In one of the landmark cases on Value Added Tax in Nigeria recently decided by the Court of Appeal between Vodacom v Federal Inland Revenue Service (FIRS), one of the issues formulated for determination was whether the lower court (Federal High Court) was correct in law when it applied “Reverse Charge” and “destination principle” without recourse to the fact that there exists no Nigerian statute establishing those principles. It was further stated that by invoking these concepts, the lower court engaged in judicial speculation on the principles of VAT Act in Nigeria.
The issue of VAT on imported serviceshas been a subject of intense debate in recent times. My article on VAT published earlier in year and titled “Nigerian VAT Act, Non-Resident Companies (NRCs) and Multi-Location Entities (MLEs): The Unsettled Matter of Imported Services” substantiallyaddressed the other issues determined by the Court of Appeal. Therefore, I will not belabor this intervention with the contentious issue of whether services rendered by a non-resident company to a taxpayer in Nigeria is“vatable”or whether VAT in Nigeria finds its taxable event strictly within the bright-line definition of what constitutes a good or service, based on the combined reading of the provisions of S2(1), S10 (1)(2)(3), S11(1) and S13 of the Act.Consequently, this article will focus exclusively on the existence, or otherwise,of reverse charge in the body of tax laws in Nigeria.
Value Added Tax or VAT (otherwise known as Goods and Services Tax or GST) is chargeable on the supply of taxable goods and services except items specifically stated as exempt or zero-rated as listed in the first schedule to the Act. The relevant law on VAT is the VAT Act, Laws of the Federation (LFN) 2004 as amended. The incidence of VAT is borne by the buyer or consumer. However, the tax burden is not in all casesborne by those who are legally required to pay the tax as it is sometimes transferrable.
The concept of reverse charge (also referred to as “tax shift”)has its origin in the European Union (EU) single market. Reverse charge mechanism essentiallytransfers the responsibility for VAT compliance and reporting from the seller to the buyer of a good or service thereby reducing the requirement for sellers to register for VAT in the relevant taxing jurisdiction – the country where the supply is made. The overarching objective is to reduce the cost of administering the tax where the supplier of “vatable” goods or services is located in a different tax jurisdiction. Since the basic idea behind reverse charge is a shift in the compliance burden from the supplier to the consumer, let us then examine the VAT Act if there are equivalent provisions in Nigeria.
Section 14 of the Act requires that a taxable person “shall on supplying taxable goods or services collect the tax on those goods or services”. It is clear from this provision that the duty to deduct and remit VAT resides with the supplier. However, S13(1) requires ministries, statutory bodies or other government agencies to deduct and remit the tax charged when making payment to contractors thus reversing the compliance obligation. Please there is no distinction between local or foreign contractors here. Therefore, even if we assume, without yielding, that the concept is only applicable to cross-border transactions,there is a clear presence of reverse charge principle in the Nigerian VAT Act consistent, in both substance and form, with the OECD VAT/GST Guidelines.
In the same vein, S13(2) of the VAT Act states that the service may, by notice, determine and direct companies operating in the oil and gas sector which shall deduct VAT at source and remit same to the Service. Pursuant to this provision, the FIRS in 2007 issued the Guideline on the Implementation of VAT Deduction (Reverse Charge) and New Payment Arrangement with Respect to Fees, Levies, and other Charges Payable by Companies in the Oil and Gas Industry. While a Guideline or Notice by FIRS or state IRS may not have legal force, but to the extent that the said Guideline derives directly from and is not inconsistent with the provision of S12(2), the principle of reverse charge cannot be more explicit.
I think the real argument is not whether the principle of reverse charge is alien to the body of Nigeria’s tax laws but whether it is applicable on imported services. This isagainst the backdrop of the varying construction being ascribed to S10(1)(2) of the Act,compounded by the absence of border-gate enforcementof VAT on services, unlike physical goods, “supplied in” Nigeria to recipients outside the oil and gas sector and government agencies.The answer to that question depends on the interpretation of S10(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”.
The above provision seems to have allocated the responsibility to remit (and not necessarily to deduct) VAT to the consumer in Nigeria while the duty to invoice, is ceded to the non-resident company. What this means is that the duty to deduct VAT on foreign supplies sits in an ambiguous equidistant position between the foreign supplier and the consumer in Nigeria. If the duty to remit VAT on imported services by a company or consumer in Nigerianecessarily implies the duty to deduct, it would then besafe to conclude that S10 recognises reverse charge. If, however, the duties are separate, the principle of reverse does not apply.
In sum, based on the provisions of S13(1)(2), to claim that the principle of reverse charge is alien to the body of Nigerian tax laws may not be quite exact. Although the phrase“reverse charge” is not specifically stated but the principles are contained in the Act. After all, if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. In fact, with regard to S13(1) (2), it is a duck. However, it is not so clear-cut with S10(2).
Glenn Ubohmhe
Ubohmhe is a Chartered Tax Practitioner, is a Fellow of both the Institute of Chartered Accountants of Nigeria and Chartered Institute of Taxation in Nigeria
