Shedding light on VAT on services in Nigeria
THE Abuja Tax Appeal Tribunal on 10 June 2015 ruled in the case of Gazprom Oil & Gas Nigeria Limited vs Federal Inland Revenue Service (FIRS) that services rendered to Nigerian entities by non-resident companies are not liable to Nigerian value added tax (VAT), except if such services were performed in Nigeria. Furthermore, a Nigerian company is only required to account for and remit VAT on such services once it has received a VAT invoice from the foreign service provider.
In terms of section 10 of the Nigerian VAT Act, a non-resident company that “carries on business in Nigeria” shall register for VAT and include VAT in its invoice and the person to whom the goods or services are supplied in Nigeria shall remit the VAT in the currency of the transaction. The act does not define the “carrying on of business in Nigeria” and numerous disputes have arisen with the revenue service regarding this aspect.
Gazprom had engaged foreign service providers to render certain consultancy and logistic services. The services were performed outside of Nigeria and the service providers had no employees, representatives, agents or assets in Nigeria. The service providers invoiced Gazprom without charging Nigerian VAT.
On the basis that the nonresident service providers were not carrying on business in Nigeria, Gazprom settled the invoices without charge or payment of VAT to the revenue service. The revenue service issued VAT reassessment notices and denied Gazprom’s subsequent objection to such assessments on the basis that, even though the foreign companies did not send employees to Nigeria, the services were imported into Nigeria under contractual agreement between the parties and Gazprom consumed and enjoyed the benefit of the services in Nigeria.
Consequently, the foreign companies were deemed to carry on business in Nigeria and they should therefore register for and charge VAT. The revenue service has stated this view in an earlier VAT circular, noting that “VAT is payable on services received from outside Nigeria if such services are supplied to a Nigerian customer”. In practice, the revenue service has applied the approach that once a foreign service provider enters into a contract with a Nigerian company, it is obliged to register for and charge Nigerian VAT. Failing to do so, the Nigerian company is required to charge and remit the VAT under the “reverse charge” mechanism.
Gazprom filed an appeal at the tax appeal tribunal, which summarised the areas of dispute as: (i) Whether the provisions of the VAT Act impose VAT on the basis of the “destination principle”, in terms of which VAT is levied on goods and services in the country of consumption rather than the country of production; (ii) Whether carrying on business in Nigeria imposes a duty to register for and charge VAT on a nonresident company; and (iii) Whether the receipt of a VAT invoice is a pre-condition to remittance of VAT from a nonresident company.
In respect of the first issue the tribunal referred to a number of other cases which defined “carrying on business” to mean conducting, prosecuting or to continue a particular vocation or business as a continuous operation or permanent occupation. The repetition of acts may be sufficient. It also means to hold oneself out to others as engaged in the selling of goods or services. According to the tribunal it is not in doubt that the non-resident companies carry on business; however, what is in doubt is whether that business is carried on in Nigeria. In conclusion it was held that, while a careful interpretation of section 10 of the VAT Act anticipates the destination principle as basis for imposing VAT in Nigeria, the same is not applicable in this case, which contention is strengthened by the uncontroverted evidence that the non-resident companies are not carrying on business in Nigeria and the services were provided outside of Nigeria. The non-resident company is therefore not required to register for and charge VAT and consequently, the Nigerian company has no obligation to remit VAT to the revenue service.
Regarding the second issue, the tribunal held that a non-resident company that carries on business in Nigeria is, in terms of section 10 of the VAT Act, obliged to register for VAT purposes and it cannot legally carry on business in Nigeria without such registration. The address of the person with whom it has a subsisting contract is to be used as its address for purposes of VATrelated correspondence.
In respect of the third issue, the tribunal concluded that a recipient of services from a foreign service provider is only obliged to submit VAT when it has been issued with a VAT invoice. In the case at hand, since Gazprom was not issued a VAT invoice, it was not required to account for or pay VAT to the revenue service.
The reassessment notices were discharged by the tribunal. The case provides clarity on the issue that the mere existence of a contract between a Nigerian company and non-resident service provider does not automatically imply that the foreign service provider is carrying on business in Nigeria. However, the revenue service in all likelihood will appeal the tribunal’s decision to the Federal High Court. It is also possible the revenue service may reinitiate a previously abandoned project to amend the VAT Act to tax cross-border services based on the destination principle. Until then, the precedent set in this case will apply in comparable circumstances.
Case is one of many disputes arising from the ‘carrying on’ of business
Celia Becker is an Africa Regulatory and Business Intelligence executive at ENSafrica.