Introduction
On 19 December 2017, the Federal High Court, Lagos ("FHC") per Kuewumi J., in Appeal No.: FHC/L/4A/2016, upheld the decision of the Tax Appeal Tribunal ("TAT") in Vodacom Business Nigeria Limited ("Vodacom") v. Federal Inland Revenue Service ("the FIRS"). The TAT had held that Vodacom - a Nigerian entity - had the responsibility to charge and remit Value Added Tax ("VAT") on a contract between itself and New Skies Satellite ("NSS") – a non-resident company - for the supply of bandwidth capacities, even though NSS did not register for VAT or incorporate VAT in its invoice to Vodacom.
There has been some controversy as to the judicial position regarding whether a Nigerian entity has a responsibility to charge and remit VAT when contracting with a non-resident entity that is not registered for VAT. This is because in Gazprom v. FIRS (2015) 19 TLRN, the Abuja panel of the TAT had held that a Nigerian entity does not have the responsibility to charge and remit VAT where it contracts with a non-resident entity that is not registered for VAT and does not issue a VAT invoice.
We would expect the FIRS to rely on it in appeal proceedings before the FHC seeking to overturn the TAT's decision in the Gazprom case.
The Judgment
In its judgment, the FHC disagreed with the TAT's finding that NSS did not carry on business in Nigeria, considering it to be wrongly premised on the impression that an entity can only carry on business in Nigeria if it has a physical presence in Nigeria. The FHC held that "one of the cardinal features of VAT is flexibility" and this means that the "systems for taxation should be flexible and dynamic to ensure that they keep pace with technological and commercial developments". As a result, the FHC held that the phrase "carries on business" must be interpreted as including a single supply of goods and services. The FHC held that for the purpose of VAT, all that was to be considered in determining whether a non-resident entity was carrying on business in Nigeria was the occurrence of a supply to a person in Nigeria and not the residence of such entity.
The FHC agreed with the FIRS that VAT is imposed on the supply of all goods and services other than those exempted in the First Schedule to the VAT Act by virtue of section 2 of the Value Added Tax Act (the "VAT Act" or the "Act"). The FHC held that the effect of section 2 is to make VAT chargeable and payable on all international, inter-state, and intra-state supplies of services.
The FHC rejected Vodacom's argument that in considering what constitutes an 'imported service,' the relevant consideration is the location where the service was rendered, and not where the service was received. The FHC held that for supplies of imported goods and imported services, the location of the supplier was of no consequence, and that the crucial question for purposes of determining that a VATable transaction had occurred was whether a supply of non-exempt goods or services was made into Nigeria for consideration.
The FHC held that the transaction between Vodacom and NSS was VATable pursuant to section 2 of the VAT Act, on the basis that the transaction was for the supply of non-exempted services (i.e. satellite network bandwidth capacities) for consideration in Nigeria. The FHC stated that the supply of satellite network bandwidth capacities qualified as an "imported service" because it was supplied by a person outside Nigeria to a person inside Nigeria.
The FHC noted that the "requirement to register (for VAT) is relaxed" for a non-resident company, which "has no physical presence in Nigeria". According to the FHC, this is "because the tax authorities cannot easily proceed against the non-resident company without incurring so much administrative cost" and because "such registration requirement places an administrative burden on the non-resident company". The FHC stated that in "some jurisdictions like the United Kingdom, the approach is to relax the requirement of registration for non-resident company outside their jurisdiction and consider the receiver of the supplies within their jurisdiction as the supplier of the goods and services for the purpose of accounting for VAT."
The FHC held that a contrary decision in this regard would be "a gratuitous escape route for VAT evasion" since a non-resident supplier would, by refusing to be registered for VAT, be excused from the liability to pay VAT for a transaction liable to VAT and that such was not the purpose of the VAT Act.
The FHC held that to avoid the administrative burden of registration on a non-resident supplier and to assure that VAT is accounted for, the reverse charge mechanism should be applied. The VAT reverse charge mechanism requires a local purchaser of VATable supply from a non-resident entity to charge itself and remit VAT due on the consideration paid to the non-resident entity.
Whilst noting that the OECD VAT/GST Guidelines were not binding in Nigeria, the FHC reinforced its conclusion that the reverse charge mechanism was appropriate by relying on the destination principle provided in these guidelines. The destination principle is to the effect that a service is rendered only when it has been consumed and that the VAT on such consumption should be levied in the consumer's jurisdiction, rather than the supplier's jurisdiction.
In concluding, the FHC held that it is "just to apply the reverse charge mechanism because a patriot dealing with a non-resident company over a supply made to him must take steps to avoid a situation where the state would be deprived of legitimate revenue".
Our Thoughts
Although a range of interesting issues arise from the FHC's judgment, we will concern ourselves primarily with the foreign principles and mechanisms referred to by the FHC in its judgment, with a view to answering the following questions:
- did the FHC import legal principles not contained in the VAT Act in reaching its conclusion that the requirement of registration for VAT is relaxed for a non-resident supplier that has no administrative or physical ties to Nigeria? and;
- did the FHC import legal principles not contained in the VAT Act in reaching its conclusion that a resident beneficiary of a service supplied by a non-resident entity which has no administrative or physical ties to Nigeria must still self-charge and remit VAT?
Did the FHC import legal principles not contained in the VAT Act in reaching its conclusion that the requirement of registration for VAT is relaxed for a non-resident supplier that has no administrative or physical ties to Nigeria?
As earlier noted, the FHC took the position that a non-resident company 'carries on business in Nigeria' if it simply transacts with a Nigerian resident, irrespective of whether such non-resident company has a physical presence in Nigeria. Assuming that position to be correct, a non-resident company, such as NSS, should have the obligation to register for VAT, given that the obligation to register for VAT is imposed on any non-resident company "that carries on business in Nigeria" by section 10 (1) of the VAT Act.
It is therefore not clear why the FHC would hold that the obligation to register for VAT did not apply to NSS simply because it was found to be carrying on business in Nigeria without having a physical presence there.
In arriving at its decision, the FHC noted that in "...some jurisdictions like the United Kingdom", the approach is "to relax the requirement of registration for non-resident compan[ies]." We can only assume that the finding that NSS was not required to register for VAT in Nigeria was based on the UK position, given that the FHC cited no other authority for the relaxation of the registration requirement
With respect, we think the FHC was wrong in finding that NSS had no obligation to register for VAT, despite clear words to that effect in section 10 (1) of VAT Act. The words of a taxing statute cannot be given a meaning different from their common, everyday meaning simply because construing them properly would work hardship to the tax authority. As stated in Halliburton West Africa Limited v. FBIR (2006) 7 CLRN 138, which the FHC itself cited, there is no equity about a tax. The words of section 10 (1) of the VAT Act need not be deliberately misconstrued by a court to prevent a "gratuitous escape route for tax evasion," when the legislature could easily solve the problem by amending the statute.
It is therefore our view that the FHC had neither statutory basis nor judicial precedent for its conclusion that the requirement for VAT registration is relaxed for a non-resident company that carries on business in Nigeria without any physical presence in Nigeria.
If NSS was carrying on business in Nigeria, then it must also have had an obligation to register for VAT in Nigeria, the failure to perform which is punishable under sections 8 (2) and 32 of the VAT Act. Consequently, NSS should also have issued a VAT invoice to Vodacom if it determined that the transaction in question constituted a VATable supply, failing which it should have been guilty of an offence under section 29 of the VAT Act.
Did the FHC import legal principles not contained in the VAT Act in reaching its conclusion that a resident beneficiary of a service supplied by a non-resident entity which has no administrative or physical ties to Nigeria must still self-charge and remit VAT?
We have earlier noted the FHC's view that a local resident purchasing services from a person outside Nigeria must take steps to avoid a situation where the state would be deprived of legitimate revenue. We have also noted the FHC's decision that the "appropriate and just" mechanism for the prevention of the loss of revenue in such cases is the 'reverse charge' mechanism.
In arriving at its position on the use of the reverse charge mechanism, the FHC noted that in "...some jurisdictions like the United Kingdom," the approach is "...to consider the receiver of the supplies within their jurisdiction as the supplier of the goods and services for the purpose of accounting for VAT." We therefore think it is safe to assume the FHC was guided by the approach taken in the United Kingdom and other jurisdictions, as there are no Nigerian statutory provisions or judicial authorities supporting such an approach,
In cases involving a supply by a non-resident supplier to a local consumer, section 10(2) of the VAT Act clearly imposes the obligation of invoicing for VAT on the non-resident supplier. Hence, such non-resident supplier must determine whether the supply is liable to VAT, the rate of the VAT to be applied on the invoice and the amount of VAT. Section 10(2) of the VAT Act also clearly states that the obligation to remit the amount of the VAT stated in the invoice of such non-resident supplier, which would have otherwise been the responsibility of the non-resident supplier, should lie on the local customer. Presumably, the lawmakers shifted the remittance obligation from the non-resident supplier to the local consumer because of the likely absence of a self-enforcement incentive for the non-resident supplier to collect such VAT and because it would be difficult or impractical for FIRS to recover the VAT from the non-resident supplier.
Section 10(2) neither requires the local purchaser to self-charge VAT nor use the reverse charge mechanism in cases where the non-resident supplier fails to invoice for VAT. With respect, we think that the FHC was wrong to infer an obligation to self-charge VAT despite the silence of section 10(2) of the VAT Act on the point. The implication of the FHC's inference is that both the purchaser and the supplier in a transaction to which section 10(2) of the VAT Act applies have the duty to make determinations as to whether the transaction is VATable, what rate of VAT should be charged, and what amount of VAT should be remitted. In our view, it would be absurd and impractical for those roles to be borne simultaneously by the purchaser and a supplier in any transaction. Furthermore, we think such an overlap of roles would be illogical, given that the legal liability for failing to perform them lies solely on the supplier.
It is our view that if the legislative intent were for any other obligation besides that of remitting the tax invoiced by the non-resident supplier to be shifted to the local purchaser, express provisions to that effect would have been included in the VAT Act.
Therefore, in the absence of such express provisions, it is our opinion that the FHC had no statutory basis for holding that Vodacom had an obligation to self-charge for VAT on its transactions with NSS.
Conclusion
It seems very unusual justice indeed that one party should be spared the consequences of breaching the clear and express words of a statute, whilst another is punished for breaching obligations which the statute does not provide for.
We believe that the FHC's decision in the Vodacom case was an attempt to address legislative lapses by judicial lawmaking which, if allowed to stand, would set a dangerous precedent for the use of extraneous laws and principles as interpretative aids for Nigerian tax statutes.
Clearly, the VAT Act does not address all of the issues that are relevant to the taxation of cross-border transactions. As has been stated by various commentators, legislative changes alone, rather than ad hoc judicial and policy interventions, will bring a lasting solution.
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