.

The Court also held that VAT registration is not a condition precedent for the imposition of VAT and that a VATable transaction will still be subject to VAT whether the supply in question is of a continuous nature or a one-off transaction.

Furthermore, the Court held that the reverse charge mechanism should be adopted so that VAT is paid by the recipient of a service, where such services are received in Nigeria from a non-resident party.

Our Analyses

  1. Scope of VAT under the VAT Act:

The Court held that VAT is a general tax levied on all goods and services bought and sold for use or consumption in Nigeria. The Court also held that the following transactions are subject to VAT in Nigeria based on the provisions of Section 2 of the VAT Act:

  1. The supply of goods and services within Nigeria (including inter-state and intra-state acquisitions of goods and services in  Nigeria);
  1. The supply of services if the recipient is established within Nigeria; and
  2. The supply of goods from outside Nigeria.

Section 2 of the VAT Act provides that:

The tax shall be charged and payable on the supply of all goods and services (in this Act referred to as “taxable goods and services”) other than those goods and services listed in the First Schedule to this Act.

Section 10(2) of the VAT Act suggests that supplies made by NRCs to Nigerian entities would only be taxable in Nigeria if the NRCs supply the goods or services in Nigeria. Notwithstanding the uncertainties as to the actual location of supply, the Court held that the supply of bandwidth capacities to a Nigerian company falls within the supply of services that is liable to VAT by virtue of Section 2 of the VAT Act.

Although this submission appears correct from a literal interpretation of the referenced section, it is necessary to consider whether Section 2 of the VAT Act can be interpreted in isolation from the requirement in Section 10(1) that an NRC should be carrying on business in Nigeria before the obligation to register for VAT in Nigeria would arise.

ii. The definition of the phrase “carrying on business” and the requirement for NRCs to register for the purposes of VAT under Section 10 of the VAT Act

The Court held in the Vodacom case that the phrase “carrying on business in Nigeria” in Section10(1) of the VAT Act includes a single contract of supply of goods and services into Nigeria and that where an entity outsideNigeria contracts to make a supply in Nigeria to a person in Nigeria such entity is deemed to have carried on business in Nigeria for VAT purposes.

Section 10 of the VAT Act provides that:

  1. For the purpose of this Act, a non-resident company that carries on business in Nigeria shall register for the tax with the Board, using the address of the person with whom it has a subsisting contract, as its address for purposes of correspondence relating to the tax.
  2. A non-resident company shall include the tax in its invoice and the person to whom the goods or services are supplied in Nigeria shall remit the tax in the currency of the transaction.

Based on our reading of the above section, it would appear that the requirements to register and charge Nigerian VAT by an NRC as well as remittance by the resident counterparty are  predicated on the precondition for the NRC to be carrying on business in Nigeria. In fact, this was the TAT’s position in the Gazprom case.

Based on the TAT’s comments in the Gazprom case, “the courts have in a plethora of cases defined “carrying on business” to mean conducting, prosecuting or to continue a particular vocation or business as a continuous operation or permanent occupation” (emphasis ours).

The foregoing definition suggests repetition of actions and the phrase “in Nigeria”in the definition of imported services suggests that the activities should be performed in

Nigeria. Unfortunately, the Judge dismissed this argument in the Vodacom case.

iii. Applicability of the destination principle

The Court in the Vodacom case further held that the word “supply” in Section 2 of the VAT Act in relation to international trade implies goods and services supplied in Nigeria. The Court also held that the destination principle has been incorporated into the charging provision of the VAT Act. To buttress this point, the Court persuasively referred to the OECD International VAT/GST Guidelines (OECD Guidelines) published on 12 April 2017 which states that the destination principle should apply to internationally traded services and intangibles.

 The OECD Guidelines are merely persuasive and do not form part of Nigerian law. Thetax authorities and the Courts have on several occasions emphasised this point when taxpayers sought to rely on OECD publications to canvass a position. 

The sudden reliance on the OECD Guidelines introduces uncertainty into the Nigerian tax system with regards to the relevant rules of interpretation.

It is pertinent to note that the VAT Act makes no provision as to the applicability of the destination principle in Nigeria. It appears that the Court attempted to give a wide interpretation to the word “supply” in a bid to incorporate the destination principle.

Furthermore, the Courts have, on several occasions, held that tax statutes are to be construed and interpreted strictly and given their ordinary meanings.

On the nature of tax legislation, Oduyemi JCA stated in the case between Ahmadu Bello and Kogi State Government that:

“The law in question is, in its nature, a law which imposes pecuniary burden and is underthe rules of interpretation, subject to the rule of strict construction. It is a well-settled rule of law that all charges upon the subject must be imposed by clear and unambiguous language because in some degree they operate as penalties; the subject, is not to be taxed unless the language of the statute clearly imposes the obligation.”

 Consequently, importing the destination principle into the provisions of Section 2 of the VAT Act is inconsistent with the requirement for tax statutes to be certain in their interpretations. Given that the clear provisions of the VAT Act require an NRC to be registered in Nigeria for the purposes of VAT and the VAT (Amendment) Act of 2007 included a definition of imported service to mean services rendered in Nigeria, it would appear that there was a gravitation towards specifying that only services rendered in Nigeria are liable to VAT.

iii Non-issuance of tax invoice and the applicability of reverse charge mechanism

The Court further held that where an NRC has no physical presence in Nigeria, the requirement to register is relaxed because the tax authorities cannot easily proceed against the NRC without incurring significant administrative cost.

The Court, therefore dismissed with the requirement to issue invoices for the purpose of accounting for VAT as specifically required under section 10 of the VAT Act.

Furthermore, contrary to the express provisions of the law, the Court held that the reverse charge mechanism should be applied to ensure that VAT is accounted for, and to avoid the administrative burden of registration of NRCs supplying services in Nigeria. The reverse charge mechanism requires the consumer of goods and services to self-account for VAT arising from such transactions. In reaching this decision, the Court once again relied on the OECD Guidelines.

It should be noted that while Section 29 of the VAT Act imposes a penalty for failure to issue a tax invoice and collect VAT on a supplier, there are no similar penalties on service recipients for failure to do the reverse charge or to remit VAT that was not charged by the NRC. Thus, it is clear that the VAT Act did not envisage the reverse charge mechanism currently being canvassed by the tax authorities.

Ignoring the requirement to register and charge VAT where no exception has been created by the Act is tantamount to seeking to amend the provisions of the law through judicial activism and this has been frowned at, in a plethora of case laws.

Section 13 of the VAT Act instances where deduction at source is to be applied (or as may be seen in practice, a reverse charge is applied where there has been a failure to obtain a VATable invoice):

  1. Every Ministry, statutory body or other agency of Government shall, at the time of making payment to a contractor, remit the tax charged on the contract to the nearest local Value Added Tax office.
  2. The Service may, by notice, determine and direct the companies operating in the oil and gas sector which shall deduct VAT at source and remit same to the Service.

The above references clearly demonstrate that the VAT Act specifically sets out the situations where VAT deduction at source or the reverse charge mechanism may be applied. These are transactions with Ministries, Statutory bodies, Government Agencies and Oil and Gas Companies.

Further to this, the FIRS has issued an information circular no. 02/2007 titled “Notification of Guidelines on the Implementation of VAT Deduction (Reverse Charge) and New Payment Arrangement with Respect to Fees, Levies, and other Charges Payable by Companies in Oil and GasIndustry”. These Guidelines were issued pursuant to Section 13 of the VAT Act.

Other than these instances, there are no other references to reverse charge or VAT deduction at source in the VAT Act.

Applicability of reverse charge mechanism in other jurisdictions

Although the international community (e.g. the OECD and the European Union) has recommended the adoption of the destination principle and the reverse charge mechanism for cross border transactions, international law is only of persuasive authority in Nigeria.

Thus, the destination principle and reverse charge mechanism should not apply unless there is a legislative enactment to that effect.

Moreover, most of the countries that adopted the reverse charge mechanism into their VAT systems did so via parliamentary amendments or enactments to address the lacuna in their national laws on the taxation of intangibles such as electronic services in cross-border transactions.

Some of the reverse charge legislative provisions adopted by these countries are highlighted below:

 

  • India

The reverse charge mechanism as it relates to the supply of goods and services by non-registered entities was introduced under Section 9(4) of the Central Goods and Services Tax Act, 2017 and Section 5(4) of the Integrated Goods and Services Tax Act, 2017.

The Sections provide that reverse charge will apply where a vendor who is not registered under the Indian Goods and Services Tax (GST) supplies goods to a person who is registered under GST. In other words, the receiver would have the obligation to pay the GST directly to the Government rather than the supplier.

 

  • United Kingdom (UK)

Section 8 of the UK Value Added Tax Act, 1994 (UK VATA) provides for the reverse charge mechanism. The UK VATA provides that where relevant services are –

  1. supplied by a person who belongs in a country other than the United Kingdom,and
  2. received by a person (“the recipient”) who belongs in the United Kingdom for the purposes of any business carried on by him,then all the same consequences shall follow under this Act (and particularly so much as charges VAT on a supply and entitles a taxable person to credit for input tax) as if the recipient had himself supplied the services in the United Kingdom in the course or furtherance of his business, and that supply were a taxable supply.

South Africa (SA)

Based on Section 7(1)(c) of the South African VAT Act, 1991, the recipient of imported services is obligated to self-account for VAT thereon.

It is pertinent to note that while Section 46 of the Nigerian VAT Act (as amended in 2007) defines imported service to mean “service rendered in Nigeria by a non-resident person to a person inside Nigeria”, it does not provide for the treatment of VAT on such services.

Section 10 of the VAT Act, however, provides the conditions under which an NRC should be required to register and charge VAT which is, that the NRC should be carrying on business in Nigeria.

The above clearly shows that the VAT Act makes no provision for the application of reverse charge mechanism in transactions relating to imported services. The pronouncement of the Judge in the Vodacom case therefore clearly contravenes the principle of certainty of our tax laws.

Conclusion

 Given the inconsistencies in the submissions of the TAT and the FHC vis-à-vis the specific provisions of the VAT Act, the applicability of VAT on transactions with NRCs may still generate some debates from taxpayers with similar business arrangements.

It is important for lawmakers to revisit the Nigerian VAT Act and amend the contentious sections to ensure clarity in the application of VAT on cross- border transactions especially items that are currently under dispute such as imported services, e-commerce activities, electricity etc.

Moreover, there is a need to expand the limited scope of the Nigerian VAT system into a classical system that would also address the recoverability of VAT for service companies beyond the current system that more or less mirrors a simple sales tax regime.

Notwithstanding, it is imperative for companies and persons that intend to enter similar business arrangements to proactively engage with their tax advisers on suitable structures that will help mitigate potential exposures.

1 COMMENT

  1. For one week,i picked this article about this taxation in Nigeria by onome and this delloitte,as I start to read my stomach start to burn immediately,honestly,i drops like a pick a hot potato or hot charcoal with my bare hand.
    Now onome,you are a trained economist,why do you not seeks a legal opinion ?.a lawyer will tell you that a supreme court will settles this contradiction.if you had sought legal opinion,this article will not arises.
    The next article by deloitte,who is proposing a double tax or not,in that artcle,this story said it will erode the powers of nse or securites regulating authority, which means if this law happen,that WE HUMANS ARE PERFECT WITHOUT FAULT OR CREATED PERFECT.
    This comes to this peace corps in Nigeria,which said have been passed by the NASS rejected by the presidency.if this law is passed it will abidicates and erodes the power,function,effectiveness of the police force.this peace corps are they trained and educated for this function ?.
    I saw an article in naija today,that said this peace corps will create job,not for peace in nigeria.WE ALL KNOWS THAT NIGERIA POLICE FORCE IS NOT WELL-FUNDED,IF YOU CANNOT FUND THE POLICE FORCE,HOW CAN YOU FUND THIS PEACE CORP ?
    what need to be done, is to fund the local govt area,who have grass root contact with various communities,or special funding by nass,with the creation of department for conflict management,with well trained social worker or sociology gradute or dept of young people in all local govt area.the acp did proposed state police force in their manifesto before election,now we have this peace corps in nigeria

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