On 19th December 2017, the Federal High
Court (“FHC”) in Lagos per Kuewumi J., upheld the decision of the Tax Appeal
Tribunal (“TAT”) in Vodacom Business Nigeria Limited v. Federal Inland
Revenue Service which set out the statutory provisions and guiding
principles in Nigeria for the imposition of Value Added Tax (“VAT”) on imported
services.Briefly, the facts of the case are that, a foreign
satellite owner, NSS had supplied Vodacom, a Nigerian company, with
satellite-network bandwidth capacities which were received in Nigeria through
earth-based stations set up by Vodacom. Also contractually, the VAT burden had
been transferred from NSS to Vodacom.
Court (“FHC”) in Lagos per Kuewumi J., upheld the decision of the Tax Appeal
Tribunal (“TAT”) in Vodacom Business Nigeria Limited v. Federal Inland
Revenue Service which set out the statutory provisions and guiding
principles in Nigeria for the imposition of Value Added Tax (“VAT”) on imported
services.Briefly, the facts of the case are that, a foreign
satellite owner, NSS had supplied Vodacom, a Nigerian company, with
satellite-network bandwidth capacities which were received in Nigeria through
earth-based stations set up by Vodacom. Also contractually, the VAT burden had
been transferred from NSS to Vodacom.
At the TAT, Vodacom argued that the
supply of bandwidth capacities was not an imported service, as it was supplied
in the Netherlands. FIRS on the other hand argued at the TAT that by virtue of
section 2 of the Value Added Tax Act 2007 (“VAT Act”), VAT is chargeable on any
good or service supplied in Nigeria, except expressly exempted. Since the
supply of bandwidth capacities was not expressly exempted, FIRS argued that
such supply was subject to VAT. The TAT accepted FIRS’ argument. The TAT also
took the view on the basis of the “destination principle” that since the
service in question, the supply of bandwidth capacities, was consumed in
Nigeria, its supply was subject to VAT in Nigeria.
supply of bandwidth capacities was not an imported service, as it was supplied
in the Netherlands. FIRS on the other hand argued at the TAT that by virtue of
section 2 of the Value Added Tax Act 2007 (“VAT Act”), VAT is chargeable on any
good or service supplied in Nigeria, except expressly exempted. Since the
supply of bandwidth capacities was not expressly exempted, FIRS argued that
such supply was subject to VAT. The TAT accepted FIRS’ argument. The TAT also
took the view on the basis of the “destination principle” that since the
service in question, the supply of bandwidth capacities, was consumed in
Nigeria, its supply was subject to VAT in Nigeria.
Vodacom appealed against the decision of
the TAT to the FHC. Vodacom argued that a service supplied by a non-resident
person to a person inside Nigeria is only subject to VAT if the service is
indeed rendered in Nigeria. Section 46 of the VAT Act defines “imported
service” as “service rendered in Nigeria by a non-resident
person to a person inside Nigeria.” Vodacom argued that the words “rendered
in Nigeria” as inserted by the lawmaker as it relates to the
definition of “imported service,” in Section 46 of the VAT
Act, has the location where the service was rendered, and not where the service
was received, as the relevant consideration. Consequently, the physical act of
rendering the service had to be performed in Nigeria for the service to be
liable to VAT. Vodacom also argued that the TAT had found that NSS, the
non-resident company in question, was not incorporated in Nigeria or registered
for tax purposes with FIRS. Vodacom therefore argued that NSS did not carry on
business in Nigeria. Vodacom also argued that the failure of the TAT to make
pronouncements on the arguments raised by Vodacom as regards the fact that NSS
was not carrying on business in Nigeria, made the judgment of the TAT flawed.
Vodacom further argued that its obligation to pay VAT was premised on the
issuance of VAT invoice to it by the non-resident supplier, NSS pursuant to
Section 10(2) of the VAT Act. Since NSS issued no VAT invoice to Vodacom,
Vodacom had no duty to remit VAT to FIRS. Vodacom further contended that the
VAT Act contained no provisions penalising the recipient of services for
non-payment of VAT consequent upon the non-issuance of VAT invoice by the
non-resident supplier of services.
the TAT to the FHC. Vodacom argued that a service supplied by a non-resident
person to a person inside Nigeria is only subject to VAT if the service is
indeed rendered in Nigeria. Section 46 of the VAT Act defines “imported
service” as “service rendered in Nigeria by a non-resident
person to a person inside Nigeria.” Vodacom argued that the words “rendered
in Nigeria” as inserted by the lawmaker as it relates to the
definition of “imported service,” in Section 46 of the VAT
Act, has the location where the service was rendered, and not where the service
was received, as the relevant consideration. Consequently, the physical act of
rendering the service had to be performed in Nigeria for the service to be
liable to VAT. Vodacom also argued that the TAT had found that NSS, the
non-resident company in question, was not incorporated in Nigeria or registered
for tax purposes with FIRS. Vodacom therefore argued that NSS did not carry on
business in Nigeria. Vodacom also argued that the failure of the TAT to make
pronouncements on the arguments raised by Vodacom as regards the fact that NSS
was not carrying on business in Nigeria, made the judgment of the TAT flawed.
Vodacom further argued that its obligation to pay VAT was premised on the
issuance of VAT invoice to it by the non-resident supplier, NSS pursuant to
Section 10(2) of the VAT Act. Since NSS issued no VAT invoice to Vodacom,
Vodacom had no duty to remit VAT to FIRS. Vodacom further contended that the
VAT Act contained no provisions penalising the recipient of services for
non-payment of VAT consequent upon the non-issuance of VAT invoice by the
non-resident supplier of services.
On its part, FIRS argued that Section 2 of
the VAT Act made every supply of service in Nigeria liable to VAT except the
services which are listed in the First Schedule to the VAT Act, notably amongst
which is exported service. FIRS argued that from the definitions of“supply
of services” and “supply of goods” in Section 46 of
the VAT Act, acts of sale and delivery are acts of supply (clearly different
from production) and that sale and delivery take place when the goods or
services are received and paid for by the consumer. FIRS argued that what
matters to Section 10(2) of the VAT Act, is that the consumer, not the means of
supply, is in Nigeria, as the non-resident supplier may or may not be required
to accompany the goods or services to Nigeria, but that even where the
non-resident supplier accompanied the goods into Nigeria, that did not detract
from the requirements to comply with Section 10(2) of the VAT Act. Thus, the
physical act of rendering the service could not be restricted to the physical
presence of NSS in Nigeria.
the VAT Act made every supply of service in Nigeria liable to VAT except the
services which are listed in the First Schedule to the VAT Act, notably amongst
which is exported service. FIRS argued that from the definitions of“supply
of services” and “supply of goods” in Section 46 of
the VAT Act, acts of sale and delivery are acts of supply (clearly different
from production) and that sale and delivery take place when the goods or
services are received and paid for by the consumer. FIRS argued that what
matters to Section 10(2) of the VAT Act, is that the consumer, not the means of
supply, is in Nigeria, as the non-resident supplier may or may not be required
to accompany the goods or services to Nigeria, but that even where the
non-resident supplier accompanied the goods into Nigeria, that did not detract
from the requirements to comply with Section 10(2) of the VAT Act. Thus, the
physical act of rendering the service could not be restricted to the physical
presence of NSS in Nigeria.
FIRS then argued that Section 10(2) of the
VAT Act creates two statutory duties namely: (i) the duty of the non-resident
company to include the tax in its invoice; and (ii) the duty of the person to
whom the goods or services are supplied in Nigeria to remit the tax. FIRS
argued that the foregoing duties were separate, distinct and independent of
each other, further arguing that the requirements under Section 10 of the VAT
Act are only made for proper record, accountability and ease of
compliance/enforcement and not a condition precedent for liability to pay VAT.
FIRS contended that the very moment the services were received in Nigeria by
Vodacom, the liability to account for VAT arose even with the failure of NSS to
include VAT in its invoice or did but under assessed VAT. FIRS maintained that
the non-registration or non-issuance of an invoice for VAT was not fatal to the
remittance of VAT by a taxable person because Section 15(1) of the VAT Act
compels a taxable person to render account of his transaction. FIRS further
argued that if Section 10 of the VAT Act was interpreted to prevent VAT
collection when the foreign supplier of services failed to register for VAT and
raise VAT invoice, then a recipe for tax evasion would be brewed as the
consumers in imported services in future cases would only need to ensure that
their non-resident suppliers do not comply with Section 10 for them to escape
VAT on the services. On the effect of the phrase, “carrying on
business” in Section 10 of the VAT Act, FIRS argued, relying on a
judicial precedent, that sale was a transaction by way of trade notwithstanding
that it was an isolated transaction where the intention of the company was to
deal in that line of business within its memorandum of association.
VAT Act creates two statutory duties namely: (i) the duty of the non-resident
company to include the tax in its invoice; and (ii) the duty of the person to
whom the goods or services are supplied in Nigeria to remit the tax. FIRS
argued that the foregoing duties were separate, distinct and independent of
each other, further arguing that the requirements under Section 10 of the VAT
Act are only made for proper record, accountability and ease of
compliance/enforcement and not a condition precedent for liability to pay VAT.
FIRS contended that the very moment the services were received in Nigeria by
Vodacom, the liability to account for VAT arose even with the failure of NSS to
include VAT in its invoice or did but under assessed VAT. FIRS maintained that
the non-registration or non-issuance of an invoice for VAT was not fatal to the
remittance of VAT by a taxable person because Section 15(1) of the VAT Act
compels a taxable person to render account of his transaction. FIRS further
argued that if Section 10 of the VAT Act was interpreted to prevent VAT
collection when the foreign supplier of services failed to register for VAT and
raise VAT invoice, then a recipe for tax evasion would be brewed as the
consumers in imported services in future cases would only need to ensure that
their non-resident suppliers do not comply with Section 10 for them to escape
VAT on the services. On the effect of the phrase, “carrying on
business” in Section 10 of the VAT Act, FIRS argued, relying on a
judicial precedent, that sale was a transaction by way of trade notwithstanding
that it was an isolated transaction where the intention of the company was to
deal in that line of business within its memorandum of association.
In its judgment, the FHC held that Section
2 of the VAT Act was the charging clause and imposed VAT on the supply of all
goods and services other than those listed as exempted in the First Schedule to
the VAT Act. Consequently, VAT is charged and payable on all international,
inter-state and intra-state supplies of goods and services except those that
are expressly exempted bearing in mind the territorial nature of tax law. The
FHC discountenanced as untenable, Vodacom’s argument that in considering what
an imported service was, the relevant consideration was the location where the
service was rendered and not where the service was received. The FHC held that
in ascertaining whether a transaction is liable to VAT, the crucial questions
are: (i) did the transaction give rise to a supply of either goods or services
(ii) was it for consideration? (iii) is the supply of goods and services
exempted by the VAT Act? The FHC held that if questions (i) and (ii) are
answered in the affirmative and question (iii), then such a transaction is
subject to VAT.
2 of the VAT Act was the charging clause and imposed VAT on the supply of all
goods and services other than those listed as exempted in the First Schedule to
the VAT Act. Consequently, VAT is charged and payable on all international,
inter-state and intra-state supplies of goods and services except those that
are expressly exempted bearing in mind the territorial nature of tax law. The
FHC discountenanced as untenable, Vodacom’s argument that in considering what
an imported service was, the relevant consideration was the location where the
service was rendered and not where the service was received. The FHC held that
in ascertaining whether a transaction is liable to VAT, the crucial questions
are: (i) did the transaction give rise to a supply of either goods or services
(ii) was it for consideration? (iii) is the supply of goods and services
exempted by the VAT Act? The FHC held that if questions (i) and (ii) are
answered in the affirmative and question (iii), then such a transaction is
subject to VAT.
The FHC further discountenanced Vodacom’s argument that a
service supplied by a non-resident person to a person inside Nigeria is only
subject to VAT if the service is rendered in Nigeria. The FHC held that for
supply of imported goods and imported services, the location of the supplier
was of no consequence. What was important was whether a supply of goods and
services was made into Nigeria and for consideration, and once that question
was answered in the affirmative, a VAT-chargeable transaction had occurred. The
FHC held that in the instant case, Vodacom was supplied in Nigeria, satellite
network bandwidth capacities for consideration as shown by the contractual
document and such supply not being within the exempted services, was liable to
VAT in Nigeria pursuant to Section 2 of the VAT Act. In essence, the supply of
satellite network bandwidth capacities qualified as “imported service” because
it was supplied by a person outside Nigeria to a person inside Nigeria.
service supplied by a non-resident person to a person inside Nigeria is only
subject to VAT if the service is rendered in Nigeria. The FHC held that for
supply of imported goods and imported services, the location of the supplier
was of no consequence. What was important was whether a supply of goods and
services was made into Nigeria and for consideration, and once that question
was answered in the affirmative, a VAT-chargeable transaction had occurred. The
FHC held that in the instant case, Vodacom was supplied in Nigeria, satellite
network bandwidth capacities for consideration as shown by the contractual
document and such supply not being within the exempted services, was liable to
VAT in Nigeria pursuant to Section 2 of the VAT Act. In essence, the supply of
satellite network bandwidth capacities qualified as “imported service” because
it was supplied by a person outside Nigeria to a person inside Nigeria.
The FHC further held that in the context of
VAT, a company was a non-resident company if it was either a foreign company
unincorporated in Nigeria but present in Nigeria on the basis that it had
applied and obtained exemption pursuant to the provisions of Section 59 of the
Companies and Allied Matters Act, Cap C20, Laws of the Federation of Nigeria
2004; or a foreign entity outside Nigeria but transacting business with persons
in Nigeria. The FHC noted that the requirement for VAT registration was relaxed
for a non-resident company which had no physical presence in Nigeria to reduce
the administrative burden on such non-resident company. In some jurisdictions,
the approach in this second instance would be to under the reverse charge mechanism,
require the VAT to be paid by the recipient (i.e. the consumer) rather than the
supplier of the imported services. The FHC held that a contrary decision in
this regard would be “a gratuitous escape route for VAT evasion” since
a non-resident supplier would be able to, by refusing to be registered for VAT,
be excused from the liability to pay VAT for a transaction liable to VAT. Such
was not the purpose of the VAT Act. As regards whether or not the non-resident
supplier carried on business in Nigeria, the FHC held that in keeping with a
cardinal feature of VAT namely, flexibility to keep pace with technological and
commercial developments, “carries on business” includes a
single supply of goods and services of Nigeria.
VAT, a company was a non-resident company if it was either a foreign company
unincorporated in Nigeria but present in Nigeria on the basis that it had
applied and obtained exemption pursuant to the provisions of Section 59 of the
Companies and Allied Matters Act, Cap C20, Laws of the Federation of Nigeria
2004; or a foreign entity outside Nigeria but transacting business with persons
in Nigeria. The FHC noted that the requirement for VAT registration was relaxed
for a non-resident company which had no physical presence in Nigeria to reduce
the administrative burden on such non-resident company. In some jurisdictions,
the approach in this second instance would be to under the reverse charge mechanism,
require the VAT to be paid by the recipient (i.e. the consumer) rather than the
supplier of the imported services. The FHC held that a contrary decision in
this regard would be “a gratuitous escape route for VAT evasion” since
a non-resident supplier would be able to, by refusing to be registered for VAT,
be excused from the liability to pay VAT for a transaction liable to VAT. Such
was not the purpose of the VAT Act. As regards whether or not the non-resident
supplier carried on business in Nigeria, the FHC held that in keeping with a
cardinal feature of VAT namely, flexibility to keep pace with technological and
commercial developments, “carries on business” includes a
single supply of goods and services of Nigeria.
The FHC viewed as a misdirection, the TAT’s
holding that NSS did not carry on business in Nigeria arising from the
perception that a business can only be carried on in Nigeria if the company in
issue was resident in Nigeria. In providing clarification, the FHC held that
all that was to be considered in finding out whether an entity was carrying on
business in Nigeria from outside Nigeria or not for the purpose of VAT was the
occurrence of a supply to a person in Nigeria. Physical presence was not a
condition to carrying on business in Nigeria for the purpose of the VAT Act.
holding that NSS did not carry on business in Nigeria arising from the
perception that a business can only be carried on in Nigeria if the company in
issue was resident in Nigeria. In providing clarification, the FHC held that
all that was to be considered in finding out whether an entity was carrying on
business in Nigeria from outside Nigeria or not for the purpose of VAT was the
occurrence of a supply to a person in Nigeria. Physical presence was not a
condition to carrying on business in Nigeria for the purpose of the VAT Act.
Referencing the non-binding OECD VAT/GST
Guidelines, the FHC held that a service had been rendered only when it had been
consumed. Essentially, VAT should be levied in the consumer’s jurisdiction,
rather than the non-resident supplier’s jurisdiction. Consequently, a service
made without delivery had not been rendered. A service was rendered in Nigeria
if it was received by a person in Nigeria from outside Nigeria.
Guidelines, the FHC held that a service had been rendered only when it had been
consumed. Essentially, VAT should be levied in the consumer’s jurisdiction,
rather than the non-resident supplier’s jurisdiction. Consequently, a service
made without delivery had not been rendered. A service was rendered in Nigeria
if it was received by a person in Nigeria from outside Nigeria.
As a passing remark, the FHC observed that
the likely conflict the insertion of the phrase “in Nigeria” in
Section 46 of the VAT Act had set out to abort, was a situation where a person
inside Nigeria imported services that were rendered in a country other than
Nigeria. The FHC noted that in this case, the non-resident supplier, NSS had
contracted its VAT liability to Vodacom and held that even if the clause
contracting the VAT liability were non-existent, Vodacom would still be liable
to VAT by virtue of Section 2 of the VAT Act as such was a purposeful way of interpretation
to avoid double taxation or unintended non-taxation.
the likely conflict the insertion of the phrase “in Nigeria” in
Section 46 of the VAT Act had set out to abort, was a situation where a person
inside Nigeria imported services that were rendered in a country other than
Nigeria. The FHC noted that in this case, the non-resident supplier, NSS had
contracted its VAT liability to Vodacom and held that even if the clause
contracting the VAT liability were non-existent, Vodacom would still be liable
to VAT by virtue of Section 2 of the VAT Act as such was a purposeful way of interpretation
to avoid double taxation or unintended non-taxation.
The FHC held that to avoid the
administrative burden of registration on a non-resident company supplying
services and to assure that VAT was accounted for, the reverse charge mechanism
was appropriate to be applied which required the VAT-registered customer to
account for the VAT on supplies received from the non-resident supplier. The
FHC subsequently held that it was just to apply the reverse charge mechanism
because a patriot dealing with a person outside Nigeria over a supply made to
him must take steps to avoid a situation where the State was deprived of
legitimate revenue.
administrative burden of registration on a non-resident company supplying
services and to assure that VAT was accounted for, the reverse charge mechanism
was appropriate to be applied which required the VAT-registered customer to
account for the VAT on supplies received from the non-resident supplier. The
FHC subsequently held that it was just to apply the reverse charge mechanism
because a patriot dealing with a person outside Nigeria over a supply made to
him must take steps to avoid a situation where the State was deprived of
legitimate revenue.
The FHC consequently affirmed the decision
of the TAT delivered on 12th February 2016.
of the TAT delivered on 12th February 2016.
Before now, it seemed like there were
two conflicting decisions on the issue of the imposition of VAT on a service
provided by a non-resident entity to a Nigerian entity arising from the
decisions of different TAT panels in Gazprom v. FIRS and Vodacom
v. FIRS. In the earlier decided Gazprom case, The
Abuja panel of the TAT had held that since a non-resident supplier contracting
with a Nigerian company was not necessarily carrying on business in Nigeria,
such company was not obliged to register for or charge VAT and the Nigerian customer
was not obliged to remit VAT to the FIRS where the supplier does not issue a
tax invoice. In the Vodacom case decided subsequently, the
Lagos panel of the TAT took the view on the basis of the “destination
principle” that since the service in question, the supply of bandwidth
capacities, was consumed in Nigeria, its supply was subject to VAT in Nigeria
and the consumer had a duty to ensure the non-resident supplier issued a VAT
invoice.
two conflicting decisions on the issue of the imposition of VAT on a service
provided by a non-resident entity to a Nigerian entity arising from the
decisions of different TAT panels in Gazprom v. FIRS and Vodacom
v. FIRS. In the earlier decided Gazprom case, The
Abuja panel of the TAT had held that since a non-resident supplier contracting
with a Nigerian company was not necessarily carrying on business in Nigeria,
such company was not obliged to register for or charge VAT and the Nigerian customer
was not obliged to remit VAT to the FIRS where the supplier does not issue a
tax invoice. In the Vodacom case decided subsequently, the
Lagos panel of the TAT took the view on the basis of the “destination
principle” that since the service in question, the supply of bandwidth
capacities, was consumed in Nigeria, its supply was subject to VAT in Nigeria
and the consumer had a duty to ensure the non-resident supplier issued a VAT
invoice.
For information as regards how
this decision may affect your tax affairs, you may contact me.
this decision may affect your tax affairs, you may contact me.
Adefolake adewusi
Senior Associate at AELEX
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