February 20, 2018
The Value Added Tax (VAT) Act provides for the deduction of Value Added Tax at source for companies operating in the oil and gas sector. This requirement typically puts some of the companies in a position where they are unable to take necessary benefits from the input VAT suffered on their purchases. This article examines the various issues bedeviling these companies, in respect of the requirement to deduct VAT at source.
Normally, when companies issue VAT invoices to their customers, such customers are expected to pay the VAT charged together with the contract sum to them. However, this is not always the case, as some companies and government agencies are required to withhold the VAT at source based on the provisions of Sections 10(2), 13(1) and (2) of the Act.
Section 13(2) of the Act provides that:
The Service may, by notice, determine and direct the companies operating in the oil and gas sector which shall deduct VAT at source and remit same to the Service.
Based on the provisions of Section 13(2) of the Act, the Federal Inland Revenue Service (FIRS) issued an information circular no. 02/2007 titled “Notification of Guidelines on the Implementation of VAT Deduction (Reverse Charge) and New Payment Arrangement with Respect to Fees, Levies, and other Charges Payable by Companies in Oil and Gas Industry”. (the Circular).
The Circular provides that companies operating in the oil and gas sector should withhold the VAT due on all contracts awarded to its contractors, at source and remit same to the FIRS. This implies that companies operating in the oil and gas sector should not pay the VAT over to the contractors. Rather, they are to pay their contractors the cost of the goods/services and withhold the VAT charges due on contracts awarded by them, and remit such deductions directly to the FIRS. Thus, making the consumer, the Government’s collection agent.
The Circular also places an obligation on oil and gas companies to prepare and forward to the FIRS, relevant schedules showing complete details of the contractors and transaction, and demand relevant receipts covering all VAT payments from the FIRS. Some of these companies are also required to account for both the VAT they have deducted at source as well as the output VAT charged. These requirements increase the compliance burden for companies in the sector as they have to file two sets of monthly VAT returns.