Nigeria: The Federal High Court Affirms Reverse Charge Mechanism In Value Added Tax

The decision of the Federal High Court (FHC) in Vodacom Business Nigeria Limited v. Federal Inland Revenue Service,¹ handed down on the cusp of the new year 2018, has understandably continued to generate a lot of controversy and angst. The FHC in that case, upheld the decision of the Tax Appeal Tribunal, making it the responsibility of Nigerian companies to assess Value Added Tax ("VAT") payable on goods and services provided by foreign companies, and remit same to the tax authorities. This rule applies, even where the foreign company is neither registered as a taxable entity in Nigeria, nor has it invoiced the local company for VAT.

On its face, the court's decision seems to deviate from strict principles which traditionally have applied to the interpretation of tax laws, to rest on forestalling the mischief that could be occasioned if such strict principles are applied. Perhaps more importantly, the reach of this decision, will have an impact on cross border transactions, and gives immediate cause for Nigerian companies to review their VAT practices with foreign partners and service providers – in order to ascertain and mitigate their potential exposures for VAT-able transactions. A closer examination of the facts of the case, will aid an appreciation of the court's decision and its implications for Nigerian businesses.

Vodacom, (the appellant), took the position, backed by Section 10 of the Value Added Tax Act, that in so far as a non-resident company ("NRC") (a foreign company with which it entered into a contract to supply bandwidth) was unregistered for VAT purposes, and had not invoiced it (Vodacom) for VAT, Vodacom was not liable to remit any VAT for the subject transaction to FIRS. In essence, Vodacom argued that the obligation for the Nigerian company to remit tax to the FIRS, according to Section 10, only applies if the foreign company is registered for tax and has invoiced the local company with VAT inclusive.

The court however rejected this argument, holding that such strict construction of the provision would provide a gratuitous escape route for tax evasion, especially since it would be administratively onerous to proceed against the foreign company.

Instead, the court employed the foreign principle of reversed charge holding that the statutory requirement for registration, is relaxed for foreign companies and as such, local companies consuming the goods/service, are to assess and remit the VAT to FIRS. It also held that for imported services such as those forming the subject of the instant case; where such services are not exempted from tax under the VAT Act, the focus should be on whether the goods/ services are made to Nigerian consumers for consideration.

It can perhaps be argued, certainly from a policy perspective, that the court decided rightly and in accordance with the purport of the VAT Act. It is pertinent to note that VAT is after all, imposed on the consumer of goods and services².

Our Take

Regardless of the controversies surrounding this decision, the FHC's decision remains the law on this matter unless overruled by a court of superior jurisdiction. As such, it is pertinent for Nigerian businesses to inform their foreign service providers accordingly, and endeavour to conduct their business transactions in the light of the decision.

Companies and individuals who transact with foreign counter-parts (either by purchase of imported service or foreign products), even in a one-time transaction, are now bound to assess their own VAT liability according to the Act, charge themselves and remit same to the FIRS; regardless of whether the foreign company is registered for tax or has invoiced them for it or not. Where the foreign counter-part is duly informed of the requirement of registration for VAT under our laws and the obligation to invoice for VAT, this consideration can be factored into the transaction at the negotiation and agreement stage; in order to forestall payment of VAT cost twice (once to the foreign company; the other directly to FIRS). Finally, it is worthwhile to consider the implication this decision may have when companies compute their financial statements. Put simply, it may be difficult for a local company to categorize the VAT charged on itself (by itself, with no trail/invoice or request) and directly remitted to tax authorities under the traditional VAT system. In essence, the decision of the Federal High Court has introduced into the Nigerian tax system, the principle of reverse VAT or reverse charge of VAT.

Footnotes

1 per Kuewumi J., in Appeal No.: FHC/L/4A/2016 (unreported)

2 "Consumer" by the combined reading of Sections 12, 14 and interpretation of 'taxable person" in VAT Act is not limited to end user of the services but includes retailers also.