A building, whether residential or commercial, is an extension of land and, therefore, should not be subject to value added tax (VAT), tax experts have told government tax authorities.
They explained that since individuals cannot own land, as land belongs to the government, VAT cannot be charged on land, pointing out that the Federal Inland Revenue Service (FIRS) demand for VAT is backed by their policy and not any existing law.
These views were expressed at a Webinar hosted by Fine and Country West Africa with the theme, ‘Controversial Interpretation and Application of Real Estate Tax Provisions and Policies’ as they relate to VAT and Stamp Duty.
“The distinction made by the Finance Act 2019 on applying VAT to residential leases varies with the FIRS policy in the sense that it only applies to individuals and not corporate bodies. It is important that we encourage growth in the real estate sector because of its capacity to contribute significantly to our GDP,” Taiwo Oyedele, Head of Tax and Regulatory Services at PWC, noted.
Oyedele also faulted the disposition of the Lagos State government which arbitrarily charges stamp duties regardless of whether corporate bodies are involved or not.
In Nigeria generally, Capital Gain Tax (CGT), Stamp Duty and VAT are taxes applicable to real estate, with stamp duty, in particular, representing government’s attestation to private real estate transactions. Good governance and social services are the expected benefits that should accrue to tax payers.
Government representatives at the Webinar disagreed with Oyedele’s views, saying that there is rationale in charging VAT on buildings because, according to them, value has been added to the piece of real estate. “It is also important that stamp duty is charged on property because it provides protection to the parties involved in the transaction, ”explained Matthew Gbonjubola, Director, Tax Policy at FIRS.
Continuing, Gbonjubola argued, “if you are selling bare land, VAT is not charged but whatever value you have added goes along with the principle of VAT and so you pay VAT on the value added.”
He explained that the principle of capital allowances as concessions made on land and VAT are applicable to building alone. Lolade Ososami, Partner at Udo Udoma & Belo Osagie, agreed but to the extent that only the development that goes into land is subject to VAT.
She pointed out, however, that having charged VAT on the services that go into the project, charging VAT on the finished product is not appropriate in view of the housing deficit challenges. “Finished buildings should not be VATable, only the services that go into the building should be Vatable,” she stressed.
Ojikutu Olawale, Deputy Director of Lands at Lagos Lands Bureau, explained the rationale for applying Land Use Charge (LUC) on a vacant property, pointing out that LUC is a consolidated charge comprising ground rent, tenement rate and neighbourhood improvement charge.
In all of this, Oyedele advised that government should provide options that will ensure there are no conflicts with the tax authorities and will also not subject parties to the slow pace of the judicial system.
Option one, he explained, would involve ultimately paying VAT on the services rendered by a developer and not on the finished product, by engaging the developer to construct on the buyer’s behalf while the second option will be to accumulate the VAT receipts paid on goods and services utilized throughout the project and submit same to the tax authorities as “Input VAT”.
He called for a deliberate real estate policy as the answer to the question of policy deficiency. He said that, “ultimately taxation is how we share in the prosperity of the people and of businesses.”
Earlier in her opening remarks, Udo Okonjo, CEO/ Chairperson, Fine & Country West Africa, had outlined the objectives of the discussion which, she explained, was an attempt to provide stakeholders with a clearer understanding of Tax and Statutory Charges, as are applicable to real estate in Nigeria.
Okonjo noted that “clarity and confidence for real estate investors/purchasers and stakeholders, in relation to accurate statutory/regulatory position and the attendant implication on their respective transactions, is the starting point for all solid investments.”
