The decision
of the Federal High Court (FHC) in VODACOM BUSINESS NIGERIA LIMITED
V. FEDERAL INLAND REVENUE SERVICE, handed down on the cusp of the
New Year 2018, has understandably continued to generate a lot of
controversy and angst.
The FHC in that case, upheld the
decision of the Tax Appeal Tribunal, making it the responsibility
of Nigerian companies to assess Value Added Tax (VAT) payable on
goods and services provided by foreign companies, and remit same to
the tax authorities.
This rule applies even where the
foreign company is neither registered as a taxable entity in
Nigeria nor has it invoiced the local company for VAT.
On its face, the court’s decision
seems to deviate from strict principles which traditionally have
applied to the interpretation of tax laws, to rest on forestalling
the mischief that could be occasioned if such strict principles are
applied.
Perhaps more importantly, the reach
of this decision will have an impact on cross-border transactions,
and gives immediate cause for Nigerian companies to review their
VAT practices with foreign partners and service providers – in
order to ascertain and mitigate their potential exposures for
VAT-able transactions.
A closer examination of the facts of
the case, will aid an appreciation of the court’s decision and its
implications for Nigerian businesses.
Vodacom (the appellant) took the
position, backed by Section 10 of the Value Added Tax Act, that in
so far as a non-resident company (NRC) (a foreign company with
which it entered into a contract to supply bandwidth) was
unregistered for VAT purposes, and had not invoiced it (Vodacom)
for VAT, Vodacom was not liable to remit any VAT for the subject
transaction to FIRS.
In essence, Vodacom argued that the
obligation for the Nigerian company to remit tax to the FIRS,
according to Section 10, only applies if the foreign company is
registered for tax and has invoiced the local company with VAT
inclusive.
The court however rejected this
argument, holding that such strict construction of the provision
would provide a gratuitous escape route for tax evasion, especially
since it would be administratively onerous to proceed against the
foreign company.
Instead, the court employed the
foreign principle of reversed charge holding that the statutory
requirement for registration is relaxed for foreign companies and
as such local companies consuming the goods/service are to assess
and remit the VAT to FIRS.
It also held that for imported
services, such as those forming the subject of the instant case,
where such services are not exempted from tax under the VAT Act,
the focus should be on whether the goods/ services are made to
Nigerian consumers for consideration. Per Kuewumi J., in Appeal
No.: FHC/L/4A/2016 (unreported).
It can perhaps be argued, certainly,
from a policy perspective that the court decided rightly and in
accordance with the purport of the VAT Act. It is pertinent to note
that VAT is after-all imposed on the consumer of goods and
services.
Our Take
Regardless of the controversies
surrounding this decision, the FHC’s decision remains the law on
this matter unless overruled by a court of superior jurisdiction.
As such, it is pertinent for Nigerian businesses to inform their
foreign service providers accordingly, and endeavour to conduct
their business transactions in the light of the
decision.
Companies and individuals who
transact with foreign counterparts (either by purchase of imported
service or foreign products), even in a one-time transaction, are
now bound to assess their own VAT liability according to the Act,
charge themselves and remit same to the FIRS, regardless of whether
the foreign company is registered for tax or has invoiced them for
it or not.
Where the foreign counterpart is
duly informed of the requirement of registration for VAT under our
laws and the obligation to invoice for VAT, this consideration can
be factored into the transaction at the negotiation and agreement
stage; in order to forestall payment of VAT cost twice (once to the
foreign company; the other directly to FIRS).
Finally, it is worthwhile to
consider the implication this decision may have when companies
compute their financial statements. Put simply, it may be difficult
for a local company to categorize the VAT charged on itself (by
itself, with no trail/invoice or request) and directly remitted to
tax authorities under the traditional VAT system.
In essence, the decision of the
Federal High Court has introduced into the Nigerian tax system, the
principle of reverse VAT or reverse charge of VAT.
Arinze John-Paul Nsofor, Senior
Associate; and Omolade Afonja, Junior Associate, are of the
commercial law firm, Perchstone & Graeys.
The decision
of the Federal High Court (FHC) in VODACOM BUSINESS NIGERIA LIMITED
V. FEDERAL INLAND REVENUE SERVICE, handed down on the cusp of the
New Year 2018, has understandably continued to generate a lot of
controversy and angst.
The FHC in that case, upheld the
decision of the Tax Appeal Tribunal, making it the responsibility
of Nigerian companies to assess Value Added Tax (VAT) payable on
goods and services provided by foreign companies, and remit same to
the tax authorities.
This rule applies even where the
foreign company is neither registered as a taxable entity in
Nigeria nor has it invoiced the local company for VAT.
On its face, the court’s decision
seems to deviate from strict principles which traditionally have
applied to the interpretation of tax laws, to rest on forestalling
the mischief that could be occasioned if such strict principles are
applied.
Perhaps more importantly, the reach
of this decision will have an impact on cross-border transactions,
and gives immediate cause for Nigerian companies to review their
VAT practices with foreign partners and service providers – in
order to ascertain and mitigate their potential exposures for
VAT-able transactions.
A closer examination of the facts of
the case, will aid an appreciation of the court’s decision and its
implications for Nigerian businesses.
Vodacom (the appellant) took the
position, backed by Section 10 of the Value Added Tax Act, that in
so far as a non-resident company (NRC) (a foreign company with
which it entered into a contract to supply bandwidth) was
unregistered for VAT purposes, and had not invoiced it (Vodacom)
for VAT, Vodacom was not liable to remit any VAT for the subject
transaction to FIRS.
In essence, Vodacom argued that the
obligation for the Nigerian company to remit tax to the FIRS,
according to Section 10, only applies if the foreign company is
registered for tax and has invoiced the local company with VAT
inclusive.
The court however rejected this
argument, holding that such strict construction of the provision
would provide a gratuitous escape route for tax evasion, especially
since it would be administratively onerous to proceed against the
foreign company.
Instead, the court employed the
foreign principle of reversed charge holding that the statutory
requirement for registration is relaxed for foreign companies and
as such local companies consuming the goods/service are to assess
and remit the VAT to FIRS.
It also held that for imported
services, such as those forming the subject of the instant case,
where such services are not exempted from tax under the VAT Act,
the focus should be on whether the goods/ services are made to
Nigerian consumers for consideration. Per Kuewumi J., in Appeal
No.: FHC/L/4A/2016 (unreported).
It can perhaps be argued, certainly,
from a policy perspective that the court decided rightly and in
accordance with the purport of the VAT Act. It is pertinent to note
that VAT is after-all imposed on the consumer of goods and
services.
Our Take
Regardless of the controversies
surrounding this decision, the FHC’s decision remains the law on
this matter unless overruled by a court of superior jurisdiction.
As such, it is pertinent for Nigerian businesses to inform their
foreign service providers accordingly, and endeavour to conduct
their business transactions in the light of the
decision.
Companies and individuals who
transact with foreign counterparts (either by purchase of imported
service or foreign products), even in a one-time transaction, are
now bound to assess their own VAT liability according to the Act,
charge themselves and remit same to the FIRS, regardless of whether
the foreign company is registered for tax or has invoiced them for
it or not.
Where the foreign counterpart is
duly informed of the requirement of registration for VAT under our
laws and the obligation to invoice for VAT, this consideration can
be factored into the transaction at the negotiation and agreement
stage; in order to forestall payment of VAT cost twice (once to the
foreign company; the other directly to FIRS).
Finally, it is worthwhile to
consider the implication this decision may have when companies
compute their financial statements. Put simply, it may be difficult
for a local company to categorize the VAT charged on itself (by
itself, with no trail/invoice or request) and directly remitted to
tax authorities under the traditional VAT system.
In essence, the decision of the
Federal High Court has introduced into the Nigerian tax system, the
principle of reverse VAT or reverse charge of VAT.
Arinze John-Paul Nsofor, Senior
Associate; and Omolade Afonja, Junior Associate, are of the
commercial law firm, Perchstone & Graeys.
Read more https://nairalaw.com/court-affirms-reverse-charge-mechanism-in-vat-matters-arising/