In brief

On 12 February 2016, the Tax Appeal Tribunal (TAT) Lagos division held that a Nigerian company that receives services performed by a non-resident company should account for and pay Value Added Tax (VAT).

The TAT also held that since a non-resident company which provided the service is not bound by the VAT Act, the Nigerian company which enjoyed the service has a duty to self-charge and remit the VAT.

In arriving at its decision the TAT refused to follow the earlier decision of the TAT Abuja division in Gazprom Oil and Gas v FIRS that non-resident companies not carrying on business in Nigeria are not required to register, charge nor include VAT on their invoices and the Nigerian recipient company has no legal obligation to self-charge and remit the VAT.

In detail


Section 10 of the VAT Act provides that a foreign company carrying on business in Nigeria shall register with the Federal Inland Revenue Service (FIRS) using the address of its Nigerian counter-party.

The section further provides that such foreign companies should include the relevant VAT on its invoice which the Nigerian counter-party should deduct and remit to the FIRS in the currency of transaction.

In effect, when a foreign

company provides a service to a Nigerian company while carrying on business in Nigeria, the foreign company is required

to register for, and charge, Nigerian VAT on any invoice issued to the Nigerian entity. The Nigerian recipient is then expected to withhold the VAT and remit it to the FIRS.

The FIRS Practice

The FIRS have often taken the view that when a foreign company enters into a contract with a Nigerian company, it becomes compulsory for the foreign company to register for, and charge Nigerian VAT.

If the foreign company did not register or charge Nigerian VAT, the FIRS has been known to impose on the Nigerian entity the obligation to self-charge the VAT and remit it to the FIRS. This is generally referred to as “reverse charge mechanism”.

The TAT, in Gazprom Oil and Gas Ltd v FIRS [Gazprom] held that foreign companies not carrying on business in Nigeria are not liable to register for or charge VAT. Furthermore, it observed that where VAT is not charged then the Nigerian counter-party cannot be required to pay VAT to the FIRS.

This, for a time appeared to settle the issue until this recent decision of the Lagos division of the TAT.

Facts of the case

In Vodacom Business Nig Ltd v. FIRS, the Appellant entered into a contract with a non-resident company [NRC] for the supply of bandwidth capacities.

NRC neither included nor charged VAT on its invoice and as a result, the Appellant did not remit VAT to the FIRS. Consequently the FIRS assessed the transaction to VAT and issued an assessment notice.

The Appellant objected to the notice contending that the transaction was not subject to VAT because NRC was a foreign company with no physical presence in Nigeria. The Appellant also pointed out that under the contract it had with NRC, it is the Appellant who had the duty to provide the facilities and equipment necessary for transmitting and receiving the bandwidth signals.

The FIRS rejected the objections and the Appellant appealed to the TAT.

Appellant’s position

The Appellant argued that:

  • By virtue of section 10 and 46 of the VAT Act, VAT only applies to imported services and for a service to be imported, it must be rendered in Nigeria by a non­resident company. Since the bandwidth capacities were not supplied in Nigeria, they were not imported services and thus not liable to VAT.
  • Since the NRC was not carrying on business in Nigeria it was not liable to register for or charge VAT.
  • The Appellant had no obligation to account for or remit any tax since it did not receive any VAT invoice from NRC.
  • The judgment of the TAT in Gazprom supports its position.

FIRS’ position

FIRS’ arguments can be summed up as follows:

  • By virtue of sections 2, 3, and 46, of the VAT Act any good or service supplied in Nigeria is liable to VAT. The First Schedule to the VAT Act lists good and services exempt from VAT and bandwidth capacity is not listed as exempt.
  • By having a contract with the Appellant, NRC has met the requirement of carrying on business in Nigeria.
  • The burden of remitting VAT is on the Appellant and this duty is not dependent on NRC registering for VAT or issuing a tax invoice.
  • The contract of service between the Appellant and NRC provided that the Appellant would be solely responsible for any Nigerian taxes.
  • Gazprom is persuasive authority for applying the destination principle to this case.

The decision

The Tribunal raised one issue for determination which was whether the FIRS can charge VAT on the bandwidth capacities received by the Appellant under its contract with NRC?

In dismissing the appeal, the Tribunal considered the provisions of Sections 2, 3, 10, 46, 1st schedule to the VAT Act as well as the decision in Gazprom v FIRS and held that:

  • By the provisions of Sections 2 and 46 of the Act, VAT is imposed on the supply of services.
  • The decision reached in Gazprom was wrong because the TAT Abuja Division relied heavily on section 10 and did not consider section 2 of the Act which is the charging section. Accordingly section 10 is a mere administrative provision dealing with registration as opposed to liability to VAT. Therefore, section 2 was not dependent on the provisions of section 10.
  • While agreeing that NRC was a foreign company and not liable to Nigerian VAT, the Tribunal held that the transaction triggered a taxable event and the Appellant was subject to VAT. The Tribunal also held that the Appellant had a duty to ensure that NRC was registered for VAT pursuant to section 10.
  • Relying on the International VAT/GST Guidelines, the Tribunal held that the destination principle is applicable in this case. The destination principle provides that for consumption tax purposes, internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption. Therefore, bandwidth is an intangible which is subject to VAT.
  • Finally, the Tribunal concluded that failure to pay tax would result in double non-taxation.

The takeaway

Rather than lay the issue to rest, this decision has reopened the age-old question of whether, under the VAT Act, a Nigerian company receiving services from a non-resident company is required to self-charge VAT.

Also, conspicuously missing from the TAT’s analysis and judgement was any reference to whether the NRC was actually carrying on business in Nigeria. The TAT appears not to have considered this point in arriving at its judgement.

Given that both the Abuja and Lagos Divisions of the TAT are of equal status, this decision raises the question of which of the two decisions taxpayers and other Tax Tribunals should follow. It is likely that the FIRS will adopt the latest ruling since it is in their favour.

The implication is that until a higher court decides on which of the two decisions is right, we are likely to have a situation where different rules or principles are applied in different divisions.

As a permanent solution, the legislature should take steps now to amend the VAT Act or re-enact a new VAT law which will among other things provide clarity of treatment regarding VAT on imported services as it is obtainable in other jurisdictions.