September 26, 2018
On 19 June 2018, the Federal High Court (FHC) set aside the decision of the Tax Appeal Tribunal (TAT or the Tribunal) in the case between Federal Inland Revenue Service (FIRS) vs Gazprom Oil & Gas Nigeria Limited (Gazprom). The FHC held that a Nigerian company is liable to Value Added Tax (VAT) on any transaction involving the supply of goods and services by a non-resident company (NRC) to such company in Nigeria, even where the non-resident company fails to issue a VAT invoice, because Section 12 of the VAT Act imposes the burden of VAT payment on the ultimate consumer.
Gazprom engaged several NRCs to supply it with consultancy and advisory services to enable it to make investment choices. Upon receipt of the consultancy and advisory services, Gazprom paid the agreed fees to the NRCs. However, payments were made without remitting VAT to the FIRS on the transactions.
Following a tax audit, the FIRS issued additional VAT assessment to Gazprom on the transactions, an assessment which Gazprom objected to, on the grounds that it had no obligation to remit VAT on the transactions.
Gazprom filed an appeal at the TAT and the TAT ruled that Gazprom was not liable to VAT on the said transactions. The bases for the TAT’s decision were that the NRCs were not carrying on business in Nigeria and also did not issue any VAT invoice as required by Section 10(2) of the VAT Act. Dissatisfied with the ruling of the Tribunal, the FIRS appealed to the FHC. The sole issue reviewed by the Judge was whether the supply of goods and services made by an NRC to a Nigerian entity should be subject to VAT.
The FHC ruled in favour of the FIRS holding that Gazprom had the obligation to deduct and remit VAT on the said transactions. In arriving at its decision, the FHC stated that the words ‘carrying on business in Nigeria’ is not limited to physical presence of the NRCs in Nigeria. It further stated that where an NRC provides consultancy services to a Nigerian company for an agreed consideration or fee payable, the NRC is automatically deemed as doing or carrying on business in Nigeria.
In addition, the FHC held that although Section 10(2) of the VAT Act imposes an obligation on an NRC to include VAT in its invoice, a Nigerian company will still be obligated to remit VAT to the FIRS even where the NRC has failed to include VAT in its invoice. This is because Section 12 of the VAT Act imposes the obligation of VAT payment on the ultimate consumer. Hence, the purpose of the VAT Act would be defeated if the Nigerian company does not remit VAT on a VATable transaction simply because its non-resident supplier did not issue a VAT invoice on the said transaction.
The Judgment in this case implies that Nigerian companies that engage in transactions with NRCs are expected to deduct and remit VAT on such transactions even where such NRCs fail to issue VAT invoices. Furthermore, it would appear that VAT is to be charged on all transactions relating to supply of services even where such services are not physically rendered in Nigeria, except for transactions expressly exempted.
This Judgment aligns with the prior decision of the FHC in the case between Vodacom vs FIRS. In that case, the FHC held that the reverse charge mechanism should be adopted so that VAT is paid and remitted by the recipient of a service, where such services are received in Nigeria from a non-resident party. The position of the Court seems to align with the recommendations of the international community (e.g. the OECD and the European Union) on the adoption of destination principle and the reverse charge mechanism for cross border transactions. However, these Guidelines are only of persuasive authority in Nigeria and the recommendations should not apply unless there is a legislative enactment to that effect.
Consequently, it is important to note that the recent Judgments of the FHC directing Nigerian companies to deduct and remit VAT on transactions involving supply of goods and services by non-resident entities even in the absence of VAT invoice deviates from previous practice and the clear provisions of the VAT Act regarding the remittance of VAT on cross-border transactions. Moreover, most of the countries that adopted the reverse charge mechanism into their VAT systems did so via parliamentary amendments or enactments to address any lacuna in their national laws.
Although the Judgment is still open to debate from taxpayers, the Judgment stands as judicial precedent unless it is overturned by a superior court.