By Glenn Ubohmhe
“Nothing in this world can be said to be certain except death and taxes”,
Benjamin Franklin was reputed to have made the above statement. To this I should quickly add that though taxes may be certain, the interpretation of tax laws is sometimes less certain.
It is therefore not uncommon for tax laws to suffer lack of clarity and yield to multiple interpretations even when we all agree that the essential principles of a good tax policy include certainty and simplicity.
It is against this background that this article seeks to examine the Nigerian VAT Act in view of the ruling of the Federal High Court in the case between Federal Inland Revenue Service (FIRS) and Gazprom Oil & Gas Nigeria Limited on the VATability of imported services supplied by non-resident companies, interrogating the likely implications of Section 10 of the Act on services acquired by an establishment of Multiple Location Entity (MLE) in Nigeria for use wholly or partially by other members of the MLE in other taxing jurisdiction(s).
In my view, Section 10 (3) as framed and if interpreted in its strict sense, poses potential double taxation risk to MLEs that have centralised function(s) in Nigeria with internal recharge arrangement, especially in view of the limitations on input VAT credit in Nigeria. On the other hand, it could also create unintended non-taxation risk with consequential revenue loss to the Revenue authorities.
By way of brief background, Value Added Tax (VAT) (or Goods and Services Tax (GST), as it is sometimes called) is a form of indirect tax imposed and payable on the consumption of goods and services. The incidence of VAT is on the consumer or user of such goods or services. The obligation to deduct and/or remit the tax depends largely on whether the parties to the VATable transaction are within the same fiscal frontiers.
The supplier is traditionally responsible for VAT deduction and remittance on transactions within a defined jurisdiction, but for imports of goods, and, in all instances for companies operating in the Nigerian oil and gas sector , the duty is that of the buyer or customer under the reverse charge/self-assessment system as contained in the Guideline on the Implementation of VAT Deduction (Reverse Charge) and New Payment Arrangement with Respect to Fees, Levies, and other Charges Payable by Companies in the Oil and Gas Industry issued by the Federal Inland Revenue Service (FIRS) pursuant to S10A (2) of the VAT Act, as amended.
In designing VAT systems, from the perspective of the International VAT/GST Guideline, the place of business use should be the ideal place of taxation for business-to-business supplies. Under the general rule for single location entities, the place of business location as determined by reference to the relevant business agreement is a good proxy for place of business use. It bears emphasising that based on the principles as outlined in the Guideline, the determination of the place of taxation for VAT purposes is not affected by onward supply, direct provision of the service to a third-party business other than the customer of the supply indicated in the business agreement. The place of taxation is equally not affected by direction of payment flows, identity and location of the entity making the payment.
The issue of VAT on cross-border services has become particularly contentious in Nigeria despite the ample clarity on the principles provided in the International VAT Guideline. The contention is due, in part, to inelegant construction of some of the provisions of the Nigerian VAT Act as well as the increasing complexity in international trade which has rendered some of the provisions obsolete. Strictly from the perspective of the International VAT/GST Guideline, the issues in contest are less controversial and not as unsettled as they seem but the Guideline has no force of law in Nigeria.
Notwithstanding, the FIRS has not failed to reference the principles contained in the Guideline to buttress its position on tax disputes. In like manner, the Revenue authority has, at different times and sometimes in the same case, urged the court to adopt both the strict constructionist and purposive approaches in the interpretation of Revenue statutes – the Gazprom case is no exemption. Highlighting the issues, without belabouring the facts of the case between FIRS and Gazprom Oil & Gas Nigeria Limited, the crux of the argument centered on the following;
- What does it mean for a non-resident to carry on business in Nigeria?
- Is a company in Nigeria which has business agreement for the supply of service with a non-resident company under obligation to ensure that the non-resident company is registered for the purpose of VAT in Nigeria?
- Is VAT invoice from a foreign supplier a necessary condition for a Nigerian entity to deduct and remit VAT to the Revenue authorities in Nigeria?
To start with, on the question whether payment for services supplied by a non-resident company is chargeable to VAT in the light of the provisions of the VAT Act, the FIRS took the view that section 2 which says that “VAT shall be imposed on the supply of all goods and services other than those goods and services listed in the First Schedule to the Act” be interpreted in its strict sense and therefore submitted that VAT is chargeable on all transactions that are not expressly exempte or zero rated as contained in the First Schedule to the Act. Please note FIRS’ argument from a strict constructionist perspective with regard to section 2 and the deviation from this canon in subsequent arguments on section 10(1)(3). Section 10(1) reads;
For the purpose of this Act, a non-resident company that carries on business in Nigeria shall register for the tax with the Board, using the address of the person with whom it has subsisting contract, as its address for purposes of correspondence relating to the tax
On the issues raised, the first and crucial point is what does it mean to “carry on business in Nigeria” as stated in section 10 (1) above. Does “carry on business in Nigeria” mean to have a fixed base in Nigeria? If the answer is in the affirmative, it therefore means that non-resident companies with no fixed base in Nigeria have no obligation with respect to VAT in Nigeria. To be sure, the Act refers here to “a non-resident company that carries on business in Nigeria” and not “a non-resident company that carries on business with a Nigerian company”. They are two different things
Ubohmhe, is a tax practitioner.