On 24 June 2019, the Court of Appeal (CoA), supported the ruling of the Federal High Court (FHC), in Vodacom Business Nigeria Limited (Vodacom) and Federal Inland Revenue Service (FIRS) on the issue of value-added tax (VAT) on imported services rendered by a non-resident company outside Nigeria. A non-resident company (NRC) is a company incorporated under foreign laws. The CoA held that the supply of satellite bandwidth by New Skies Satellites (NSS), a foreign company, is liable to VAT regardless of whether NSS added VAT on its invoice to Vodacom or was physically present in Nigeria to offer the services. As a result, Vodacom was required to account for and remit the VAT payable on the invoice.
Value Added Tax is a charge of 5% on the supply of goods and services; foreign and local. Imported services are services rendered in Nigeria by a non-resident person to a person in Nigeria. When a NRC provides service to a Nigerian company, the foreign company will register for and charge VAT on its invoice. Thereafter, the Nigerian company will withhold and remit VAT to the FIRS. When the foreign company does not register and charge VAT on invoice to the Nigerian company, the latter bears the VAT.
CoA addressed and decided on three issues below.
- Whether the transaction is VATable
The emphasis in the definition of imported services is “rendered in Nigeria” which suggests that an offshore company must be physically present in Nigeria. CoA decided that although the NRC was outside Nigeria, NSS supplied satellite network bandwidth capacities through Vodacom’s infrastructure in Nigeria. Thus, based on Section 10 of the VAT Act, NSS carried on business in Nigeria and subject to VAT as the service is not exempt under the Act.
- Whether the earlier ruling of FHC was right when it held Vodacom was liable to pay VAT even though the conditions precedent were not met
VAT compliance on imported service creates two distinct responsibilities for the local company and the foreign company. First, the recipient of the service in Nigeria will remit VAT and file returns on the transaction. Second, the foreign company will register and charge VAT. As these conditions are independent, Vodacom should remit VAT regardless of whether NSS registered for VAT in Nigeria, or issued a VAT-inclusive invoice. Thus, FIRS the power to recover from Vodacom any outstanding VAT payable on the transaction under Section 7(2).
- Whether the FHC is correct in applying the principles of ‘reverse charge’ and ‘destination principle’, which is not substantiated in the local tax laws
Destination principle states that a person pays tax on imported goods in the place of importation. On the other hand, reverse charge means that the purchaser of goods (or services) is responsible for the corresponding VAT exposure. The CoA agreed that even though the FHC may have been incorrect in applying Reverse Charge, the obligation for beneficiaries of services or goods provided by NRCs to remit VAT is synonymous with the principle of “reverse charge”. While the ‘destination principle’ may be inappropriate, the CoA believes that Vodacom should self-account for and remit VAT as the transaction was VATable.
As technology continues to disrupt the global marketplace, an offshore company can render services from a remote location without a physical presence in Nigeria. Meanwhile, the Federal Government of Nigeria intends to generate non-oil revenue through sound fiscal policies such as taxation. The local tax authorities also want to make sure that taxes on (cross-border) transactions get into the government coffers. Thus, CoA’s decision expounds the likely VAT costs for Nigerian businesses that engage the services of a foreign entity. Pending a contrary judgment by a higher court, Supreme Court, the Nigerian entity remains a collection agent of FIRS and is accountable for unpaid VAT on imported services. A copy of the decision is available here.
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