Precedent ignored in Nigeria Vodacom tax case
THE Lagos Tax Appeal Tribunal on February 12 2016 ruled in favour of the Federal Inland Revenue Service in its case with Vodacom Business Nigeria Limited that satellite-network bandwidth capacities provided to Vodacom outside Nigeria by New Skies Satellites, a Dutch incorporated company, are liable to value added tax (VAT) in Nigeria.
In terms of the Nigerian VAT Act, VAT is chargeable on the supply of goods and services, other than those specifically exempted under the First Schedule to the VAT Act. Section 10 of the VAT Act requires a nonresident company “carrying on business in Nigeria” to register for VAT purposes in Nigeria, using the address of its Nigerian customer and to include VAT on the invoices it issues to the Nigerian customer.
The Nigerian customer is required to remit the VAT to the Federal Inland Revenue Service.
New Skies Satellites entered into a contract with Vodacom for the supply of bandwidth capacities for Vodacom’s use in Nigeria.
The capacities were transmitted by New Skies Satellites to its satellite in orbit and received in Nigeria by Vodacom via its earthbased satellite. New Skies Satellites did not charge VAT on its invoice to Vodacom for the service rendered and Vodacom did not remit any VAT to the Federal Inland Revenue Service.
During an audit, the revenue service assessed Vodacom to VAT on this transaction, and when the revenue service refused to accept several objections by Vodacom, it filed an appeal at the Lagos Tax Appeal Tribunal.
Vodacom argued that New Skies Satellites’ supply of bandwidth was a service provided outside Nigeria (from the Netherlands), and that in terms of the VAT Act, such services would not qualify as “imported services” as the services were not rendered in Nigeria, and accordingly, VAT should not be levied on the transaction.
Relying on the Gazprom Oil and Gas Ltd (Gazprom) vs Federal Inland Revenue Service case, Vodacom argued that New Skies Satellites did not have an obligation to register for and charge VAT on its invoices as it was not carrying on business in Nigeria and Vodacom, accordingly, did not withhold and remit VAT, since the obligation to remit VAT arises from the issuance of a tax invoice.
The Federal Inland Revenue Service argued that:
Based on the destination principle under the International VAT/GST Guidelines, the services provided by New Skies Satellites were effectively imported into Nigeria, because the bandwidth capacities were received in Nigeria through earth-based stations set up in Nigeria by Vodacom;
The “imported service” utilised by Vodacom in Nigeria is liable to VAT, since such services fall within section 2 of the VAT Act, and “bandwidth capacities” are not specifically VAT-exempt services per the First Schedule to the VAT Act;
By having a contract with Vodacom, New Skies Satellites meets the requirement of “doing business in Nigeria”, and, accordingly, was required to register and charge VAT on the supply to Vodacom;
The fact that New Skies Satellites failed to register with the revenue service and issue a VAT invoice, does not preclude Vodacom from fulfilling its obligation to withhold and remit the VAT due on the transaction as section 10 of the VAT Act is an administrative provision that deals with the VAT registration of companies carrying on business in Nigeria and does not specify transactions which should be subject to VAT.
The Lagos Tax Appeal Tribunal held that:
Section 2 of the VAT Act imposes tax on the supply of all services, other than those specifically exempted under the First Schedule to the VAT Act. On the basis that bandwidth capacities are not exempted under the schedule, the services provided by New Skies Satellites are liable to VAT;
Section 10 of the VAT Act is merely an administrative provision and it does not lay down conditions precedent for substantive viability; and
As it was Vodacom, rather the New Skies Satellites that is being taxed in Nigeria, it has the obligation to pay the VAT due on the transaction, irrespective of the fact that New Skies Satellites did not have a presence in Nigeria.
KPMG and EY Nigeria highlighted that the TAT did not seem to have properly considered the meaning of “imported service” as per the VAT Act, which is quite clearly defined by the VAT Act as “a service rendered in Nigeria by a non-resident person to a person inside Nigeria”. The Lagos Tax Appeal Tribunal in its judgment admits that the destination principle, “while not binding on us, is a helpful guide in resolving this case”. However, in terms of the destination principle, a service is deemed to be “imported” and therefore subject to VAT regardless of where it is rendered by the nonresident service provider, whereas the VAT Act refers to “services rendered in Nigeria”.
The judgment contradicts the decision of the Abuja Tax Appeal Tribunal (a court of equal standing to the Lagos tribunal) on June 10 2015 in the case of Gazprom vs Federal Inland Revenue Service, in which it was held that services to Nigerian entities by nonresident companies are not liable to Nigerian VAT, except if such services were performed in Nigeria. 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.
The Lagos Tax Appeal Tribunal ruled “Gazprom cannot guide us” as “the emphasis by the parties on section 10 was exaggerated and misplaced”.
It would appear that, in appealing to the tribunal, taxpayers cannot rely on precedents set by other tribunal courts of equal standing, but should wait until clarity is provided by a Federal High Court on appeal.
Lagos Tax Appeal Tribunal on February 12 ruled in favour of the Federal Inland Revenue Service
Celia Becker is an Africa Regulatory and Business Intelligence executive at ENSafrica.