February 13, 2018
The Federal High Court (FHC), on 19 December 2017, affirmed the decision of the Tax Appeal Tribunal (TAT or the Tribunal) in the case between Vodacom Business Nigeria Limited (Vodacom) vs Federal Inland Revenue Service (FIRS). The FHC held that the supply of satellite network bandwidth capacities by a non-resident company to a Nigerian company for a consideration is liable to Value Added Tax (VAT), in line with the provisions of Section 2 of the VAT Act (The Act).
Vodacom executed a contract with New Skies Satellites (NSS), a non-Nigerian company based in the Netherlands for the supply of bandwidth capacities for Vodacom’s use in Nigeria. The bandwidth was received in Vodacom’s base stations in Nigeria.
The FIRS issued VAT assessment to Vodacom for the transaction – an assessment which Vodacom objected to, on the ground that it had no obligation to remit VAT as the receiver of the service. Vodacom also contended that NSS was not under any legal obligation to register for VAT in Nigeria based on the provision of the VAT Act. Thus, it posited that VAT liability could not have arisen from the transaction.
Vodacom filed an appeal at the TAT but the case was decided in favour of the FIRS. Dissatisfied with the ruling of the Tribunal, Vodacom appealed to the FHC.
The FHC held that all supplies made within and/or into Nigeria for consideration are liable to VAT in line with Section 2 of the VAT Act to the extent that they are not expressly exempted by the Act.
Specifically, the court stated that the following three questions were crucial in ascertaining whether a transaction is liable to VAT:
The FHC in arriving at its judgment applied the destination principle which suggests that VAT should be levied in the consumer’s jurisdiction rather than the supplier’s jurisdiction.
In addition, the court held that VAT registration is not a condition precedent for the imposition of VAT and that a VATable transaction will still be subject to VAT whether the supply in question was of a continuous nature or a one-off transaction.
The court also held that the reverse charge mechanism should be adopted so that VAT is paid by the recipient of a service, where such services are received in Nigeria from a non-resident party.
The decision of the court in this case implies that VAT is to be charged on all transactions relating to supply of goods/services even where such services are not rendered in Nigeria, except for transactions that are expressly exempted by the Act.
Given that the judgment deviates from the previous practice where some Nigerian companies did not account for VAT on supplies received from non-resident parties, it would be interesting to see how this principle will be effectively applied in respect of VATable transactions with non-residents.
Although the judgment constitutes a judicial precedent unless it is overturned by a superior court, the matters arising are still open to debates from taxpayers that have similar business arrangements due to the apparent contradiction with the law.
Consequently, it is imperative for companies and persons that intend to enter similar business arrangements to proactively engage with their tax advisers on suitable structures that will help mitigate potential exposures.