Value Added Tax, Imported Services and Issues with the Current System

Overview

Nigeria imports anything and everything ranging from toothpick to machinery and all manners of services from clerical support to technical assistance. Since Value Added Tax (VAT) was introduced in 1993, it has generated over N5 trillion in revenue for all the three tiers of government. Despite being only at the rate of 5%, which is one of the lowest in the world, VAT is currently the largest source of non-oil tax revenue. But at about N500 billion annually for a country with GDP in excess of N80 trillion, there is no doubt that Nigeria is underperforming in VAT collection just as in other tax areas.

VAT is applicable on all goods and services (imported or otherwise) except those that are stated as exempt or zero-rated in the VAT Act such as educational and pharmaceutical products, or those that enjoy special waivers from government. The supplier does not need to have a presence in Nigeria for VAT to apply on the imported goods. However, to a large extent, this is not the case for imported services. The VAT Act requires a non-resident entity to only register for and charge Nigerian VAT where it is carrying on business in Nigeria. While this is logical, and it is in fact in accordance with global best practice, there is a significant gap in the sense that the local recipient in Nigeria is not legally required to self-charge the VAT in such cases.

Many countries require the local recipient to charge VAT on imported services and remit to the tax authority. This not only ensures that governments get the revenue for goods and services consumed within their territories but also provides a level playing field for local service providers who are obliged to charge VAT on their services.

FIRS Guidelines and Practice

Notwithstanding the clear provisions of the law under Section 10 of the VAT Act, which requires only a foreign company that is carrying on business in Nigeria to register for VAT using the address of its Nigerian counter-party, the FIRS in its various pronouncements and in practice require a non-resident service provider to charge VAT, regardless of whether it is carrying on business in Nigeria or not.

Where VAT is not charged on imported services, the FIRS will demand that the Nigerian recipient self-charge the VAT and remit them. No matter the justification for VAT on imported services, tax is strictly a matter of law so it cannot be imposed or waived based on guidelines, other pronouncements or wishful thinking.

The New Judgement by the Tax Appeal Tribunal

On 10 June 2015, the Tax Appeal Tribunal sitting in Abuja held that a foreign company providing services to Nigerian customers is not carrying on business in Nigeria for the purposes of the Nigerian VAT to the extent that such services are performed outside Nigeria. Since it not carrying on business in Nigeria, it is not required to register for, or charge Nigerian VAT. Also, a Nigerian company that has not received a VAT invoice from the foreign provider is not required to account for or remit VAT to the FIRS.

The Tribunal held that that carrying on business in Nigeria means ‘conducting, prosecuting or to continue a particular vocation or business as a continuous operation or occupation’ within Nigeria.

This decision provides some clarity on the often disputed position of the FIRS that a Nigerian company should self-charge VAT on services received from a foreign entity even when such provider is not carrying on business in Nigeria.

The way forward

Given the dwindling revenue accruing to the government, it has become critical to look beyond oil and VAT should clearly be a major area of focus.

The emphasis on the part of government seems to be on how to increase the VAT rate rather than a complete overhaul and re-enactment of the VAT legislation to make it fit for purpose and to address the various anomalies and loopholes. These include:

 

1. Unclear scope and coverage – VAT is applicable on goods and services but there is no clear definition of what is a good or service. The FIRS had in the past lost a case involving VAT on the transfer of interest in a petroleum asset. The court held that based on the VAT law, it is neither a good not a service and therefore not liable to tax. There should be a broad definition of goods and services that is wide enough to cover every intended transaction but sufficiently specific to prevent avoidable controversies.

 

2. Ambiguities regarding exemptions – in yet another recent case, the court ruled against the FIRS seeking to charge VAT on bottled water on the basis that it has been processed and packaged and therefore not within the category of “basic food items” that are VAT exempt. It does not help much to simply say “basic food items” or “educational materials” etc are exempt. The list of exempt and zero rated goods and services should be more detailed and specific.

 

3. VAT on imported services – from a common sense and practicality viewpoint, a non-resident company without any form of presence in Nigeria cannot register for or charge Nigerian VAT. However, the local recipient should self-charge the VAT but only by a clear provision of the law. Such input VAT should then qualify as claimable provided the related output is VATable.

 

4. Claimable input VAT – under a proper VAT system, only the final consumer should bear the burden of the tax. Input VAT incurred on goods, assets and services should be claimable to the extent that they have been applied in supplying taxable goods and rendering of taxable services on which output VAT is charged. The Nigerian VAT law currently prohibits input claim on capital assets, overheads and services. This makes the VAT regime more like a sales tax system.

 

5. Arbitrary VAT waivers – it is far too common to see the federal government grant waivers of VAT especially on imports but also on local transactions like the recent VAT waiver on capital market transactions. Interestingly VAT revenue belongs to the states and local governments but it is the federal government as the collecting agent who has the power to grant VAT waivers (through the finance minister). It is simply absurd for an agent who collects money on behalf of a principal to have absolute power to decide whether to collect or give the money away without any recourse to the principal.

Many countries make changes to their tax laws and regulations every year to adapt to the fast changing world we live in. Nigeria cannot continue to be lazy in tax matters as to keep a law for over 20 years without any major changes necessary to address current realities. If we have been indifferent in the past due to the free flowing revenue from oil, it is now obvious that the party is over and we can no longer continue with business as usual. Nigeria must wake up fast or face the music.

Taiwo Oyedele

 

Taiwo Oyedele is a Partner and Head of Tax and Regulatory Services at PwC Nigeria. He is a regular writer and public speaker on accounting and tax matters.

 

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