Current Issues on Value Added Tax (VAT) Law and Practice in Nigeria

Value Added Tax: Introduction
Value Added Tax (VAT) is an indirect tax based on the consumption of some specified goods and services. It was introduced into the Nigeria tax system through VAT Decree No 102 of 1993 which repealed the Sales Act of 1986 and it became effective 1 January 1994. Recent amendments to the VAT Act were in 2007 and 2012 respectively.

The burden of Value Added Tax (VAT) is borne solely by the final consumer.

The rate of VAT in Nigeria is currently 5%. According to the National Tax Policy 2010, the Nigerian VAT rate of 5% is comparatively the lowest when juxtaposed against that of other ECOWAS countries.

Value Added Tax in other jurisdictions/ countries in Africa
In summary, the different tax jurisdictions administering Value Added Tax in Africa have some similarities and dissimilarities in terms of rates, scopes, registration and deregistration, list of exempt items, returns, payments, refunds, record keeping, sanctions and penalties for non-compliance. The different VAT rates in Africa as published by PricewaterhouseCoopers are summarized below:

Botswana:   Standard rate 12%
Cameroun:  Minimum 19% and maximum 25%
Cape Verde: 15%
Chad: 18%
Congo: Standard rate 18% and reduced rate of 5% for imported petroleum products from Cameroun and to certain categories of goods such as cement, sugar, tomatoes, etc
Cote d’ Ivoire: Standard rate 18% and reduced rate of 9% on certain food products such as milk, pastas and production equipment for solar energy and oil companies.
Equitorial Guinea: Standard rate 18% and reduced rate of 10% applicable to production, manufacturing and selling of some specified food items as contained in the Gabonese Tax Code 1995 as amended to date. Ghana: Standard rate 15% and reduced rates of 2% and 5% applicable to all supplies of goods and services not qualifying for an exemption or zero-rating.
Guinea: Standard rate of 18%
Kenya: Standard rate 16% and 18% applicable to catering, hotel and restaurant services.
Lesotho: Standard rate 14%, 5% to supplies of electricity and phone calls and 15% on import and supplies of alcoholic beverages.
Madagascar: Standard rate 20%
Malawi: Standard rate 16% and reduced rate of 5%
Mauritius: Standard rate 15%
Morocco: Standard rate 20% and reduced rates of 7%, 10% and 14% applicable to designated operations.
Mozambique: Standard rate 17%. There are instances where VAT is not due on the full invoice price and these lead to effective reduced rates.
Namibia: Standard rate 15% and an increased effective rate of 16.5% on importation.
Nigeria: Standard rate 5%
Rwanda: Standard rate 18%
Senegal: Standard rate 18% and reduced rate of 10% on tourism-related activities such as hotel accommodation and catering services.
South Africa: Standard rate 14%
Swaziland: Standard rate 14%
Tanzania: Standard rate 18%
Tunisia: Standard rate 18% and reduced rate of 12% to some specified operations.
Uganda: Standard rate 18%
Zambia: Standard rate 16%
Zimbabwe: Standard rate 15%

General Features of VAT in Nigeria

• VAT is a consumption tax designed primarily to tax private individuals, corporate bodies, NGOs and Government through its Ministry, Departments and Agencies (MDAs) when they consume VATable goods & services.
• It is a multi-stage tax which applies wherever goods and services are supplied by a producer.
• The tax is levied on the value gained by the products or service before being sold. It is applied at several points in the production and distribution chain until the item reaches the final consumer.
• The tax is at a flat rate of 5%
• It has a wide coverage as it applies to all goods & services including import unless those items exempt from the tax.
• It has a built in self-assessment mechanism that allows a business to claim credit for the tax paid on its input and calculate the tax liability on its output.

Advantages of (Argument for) VAT

• It serves as a significant source of revenue to the government
• It is difficult to evade because the tax is paid whenever VATable goods are purchased
• It encourages the exportation of Nigerian goods since exported goods and services are zero-rated
• The yield from VAT could be used to estimate growth rate of the economy because it will reveal the consumption pattern.
• It redresses the cascading effect of sales tax
• It improves fairness and tax system since the consumer pays tax in line with their ability to buy goods & services.
• VAT is easy to collect since it is being paid at the point of consumption of goods and services
• It favors the marginalized masses because it does not affect the basic needs of life.
• VAT provides employment opportunities for young graduates as the FIRS VAT Directorate are adequately staffed.

Disadvantages of (Including administrative bottlenecks) VAT

• There is problem of ineffective administration of VAT as it requires enormous paper work and adequate record keeping when compared to sales tax.
• There is higher cost of administration to government as higher number of tax officials is needed to administer VAT.
• VAT computation entails a lot of arithmetic and this makes it tedious.
• It imposes economic lordship on the marginalized masses because traders may take advantage of the situation to inflate the prices of goods.
• It can lead to double tax on the workers as they pay PAYE and still pay VAT on goods bought.
• Businesses incur additional cost of keeping VAT records and processing information required for the payment of tax and for claiming refund from the FIRS.
• Most Oil and Gas Companies and Government’s Ministries, Departments and Agencies deduct VAT at source without remitting such to FIRS thereby increasing the burden of contractors and suppliers.
• Accounting and reconciling of VAT issues arising from some distributorship business such as recharge cards and DSTV dealership poses significant problems.

Status of goods and services for VAT purposes
Goods are classified into EXEMPT and ZERO RATED for the purpose of VAT and all others not itemized are VATable in line with the First Schedule Part 1 and 2 of the Act, FIRS Circulars and Exemptions sometimes granted by the Minister of Finance respectively.

Goods exempt
These under-listed goods are exempt from VAT. For emphasis, VAT will not be payable whenever any of these goods is consumed.

• All medical and pharmaceutical products
• Basic food items
• Books and educational materials
• Baby products
• Fertilizers locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment.
• All exports
• Plant and machinery imported for use in the Export Processing Zone
• Plant, machinery and equipment purchased for utilization of gas in down-stream petroleum operations
• Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes.
• Proceeds from the disposal of Short Term Federal Government of Nigeria Securities and Bonds

• Proceeds from the disposal of Short-Term State, Local Government and Corporate Bonds (including supra-natural Bond).
• Save for Bonds issued by the Federal Government, which shall continue to enjoy tax exemption as provided under the Value Added Tax Act, the tax exemption granted pursuant to order 1 of this order is for a period of 10 years from the date of this order.

Services exempt
These under-listed services are exempt from VAT. For emphasis, VAT will not be payable whenever any of these services is consumed.

• Medical services
• Services rendered by Community Banks, Peoples Bank and Mortgage Institutions
• Plays and performances conducted by educational institutions as part of learning
• All exported services.

Zero – Rated goods and services
These categories of goods and services attract VAT but the applicable rate is 0%.

• Non-oil exports
• Goods and services purchased by diplomats
• Goods purchased for humanitarian donor funded projects undertaken by NGOs, Religious and Social Clubs that are recognized by law whose activity is not for profit and in the public interest.

Other exemptions
Additional exemption granted by the Minister of Finance through Fiscal Policy Measures in line with section 38 (b) of the VAT Act which states that ‘The Minister may by order published inthe Gazette, amend, vary or modify the list set out in the First Schedule to this Act.

The under-listed are further exempted from VAT at various periods by the Minister of Finance in line with section 38 (b) of the Act.

• Locally manufactured biscuits
• Plant, machinery and equipment (including steel structures) for the
• manufacture of cement and allied products
• Vegetable oil
• Motorcycle (CKD)/Bicycle (SKDs) and their spare parts
• Corporate bonds and government securities (10 years from 2 January 2012)

Also, The Federal Inland Revenue Service, through its Guidelines and Circulars, has exempted petroleum products from the net of Value Added Tax. This exemption is premised on Petroleum Products Pricing Agency (PPPA)’s template for determining the price of petroleum products which indicates VAT has already been incorporated into it.

Problems associated with the categorization of exempt goods in the First Schedule
In recent times, disputes have arisen between the FIRS and taxable persons as to what constitute the definition or explanation of what constitutes the items in some categorisations. A very recent case in reference is the one in respect of what the definition of ‘basic food item’ is as the VAT Act does not provide such answers in terms of explanations or definitions.

This lacuna in the VAT Act resulted in litigation between the FIRS and some Limited Liability Companies that are producers of water. These companies are members of the Association of Food, Beverage and Tobacco Employers (AFBTE).

The details of the case are as described below:

Warm Spring Water Nigeria Limited, Ashmina Limited, Seven-Up Bottling Company Plc, Voltic Nigeria Limited, Nigerian German Chemical Plc., Adama Beverages Limited, Nigerian Bottling Company Limited, Regolis Waters Nigeria Limited vs. Federal Inland Revenue Service (Federal High Court, Lagos Judicial Division. Suit No: FHC/L/CS/157/2015. Judgment given: 11 May 2015).

In this landmark case, Honorable Justice I.N. Buba as he then was ruled in favor of the plaintiffs and granted all the reliefs sought in the following manner:

That water (whether in bottle or packaging material) is a basic food item and therefore exempt from VAT.

• That the FIRS’s 2007 VAT Exemption Circular No 2007/02 of 30 November 2007 is not a clarificatory circular, but rather a purported amendment to the list of VAT exempt items in paragraph 2 of part 1 of the First Schedule to the VAT Act.
• That the issuance of the circular contravenes the VAT Act and exceeds the powers of the FIRS to make regulations under the Act.
• That neither the FIRS nor its Chairman is legally empowered to make an order to either amend, vary or modify the list of exempt items and even if they are empowered, they have failed to comply with mandatory steps provided in the VAT Act for such amendment to be effective.
• That, to the extent that the 2007 VAT Exemption Circular 2007/02 of 30 November 2007 purports to amend the list of exempt items in the VAT Act, it is null and void and should be set aside and ignored as a pointless and ineffective attempt to amend primary tax legislation by an executive circular.

The granting of ‘an Order of perpetual injunction retraining FIRS, its agents, officials, and/ or privies from withholding and/ or suspending the issuance of Tax Clearance Certificates (TCC) to the Plaintiffs on the ground of failure to pay VAT on bottled water’ as contained in Relief (h) has further reinforced the consensus opinion that the VAT position of a taxpayer should not impair its ability to process Tax Clearance Certificate (TCC). Tax Clearance Certificate (TCC) application is a provision within the Companies Income Tax Act and not the VAT Act of 2007. So non-compliance with value Added Tax (VAT) and withholding Tax (WHT) should not preclude a taxpayer from processing and obtaining its Tax Clearance Certificate (TCC) as appropriate.

It is instructive to note that the VAT Act 1993 as amended to date has different provisions for  different offences and penalties and these are captured in sections 25 to 37 and do not include withholding the tax clearance certificate (TCC) of a company when there is a VAT dispute or outstanding reconciliation.

Administration of VAT
The overall administration of the value Added Tax is carried out by the Federal Inland Revenue Service as provisioned for in section 7 of VAT Act of 2007. The FIRS which has offices in major cities nationwide collaborates very closely with the Nigerian Customs Service and the States Internal Revenue Service (SIRS) in the discharge of the burden of VAT administration in Nigeria.

Distribution of VAT revenue
Section 40 of the Act specifically stipulates that VAT revenue shall be distributed among the three tiers of Government as follows

• 15% to the Federal Government
• 50% to the State Governments and Federal Capital Territory, Abuja
• 35% to the Local Governments

Registration for VAT
The entities that are required to register for VAT collection purposes are called ‘Registered Persons’. The ‘Registered Persons’ act as agents of FIRS for the collection and remittance of VAT.

Section 8 of the Act ambiguously makes it seem as if only business oriented entities are legally required to register for the purpose of VAT.

Section 8(1) states that  ’A taxable person shall , within six months of the commencement of the Act  or within six months of the commencement of business, whichever is earlier, register with the Board for the purpose of the tax’

Incidentally, Section 46 of the Act defines ‘Taxable Person’ thus:  ’A taxable person means a person who independently carries out in any place an economic activity as a producer, wholesale trader, supplier of goods, supplier of services (including mining and other related activities) or person exploiting tangible or intangible property for the purpose of obtaining income there from by way of trade or business; and includes person and an agency of government acting in that capacity’

It is interesting to note that this mischief was remedied by section 9(1) and (2) of the Act respectively:

• ‘Every Government Ministry, statutory body and other agency of government shall register as agents of the Board for the purpose of collection of tax under this Act’
• ‘Every contractor transacting business with a government Ministry, statutory body and other agency of the Federal, State or Local government shall produce evidence of registration with the Board (FIRS) as a condition for obtaining a contract’

Also, non-resident companies are required to register in line with section 10(1) and (2) of the Act.

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 the 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’

Finally, Non-Governmental Organizations (NGOs) are required to register for VAT as contained in the Federal Inland Revenue Services Circulars and Publications.

So, in summary the following entities are required to register for VAT (the list is not exhaustive):

• Entities (Enterprises and Companies) involved in manufacturing, distribution, imports, exports, supplies and contracts.
• Non-resident companies
• Non- Governmental Organisations (NGOs) like the churches, mosques, social clubs, service clubs, etc especially whether or not they also have business oriented lines.
• Government’s Ministries, Departments and Agencies
• Professional firms such as that of Accountants, Stockbrokers, Lawyers, Estate Agents and Valuers, Quantity Surveyors, Underwriters, etc
• Banks and other Financial Institutions
• Hotels and other Hospitality Businesses
• Restaurants and eateries
• Airlines
• Road Transportation Companies

VAT reverse charge
In local transactions, there are situations whereby the taxpayers (the entity that’s supposed to bear the VAT burden) pass on the VAT burden to the supplier or contractors on a VAT-INCLUSIVE-BASIS. Most Government’s MDAs adopt this basis to shift the burden of VAT on consumption to suppliers and contractors especially in respect to MDG projects.

In this respect the supplier or contractor calculates VAT in reverse 5/105 * value of goods or services rendered and remits same to FIRS.

It should be stressed here that FIRS frowns at this practice of VAT inclusiveness as Nigeria operates a VAT exclusive system which means that the VAT element of any transaction should be openly stated on the face of the invoice.

The reverse charge is also the amount of VAT a Nigerian entity would have paid on a service or goods purchased if such were to be supplied by another Nigerian Company instead of a non-resident company. It is a form of self-charge.

VAT reverse charge is more predominant in the supply of VATable services and goods by non-resident companies to Nigerian companies.

This issue of reverse charge or self-charge was aptly adjudicated on in the recently decided case of Vodacom Business Nigeria Limited vs. FIRS (12 February 2016) wherein the Tax Appeal Tribunal, Lagos held as follows:

• That by provisions of sections 2 and 1^st schedule to the VAT Act, VAT is imposed on the supply of goods and services. That the decision reached in Gazprom Oil and Gas Ltd vs . FIRS by the Tax Appeal Tribunal, Abuja was wrong. The TAT, Abuja held that foreign companies not carrying businesses in Nigeria are not liable to register for VAT.
• That, though the non-resident company being a foreign company is not liable to Nigerian VAT, the transaction triggered a taxable event and the Nigerian company was subject to VAT. The TAT also held that the Nigerian company would have ensured that the NRC was registered for VAT in pursuant to section 10(1) and (2) of the Act.

Penalties for non-registration for VAT
Section 8(2) stipulates the following penalty for any taxable person who fails to register for VAT:

• N10,000 for the first month in which the failure continues
• N5,000 for each subsequent month in which the failure continues

In addition, section 32 stipulates conviction for failure by a taxable person to register.

Section 32 stipulates that ‘A taxable person who fails to register under this Act, is guilty of an offence and liable on conviction to a fine of N5,000 and, if after one month, the person is not registered, the premises where the business is carried on shall be sealed’

Government, its agencies and VAT
The question has often been asked whether it is legally right or not for government through its agencies to pay VAT on projects executed in public interests such as construction of roads, schools, railways, etc. to FIRS.

Before, we go into this debate, let’s consider an extraction from the FIRS Circular on VAT, para 4, No. 9502 of 29 February 1995. ’VAT is a consumption tax payable on the goods and services consumed by any person, whether government agencies, business organisations, or individuals. The target of VAT is the final consumer of goods and services and unless an item is specially exempted by law, the consumer is liable to tax. Exemption from this is not aimed at agencies, companies, or individuals but rather at the goods and services.

Therefore,  all agencies of government, religious and other organizations and similar persons that are not normally exempted from income tax are expected to pay VAT on goods and services consumed by them except when the goods and services are specially exempted by the VAT Act’.

It is trite law that the FIRS Information Circulars and Guidelines are valid to the extent that they do not contravene the extant provisions of the tax laws or amount to an amendment of the law thereof. It is also important to note that section 7(2) of the Act gives FIRS the power to do such things as it may deem necessary and expedient for the assessment and collection of VAT.

It is the position of the author that Government, through its Ministries, Departments and Agencies, is legally required to pay VAT on consumption derived from supplies and contracts and this is reinforced by section 9 (1) and (2), 13(1) and (2) and First Schedules, part I and II respectively.

Deduction of VAT at source
 VAT deduction at source simply means that the entity that pays the VAT withholds such and remits directly to FIRS instead of paying it to the suppliers, contractors or service providers.

The following entities are required to deduct VAT at source:

• Government’s Ministries, Departments and Agencies [section 13(1) and (2) of the VAT Act]
• Oil and Gas companies operating in the upstream petroleum sector including oil service companies (FIRS Circulars)
• Resident entities in respect of transactions with non-residents [Section 10 (1) and (2) of the Act]

Obligations of parties involved in VAT deduction at source

Entities that deduct VAT at source
Entities that deduct VAT are obligated to do the following:

• Ensure contractors and suppliers they transact with are duly registered for VAT by FIRS
• Ensure that full addresses and Taxpayers Identification Numbers (TIN) are copiously written on the tax invoices before accepting same.
• Ensure VAT on contracts and supplies are withheld and remitted to the nearest FIRS office on or before the 21^st day after the month of the transaction.
• Ensure schedule of remittance of VAT on behalf of contractors and suppliers is prepared and attached alongside the evidence of payment to the FIRS.
• Prepare remittance schedule to be issued to contractors and suppliers who suffer VAT deduction at source.

Contractors and suppliers
Contractors and suppliers are obligated to do the following:

• Ensure that Taxpayers Identification Number (TIN) is accurately written on the face of tax invoices.
• Insist on the collection of remittance advice from clients that deduct VAT at source.
• File returns by filling VAT Form 002 on or before 21^st day after the month of the transaction.
• File a nil return whenever there is no VATable transaction in any month.
• Whenever, there is Input VAT suffered on the purchase of goods or services in the ordinary course of the business or the contracts, fill the VAT Form 002 to reflect such so as to be able to claim a refund.
• Ensure all relevant documents associated with VAT accounting are adequately kept.

Illustration 1: B Limited renders consultancy services to NDDC (Federal Government’s agency) for N1,000,000.00. How will the entities account for VAT in this transaction if (a) It is VAT exclusive (b) It is VAT inclusive?

Solution

(a)VAT exclusive

B Limited’s invoice to NDDC

In summary, NDDC will pay N1,000,000.00 less {VAT 50,000.00 + (WHT 5%*1,000,000.00) and that will amount to N950,000.00. VAT and WHT schedules will be separately prepared, VAT Form 002 filled and evidence of remittances attached to them for onward filing at FIRS. Finally, FIRS will issue VAT receipt and WHT credit note to NDDC on behalf of B Limited.

(b)VAT inclusive
Please note that NDDC would stated in the award letter that the contract of N1,000,000.00 was VAT inclusive and B Limited would have signed.

B Limited’s invoice to NDDC

In this transaction, NDDC will pay B Limited N1,000,000.00 less (WHT 5% * 1,000,000.00) amounting to N950,000.00. It will not deduct VAT at source as it has already been incorporated into the value of N1,000,000.00.

B Limited will compute the embedded VAT as 5/105 * 1,000,000.00 and this will amount to N47,620.00. B Limited will remit the sum of N47,620.00 to FIRS and file returns on the due date. It should be noted here that the risk of non-remittance of the VAT of N47,620.00 is high by B Limited than when NDDC deducts same at source. Consequent upon this method of invoicing, the revenue’s loss to FIRS if the transaction had been VAT exclusive is N2,380.00 (50,000.00-47,620.00). This method of VAT inclusiveness is against the spirit and letter of the VAT Act and that is why FIRS frowns at such practice.

Remittance and refund procedure
The Value Added Tax (VAT) is structured in a way that there would be a remittance to be made to the FIRS or getting a refund from FIRS by the VAT agent. Also, there could be a position where neither the FIRS refund to the VAT Agent nor the VAT Agent remit to FIRS; that is Output VAT is equal to Input VAT.

Output VAT:
This is VAT due on VATable goods and services supplied. It could be added as 5% on the invoice value or included in the sales figures and termed VAT inclusive.

Input VAT
This is VAT due on VATable goods and services purchased. It could be added as 5% on the invoice or included in the purchases as VAT inclusive.

Remittance to FIRS
When Output VAT is greater than Input VAT at the end of a particular month, the VAT Agent remits the difference to FIRS and fills the VAT form 002 attaching evidence of payment not later than 21 days after the end of the month in which the transaction took place.

Refund from FIRS
Refund from FIRS arises whenever Input VAT exceeds Output VAT in a given month.

Though the VAT Act does not specifically address the refund procedure, section 23 of the FIRS Act of 2007 and the FIRS Information Circular No. 9501 dated 19 September 1994 make provision for it.

A VATable person who suffered more Input VAT in relation to Output VAT can apply for a refund by filling the VAT Return form 002 and submit same to the FIRS office wherein its file is domiciled. If possible, attach relevant documents to facilitate speedy processing and refunds.

Refunds can be claimed by credit method, direct cash refund method and a combination of both credit and cash.

It should be noted that FIRS would carry out document verification and audit before making a refund. The refund shall be made within 90 days of the service after the confirmation of the eligibility of the refund. See sections 23(1) (2) (3) (4) (5) of the Federal Inland Revenue Act, 2007.

Documents expected to be reviewed by the FIRS in respect of application for refunds:

• Cash book
• Sales and Purchases Day Books
• Ledger accounts, especially VAT account
• Trial balance
• Sales and Purchases Invoices
• Tax invoices

Tax invoices:
These are issued in support of transactions whenever VATable goods and services are supplied. Duplicate copies should be safely kept. The information to be contained in a tax invoice includes but not limited to the following:

• Taxpayers Identification Number
• Supplier’s name and address
• Customer’s name and address
• Invoice number
• Type of supply
• A description of the goods and service supplied
• Rate of VAT
• The rate of any cash discount offered
• Total VAT payable

Allowable Input VAT for Remittance and Refund Purpose
It is instructive that, when posting items of input VAT into VAT Account in the General Ledger, only Input VAT suffered on goods which form the stock in trade or used for direct production of any new product on which Output VAT is charged is allowed as debit therein. In other words, only such Input VAT is allowable as deduction from Output VAT in line with section 17(1) of the Act.

Input VAT on any overhead, service, general administration is expended to the Statement of Comprehensive Income and so not allowable as deductions from output VAT. See section 17 (2) (a) of the Act. Also, Input VAT on any capital item (non current asset) is capitalised along with the cost of the item and, so not allowed as a deduction from Output VAT. Section 17 (2) (b) of the Act.

Some Other offences associated with VAT and penalties                                               

• Section 29: Failure to issue tax invoice: A defaulting entity is guilty of an offence and liable on conviction to a fine of 50% of the cost of the goods or services for which the invoice was not issued.
• Section 31: A non-Registered Person issuing a tax invoice: Guilty of an offence and is liable on conviction to a fine of N10, 000 or imprisonment for a term of six months.
• Section 33: failure to keep records: N2,000 for every month in which the failure continues.
• Section 34: failure to collect VAT: penalty of 150% of the amount not collected plus 5% interest above the CBN rediscount rate.
• Section 35: failure to submit returns: fine of N5,000 for every month in which the failure continues.

Value Added Tax on specific and contentious areas

Foreign transactions: The aspect of foreign transactions that is more significant to the VAT administration and practice is in the area of a foreign non-resident company providing services to a resident person/ company in Nigeria. This dispute arises as a result of the different interpretations given to sections 10(1) (2) of the VAT Act by tax consultants and FIRS and this has been further compounded as a result of two conflicting judgments given by the Tax Appeal Tribunals (TATs) in Abuja and Lagos respectively in this respect.

Illustration 2: B limited (a non-resident company without a fixed base in Nigeria) renders offshore services to W Limited (a resident Nigerian company) without the former (B Limited) entering Nigeria. What is the VAT implication of these transactions?

Solution
It is the author’s opinion that the above scenario be treated in line with the most recent pronouncement of the Tax Appeal Tribunal, Lagos in the case of Vodacom Business Nigeria (Vodacom or ‘the Appellant’) vs. Federal Inland Revenue Service (FIRS). Flowing from this case, it is legally binding for W Limited to ensure the following happens:

• B Limited registers for VAT using W Limited’s office as address. W Limited should ensure B Limited registers for VAT.
• B Limited issues a tax invoice. That is, the invoice must include VAT of 5% in addition to the fee for the services rendered.
• W Limited should ensure the invoice is settled net of VAT. That is, the VAT component should be deducted and remitted to FIRS VAT account.
• W Limited should prepare VAT schedule and accompany it with evidence of remittance to FIRS at the earliest due date for filing of returns. Prior to filing the VAT returns, proper internal computation and reconciliation should be made in respect of Input and Output VAT.
• The VAT should be remitted in the currency of the transaction.

In respect of imported goods, the value of goods in line with section 6 of the Act includes all taxes, duties and charges levied outside or by reason of importation into Nigeria. It also includes all costs by way of commission, parking, transport and insurance up to the port or place of importation.

Transfer of asset/ sale including intellectual property and royalty
This is one area in VAT practice that tax consultants and taxable persons will keep having scores to settle with the FIRS and this is further compounded by the absence of the clear definition of what constitutes goods and services in the Act. In order to consider the applicability of VAT to the sale/ transfer of interest in assets such as land, intellectual property/ royalty, etc, it will be important to make adequate clarifications and categorisation of transactions into goods, services and private transactions. This clarification is important as VAT is only applicable to goods and services as contained in section 2 of the Act which states that ‘the tax (VAT) shall be charged and payable on the supply of goods and services (in this Act referred as taxable goods and services) other than those goods and services listed in the First Schedule to this Act.’

This ambiguity would have been remedied if the Interpretation section 46 of the Act has copiously defined what constitutes goods and services instead of merely defining ‘supply of goods’ ‘as any transaction where the whole property in the goods is transferred or where the agreement expressly contemplates that this will happen and in particular includes the sale and delivery of taxable goods on hire or leasing and taxable goods’ while ‘supply of service’ ‘as any service provided for consideration’

With the mischief flowing from the above definitions, the Act merely says ‘taxable goods and services’ ‘means goods and services not listed in the First Schedule to the Act’ without addressing issues of assignment and transfer of interest in assets and other intellectual property. For an instance, The UK VAT Act, so as to forestall any ambiguity could arise from applicability of VAT, copiously included grant, assignment or surrender of any major interest in land, provided consideration is paid in its definition of  ‘supply of goods’.

So, it can be concluded from the wordings of the VAT Act that the applicability of VAT does not extend to land and intellectual property as they neither fall into the category of goods nor services. However, land and other intellectual property can be conveniently classified as intangible property with the owners having only interest in them.

For more clarification, according to Wikipedia, ‘Intellectual property refers to creations of the intellect for which a monopoly is assigned to designated owners by law. Intellectual property rights (IPRs) are the protections granted to creators of IP, and include trademarks, copyright, patents, industrial rights and in some jurisdictions trade secrets’. So, it can be seen clearly that intellectual property cannot be termed as goods as defined in the VAT Act.

In CNOOC Exploration and Production Nigeria Limited vs. Attorney General of the Federation (2011), the court held that the rights to an OML do not constitute goods under section 2 of the Act because such rights are intangible property which constitutes a chose in action.

Special mention should also be made of sales of land and buildings. VAT generally is not applicable to assets if such can be established not to constitute goods. However, in terms of the sales of buildings, it is almost impossible to separate the value of services rendered by estate developers deployed to construct such buildings which are susceptible to VAT. If the amount charged by estate developers in the construction of a building in a land (an intangible property) can separate and categorized, such is liable to VAT.

Emerging issues
The issue of how the VAT rate in Nigeria can be increased so as to harmonise it with the rates applicable in the other West African Countries is complex considering the resentment and public outcry that trailed previous contemplations. The reform initiatives as contained in the National Tax Policy 2012 as amended in the draft in 2016 are aimed at initiating a gradual shift from direct tax to indirect tax and VAT is the most significant component of indirect taxes. The overriding objective of the gradual increase of the VAT rate in Nigeria from 5% to 15% in the near future is to increase government revenue and improve trade conditions which the harmonization of VAT rate in Nigeria with that of other ECOWAS trading blocs will jumpstart. This potential increase in VAT rate is going to be a herculean task because of the commonality of VAT as compared to other direct taxes.

Other issues that will continue to be in the front burner will be in the areas of registration thresholds, widening of Input VAT recovery to include overheads and services, unambiguous definition and clarity on imported and exported services, goods and services, basic food items and private transactions in the VAT Act.

Conclusion and recommendation
The avalanche of issues and disagreements arising from the administration of Value Added Tax has been a source of concern to numerous stakeholders. This is even worrying considering the fact that an amendment was made as recent as 2012 and still did not correct numerous contentious areas such as definition of basic food items, goods and services, residency, private transactions, etc that have posed confusion and problems between taxpayers, consultants and tax administration. The VAT Act is due for another amendment and the legislature, FIRS and other concerned entities should make efforts to galvanise the views of the numerous stakeholders in the tax practice and administration chain.

It is also important that the taxpayer education and enlightenment being carried out by the Federal Inland Revenue Service should be sustained and stepped up. In addition to this, there should be a strategic restructuring of the Tax Offices such that would separate the administration of VAT from other taxes as it used to before the emergence of Integrated Tax Offices. This will enhance the implementation of the VAT Act and streamline the muddling up currently going on in the tax offices.

Finally, taxpayers should brace up to the current economic reality which has made the government to rely heavily on non-oil revenue of which VAT forms a substantial part and as a consequence, FIRS will be more aggressive in its revenue drive. So, ‘faithful compliance’ should be the watchword of taxpayers so as to avoid sanctions and penalties.

References:

1. Laws of the Federation: Value Added Tax Act as amended to 201.
2. Ola, C.S (2001), Income Tax Law and Practice in Nigeria, Oxford: Heinemann Educational Books Plc.
3. Federal Inland Revenue Service (1995)’, ‘Guidelines on the Collection Procedure for Withholding Tax and Value Added Tax for Ministries, Parastatals and Other Agencies of Government’ Information Circular No. 9502, FIRS, Abuja.
4. Federal Inland Revenue Service (1993)’, ‘Guidelines on Value Added Tax’ Information Circular No. 9501, FIRS, Abuja.
5. PwC Nigeria (2016), Tax Alert for April 2016.
6. KPMG Nigeria (2015), Newsletter of July 2015.
7. PwC (2014) Overview of VAT in Africa, South Africa: PricewaterhouseCoopers
8. Wikipedia (Free internet}

Article by Francis Chavwuko Okoro FCA

Mr. Okoro, a Fellow of the Institute of Chartered Accountants of Nigeria (ICAN) is the Principal Partner, F.C. Okoro & Co. (Chartered Accountants) based in Warri.