Value Added Tax And Digital Services In Nigeria

Introduction

Value Added Tax (VAT) is an indirect tax imposed on the supply of goods and services. Historically, this supply of goods and services involved physical exchanges in specific locations known as markets, where the identities of the transaction parties were also disclosed.

However, technological advancements and globalization have transformed these conventional marketplaces into digital economies. Today, trade in goods and services occurs electronically, leading to the emergence of digital services as a new economic order. The development has graduated from the "discovery of computers" to "internet services" which brought about "software and application" that later paved way for the creation of different "platforms" that integrate seamlessly into daily economic activities. The traditional marketplace has thus evolved into a virtual space where services are provided through applications, high-frequency trading, electronic data storage, and online advertising, commonly referred to as e-commerce.

The rise of e-commerce platforms, digital payment systems, and online marketplaces has dramatically changed the way consumers engage with businesses and access goods and services. This shift has resulted in significant changes in consumer behavior, including an increased reliance on digital channels, a preference for convenience, and a demand for personalized experiences.

This article aims to explore the application of VAT to digital services, particularly in response to the growing digital economy. We will examine the legal framework that governs the application of VAT to digitally supplied services and address the administrative challenges that impact its effectiveness in Nigeria. Additionally, the article includes a comparative analysis of the VAT regimes in other Commonwealth jurisdictions and offers recommendations to enhance Nigeria's VAT system for digital services.

VAT Applicability to Digital Services

Digital services encompass a broad spectrum of activities, including online banking, streaming services, online payments, digital communication, social media engagement, cloud management, online bookings, e-commerce, and websites, along with online job platforms and business automation tools. These services are characterized by their ability to transcend traditional geographic boundaries and are typically delivered electronically over the internet with minimal physical or human interaction. They are automated, relying on a digital Information, Computing, Communication, and Automation Technology (ICCAT) system that responds to user inputs to generate the desired outcomes.¹

Given the borderless nature of these transactions, which may span multiple jurisdictions simultaneously, a critical question arises: How is VAT applied within the context of Nigeria?

The administration of VAT in Nigeria is primarily regulated by the Value Added Tax Act 2004 ("VAT Act" or "Act"), with significant amendments introduced through the Finance Acts of 2019 through 2023 and the Value Added Tax (Modification) Order of 2021 (the 2021 Order). Since 2019, the VAT Act has been the subject of consistent legislative updates annually.

Practical Approach to VAT Application to Digital Services

The VAT Act generally specifies what constitutes goods and services and when VAT is applicable to any supply. It is widely interpreted that digital services fall under the scope of the Act, even though it lacks a specific definition for 'digital service.' Essentially, as long as services are rendered and supplied, whether physically or digitally, they are subject to VAT unless specifically exempted in the First Schedule to the Act.² Goods and services consumed or utilized within Nigeria are considered to be supplied within the country according to the Act.³ The Act also defines scenarios where a taxable supply is deemed to occur within Nigeria.

It is important to note that exported digital services are exempt from VAT, aligning with the destination principle as codified in Section 10 of the Act and the Organisation for Economic Co-operation and Development's (OECD) recommendations. This stance is consistent with the approach taken by the United Kingdom, where HM Revenue & Customs (HMRC) applies the destination rule to supplies of digital services to consumers. In instances where digital services are provided to customers via a third-party platform or marketplace, the responsibility for VAT falls on the digital platform rather than the originating company.

Consider a scenario involving Company A that supplies VAT-able goods through an online marketplace owned by Company X to Mr. B, with payment on delivery terms. Mr. B pays through his local bank while Company A receives the purchase price through an online financial payment platform—Company Z. In this example, four different digital services are involved, each subject to VAT:

1. Online Service: The service provided to Company A by Company X's platform, which includes displaying and advertising goods.
2. Online Supply of Goods: The actual transaction of goods from the online market platform (Company A) to Mr. B.

• Online Money Transfer Service: The transfer of funds from Mr. B's local bank to Mr. B.

7. Online Payment Platform: The intermediate third-party payment service by Company Z. The VAT rate applied is consistent at each stage of the transaction, currently set at 7.5%. This rate applies to the fees charged by Company X for allowing Company A to market and advertise goods online, the value of the goods supplied to Mr. B, the commission charged by Mr. B's local bank, and the commission charged by the intermediate third-party payment platform, Company Z.

Current Regulations for Digital Services: Simplified VAT Compliance for Non-Resident Suppliers

On October 11, 2021, the Federal Inland Revenue Service (FIRS) issued Information Circular No. 2021/19, which outlines the Guidelines on Simplified Compliance Regime for VAT for Non Resident Suppliers (NRS).⁴ These guidelines are developed under Section 10 of the VAT Act, which requires any non-resident individual or entity making a taxable supply of goods or services to Nigeria to register for tax with the FIRS and obtain a Tax Identification Number (TIN).

The guidelines specifically address the supply of goods, services, intangibles, and other digital products made through digital means by entities not physically located, based, or represented within Nigeria (i.e., NRS) to either businesses (B2B) or consumers (B2C) in Nigeria. It includes intermediaries who, although not the actual owners or suppliers of the goods or services, facilitate the supply, issue invoices, and handle payments.⁵ For example, a Singapore-based online marketplace that connects global sellers with buyers worldwide (and does not directly own the products listed on its website but is an intermediary) would need to register for VAT in Nigeria if it facilitates transactions involving Nigerian consumers.

Furthermore, services are described in the Guidelines to include "any intangible or services delivered via electronic or digital means or similar networks, whose supply is essentially automated, involves minimal human intervention, and is impossible to ensure in the absence of information technology'.'⁶ This category includes online gaming, automated online professional and consultancy services, online advertising, cloud computing services, and payment platforms. The Guidelines exempt professional and consultancy services that are not automated (such as those delivered via email), broadcasting services, telecommunications services, and services listed as exempt under the First Schedule to the Act.

Similar to the UK Guidelines, internationally traded services or intangibles are deemed to be supplied in Nigeria where the services or intangibles are consumed or intended to be consumed in Nigeria. The guidelines stipulate several criteria to determine if a service is consumed in Nigeria:⁷

• The recipient has a Nigerian billing, business, residential, or postal address.
• The consumer's usual place of residence is inferred to be Nigeria based on information provided.
• The customer is a company incorporated under Nigerian law.
• The customer's URL, geo-location, or IP address is in Nigeria.
• The services are physically performed in Nigeria.
• Other evidence suggests that the supply is consumed or utilized in Nigeria.
• If none of the above can determine the place of consumption, it is considered to be Nigeria if the payment originates from a Nigerian bank or financial institution.⁸

In these circumstances, the NRS is required to remit VAT, using its name and TIN to the FIRS. NRSs are primarily responsible for collecting VAT on cross-border supplies of goods and services. If the NRS fails to collect the VAT, the Nigerian customer must withhold or self account for the tax as mandated by section 14 of the Finance Act 2020. This provision transfers the responsibility to the Nigerian resident to whom the taxable goods or services are supplied, ensuring that the tax is remitted to the FIRS in the transaction's currency.

Challenges of VAT Administration on Digital Services in Nigeria

• Nature and Invisibility of Digital Services: The borderless and intangible nature of digital services presents significant challenges in administering VAT in Nigeria, leading to substantial losses in domestic revenue. Digital services often lack a physical presence, operating instead from the cloud or foreign jurisdictions, which complicates the identification of entities responsible for supplying these services within Nigeria. While the Nigerian VAT Act⁹ requires non-resident companies doing business in Nigeria to register with the Federal Inland Revenue Service (FIRS) and remit VAT in the transaction currency, ensuring compliance is challenging.
• Technological Infrastructure Limitations: The underdevelopment of technological infrastructure necessary to support the administrative capacity of the FIRS further hampers effective VAT management on digital services. However, a potential solution has been identified in empowering banks, financial institutions, and digital platforms to act as VAT collection agents for the FIRS.¹⁰ This approach leverages existing financial systems to track transactions, gather necessary information, and ensure proper VAT collection and remittance.
• Absence of Uniform Global Tax Rules: Historically, the lack of uniform international rules for taxing non-resident companies on digital services has been another significant challenge.¹¹ The absence of a standardized global framework leads to inconsistencies and complexities for companies operating across multiple jurisdictions. This situation often results in double taxation, difficulties in compliance with diverse tax laws, and unintentional non-compliance, further complicating the tax landscape for digital services.

The need for greater international collaboration led to the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) initiated by the OECD in 2013. This framework introduced proposals such as Pillar One and Pillar Two, which focus on the right to tax and the establishment of a minimum tax payable, respectively. These initiatives aim to provide clarity and certainty for businesses, enhancing the ability of tax authorities to enforce compliance and collect appropriate taxes from digital transactions.¹²

It is however crucial to tailor the VAT framework to the peculiarities of the Nigerian tax environment. This adaptation is necessary to effectively address the specific challenges posed by taxing digital services in Nigeria. The government's reservations regarding Pillar Two highlights the need to consider local conditions and ensure that any international agreements or frameworks align with national interests and the unique aspects of the local tax landscape.¹³

Nigeria's Response to Digital VAT Challenges

The digital era has transformed consumer behavior and business transactions significantly, presenting a mix of opportunities and challenges for VAT regulation both in Nigeria and globally. As digital services become more prevalent, there is a pressing need for VAT frameworks to evolve and adapt to these new modes of commerce.

In response to the challenges posed by digitalization, the Nigerian government has issued guidelines to ensure compliance by non-resident suppliers of digital goods and services in compliance with the extant VAT Act. These guidelines clarify the obligations of such suppliers and outline the processes for determining VAT liabilities in cross-border transactions. An efficient implementation of these guidelines is crucial to address potential revenue losses due to the growth of the digital economy and ensure fair and equitable taxation.

Global and Regional Efforts

The OECD has been proactive in ensuring that countries can exercise their taxing rights, focusing primarily on income tax as a form of direct taxation.

Regarding cross-border transactions, the OECD advocates for the destination principle, which upholds the autonomy of sovereign states to devise strategies for collecting revenue from indirect taxes like VAT. Nigeria has since domesticated this principle in its principal VAT legislation¹⁴. The mandate for non-resident and digital companies to register in Nigeria due to their "significant economic presence" is a positive step. However, further measures are needed to enhance the revenue generated from VAT on digital services.

The European Union's VAT Mini One Stop Shop (MOSS) scheme, introduced in 2015, facilitates the collection and transmission of VAT across the EU's 28 Member States. This scheme allows businesses selling digital services in multiple EU countries to manage VAT through a single online portal in their home country, simplifying the VAT process. Similarly, organizations like the African Tax Administration Forum (ATAF) and the OECD could develop policies to streamline VAT administration across nations. As digital transactions often transcend national borders, international collaboration is essential to develop cohesive VAT policies that promote fair taxation and minimize tax evasion.

Stay Updated: Ensuring Compliance with VAT Regulations

Service providers engaged in digital activities and all stakeholders in the digital economy must stay informed about developments in VAT statutes and regulations. Regular updates are necessary to ensure compliance and avoid potential sanctions that could cause both financial and reputational damage to their businesses. For further insights, please reach out to SimmonsCooper Partners at: Bashir Ramoni & Onyinye Igweonu.

Footnotes

1 Daniel Pakkala and Jim Spohrer in "Digital Service: Technological Agency in Service Systems" being paper presented at the Proceedings of the 52nd Hawaii International Conference on System Sciences | 2019 at page 1886

2 Section 2(1) of the VAT Act

3 Section 2(2) of the VAT Act

4 https://firs.gov.ng/wp-content/uploads/2021/11/Guidelines-on-VAT-Simplified-Compliance-Regime 11.09.2021.pdf

5 Paragraph 5.2, 26 of the Guidelines

6 Paragraph 14 of the Guidelines

7 Paragraph 15 of the Guidelines. Additionally, the Guidelines provides comprehensive illustrations where internationally traded services or intangibles are taxable.

8 Comprehensive illustrations are provided in the Guidelines.

9 Section 10 of the VAT Act

10 Bolts Operation OU v. FIRS delivered on 26th May 2023 by the Tax Appeal Tribunal. The Tribunal interpreted the provision of Section 14(3) of VAT Act, amended by Section 37 of Finance Act, 2019. FIRS sought to appoint Bolt as a VAT collection agent, requiring the platform to collect VAT from its drivers and remit it to the tax authorities. Bolt challenged this appointment, asserting that the drivers who make use of the platform are not employees of the Company but independent operators providing cab driving services. The Company also posited that it operates primarily as a provider of a technology platform which facilitates the connection between drivers and passengers and should not be burdened with the responsibility of collecting and remitting VAT. The Tribunal held that the FIRS is empowered to appoint Bolt as agent.

11 Kabwe, Ruddy, and Stephanus van Zyl. 2021. Value-added tax in the digital economy: A fresh look at the South African dispensation. Obiter 42: 499–528.

12 Mpofu, Favourate Y. 2022. Taxing the Digital Economy through Consumption Taxes (VAT) in African Countries: Possibilities, Constraints and Implications. International Journal of Financial Studies 10: 65. https:// doi.org/10.3390/ijfs10030065

13 The effect of VAT on digital services on the economy must be considered. See Katz, Raul. 2015. The impact of taxation on the digital economy. Paper presented at the 15th Global Symposium for Regulators, Libreville, Gabon, June 9–11; pp. 1–61; Youssef, Adel Ben, Sabri Boubaker, But Dedaj, and Mjellma Carabregu-Vokshi. 2021. Digitalization of the economy and entrepreneurship intention. Technological Forecasting and Social Change 164: 120043.

14 Section 2, 10 VAT Act

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