• Thursday, March 28, 2024
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Nigerian VAT Act, Non-Resident Companies (NRCs) and Multiple Location Entities (MLEs)

Tax Appeal Tribunal exempts Voluntary Pension Contribution from PAYE tax

The purposive view is not without precedence as Mohammed Bello JSC once expressed in Mobil Oil (Nig) Ltd and Federal Board of Inland Revenue that “in construing a statute, regard shall be given to the cause and necessity of the Act and then such construction shall be put upon it as would promote its purpose and arrest the mischief which it is intended to deter”. To align with this view is to give a benefit of the doubt to the purposive interpretation of section 10(3) since the ultimate intent of the VAT Act is not the creation of VAT invoices but the payment of tax? If we agree that the overarching objective of VAT is to impose tax on consumption and that consumers or users bear the burden, it may not be illogical to state that the duty to remit presupposes the duty to ensure the deduction of VAT where an NRC fails to invoice the applicable amount.

 

In any event, since the incidence of VAT is on the final consumer or user who perhaps has the rational incentive to avoid the burden, it creates a compelling argument for proponents of purposive approach. Therefore, if one follows this strain of thought, it could be argued that the normative validity of the duty imposed on a Nigerian Company to ensure that an NRC is registered for VAT and also ensure the deduction of VAT, derives from the second part of S10(3)which states thus; … and the person to whom the goods or services are supplied in Nigeria shall remit the tax in the currency of the transaction.

 

In view of the observed inconsistency, the question that agitates the mind is whether the FIRS will, in the same breath, defer to the International VAT Guideline and allow cross-border recharge of external costs between establishments of the same MLE for the purpose of VAT, and therefore cede the taxing right to other jurisdictions? Or viewed from another perspective, what rule of interpretation will the FIRS urge the court to adopt in the construction of section 10(3) in a hypothetical case of an establishment of an MLE in Nigeria that acquired service for use wholly or partially by other establishments of the same MLE in other jurisdictions? Section 10 (3) reads; 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 precedence, it is perhaps not difficult to speculate that FIRS will pitch tent with strict interpretation of “the person to whom the goods or services are supplied in Nigeria”. The section as drafted tends more towards the direct delivery approach and does not envisage an internal recharge mechanism, both recommended by the International VAT Guideline under different circumstances. Within the scope of the Guideline, when a service or intangible acquired by an establishment of an MLE is used wholly or partially by other establishments of the same MLE in other jurisdictions, supported by an internal recharge mechanism for the allocation of external cost of the service, the allocation should form the basis to allocate the taxing rights by/to tax administrations where the establishments of use are located.

 

Therefore, if the entity to whom the goods are supplied in Nigeria is not the only user of the service based on internal recharge arrangement within an MLE, strict interpretation of section 10(2) could result in double taxation for the MLE.

It is not unlikely that the Gazprom case has some features of internal recharge (please note that internal recharge for the purpose of VAT is, in principle, different from recharge for the purpose of Company Income Tax (CIT) and as such, conclusion should not be drawn based on the judgement of the Tax Appeal Tribunal in the case between VF Worldwide Holdings Ltd vs FIRS).

The implication therefore is that businesses with centralized functions in Nigeria whose objective is to gain efficiencies and improve competitiveness could face the potential risk of double taxation. Therefore, to guide against this kind of potential exposure the necessity for a robust tax strategy as an integral part of corporate strategy cannot be emphasized enough. On the flip side, the Revenue Authorities in Nigeria also face the risk of unintended non-taxation and revenue loss since Nigerian establishment of an MLE may also be the final user of services imported by establishments of the same MLE in other jurisdictions.

Hence, disclosures may be required from Nigerian entities on recharges from other establishments of the same MLEs in other jurisdictions for proper VAT accounting in Nigeria. Perhaps, the Country-by-Country Reporting (CbCR) Regulations released by the FIRS in 2018 suffices for this purpose. If not, this may be included as part of the compliance requirements in line with section 8(2) of the Regulation.

In conclusion, it is expedient that steps be taken to clarify the legal position with respect to the requirements for internal recharge for the purposes of VAT and steps should also be taken to align the VAT Act with current business realities. This should be done through an amendment to the relevant sections of the VAT Act in order to remove any burden, current uncertainty and potential risk, on both sides, associated with VAT compliance on imported services.

 

  • Concluded

Glenn Ubohmhe

Glenn is a tax practitioner. He has B.Sc (Acct), MSc (Energy Fin.), LLM (Petroleum Tax. & Fin), MBA, ACA, ACTI.