The Lagos Tax Appeal Tribunal ("TAT") on 12 February 2016 ruled in favour of the Federal Inland Revenue Service ("FIRS") in its case with Vodacom Business Nigeria Limited ("Vodacom") that satellite-network bandwidth capacities provided to Vodacom outside Nigeria by New Skies Satellites ("NSS"), a Dutch incorporated company, are liable to value added tax ("VAT") in Nigeria.
In terms of the Nigerian VAT Act, VAT is chargeable on the supply of goods and services, other than those specifically exempted under the First Schedule to the VAT Act. Section 10 of the VAT Act requires a non-resident company ("NRC") "carrying on business in Nigeria" to register for VAT purposes in Nigeria, using the address of its Nigerian customer and to include VAT on the invoices it issues to the Nigerian customer. The Nigerian customer is required to remit the VAT to the FIRS.
In the case at hand, NSS entered into a contract with Vodacom for the supply of bandwidth capacities for Vodacom's use in Nigeria. The bandwidth capacities were transmitted by NSS to its satellite in orbit and received in Nigeria by Vodacom via its earth-based satellite. NSS did not charge VAT on its invoice to Vodacom for the service rendered and Vodacom did not remit any VAT to the FIRS.
During and audit, the FIRS assessed Vodacom to VAT on this transaction, and when the FIRS refused to accept several objections by the Vodacom, it filed an appeal at the TAT.
Vodacom argued that NSS' supply of bandwidth was a service provided outside Nigeria (from the Netherlands, without any physical presence in Nigeria), and that in terms of section 64 of the VAT Act, such services would not qualify as "imported services" as the services were not rendered in Nigeria, and accordingly, VAT should not be levied on the transaction. In addition, relying on the Gazprom Oil and Gas Ltd ("Gasprom") vs FIRS case, Vodacom argued that NSS did not have an obligation to register for and charge VAT on its invoices as it was not carrying on business in Nigeria and Vodacom, accordingly, did not withhold and remit VAT, since the obligation to remit VAT arises from the issuance of a tax invoice.
The FIRS argued that:
- based on the destination principle under the International VAT/GST Guidelines, the services provided by NSS were effectively imported into Nigeria, because the bandwidth capacities were received in Nigeria through earth-based stations set up in Nigeria by Vodacom to receive them;
- the "imported service" utilised by Vodacom in Nigeria is liable to VAT, since such services fall within section 2 to the VAT Act, and "bandwidth capacities" are not specifically VAT-exempt services as per the First Schedule to the VAT Act;
- by having a contract with Vodacom, NSS meets the requirement of "doing business in Nigeria", and, accordingly, was required to register and charge VAT on the supply to Vodacom;
- the fact that NSS failed to register with the FIRS and issue a VAT invoice, does not preclude Vodacom from fulfilling its obligation to withhold and remit the VAT due on the transaction as section 10 of the VAT Act is an administrative provision that deals with the VAT registration of companies carrying on business in Nigeria and does not specify transactions which should be subject to VAT.
The TAT held that:
- section 2 of the VAT Act imposes tax on the supply of all services, other than those specifically exempted under the First Schedule to the VAT Act. On the basis that bandwidth capacities are not exempted under the Schedule, the services provided by NSS are liable to VAT in Nigeria;
- section 10 of the VAT Act is merely an administrative provisions and it does not lay down conditions precedent for substantive viability; and
- as it was Vodacom, rather the NSS that is being taxed in Nigeria, it has the obligation to pay the VAT due on the transaction, irrespective of the fact that NSS did not have a presence in Nigeria.
In response to the judgement, both KPMG and EY Nigeria highlighted that the TAT did not seem to have properly consider the meaning of "imported service" as per the VAT Act, which is quite clearly defined by section 46 of the VAT Act as "a service rendered in Nigeria by a non-resident person to a person inside Nigeria". The TAT in its judgement admits that the destination principle, "whilst not binding on us, is a helpful guide in resolving this case". However, in terms the destination principle, a service is deemed to be "imported" and therefore subject to VAT regardless of where it is rendered by the non-resident service provider, whereas section 46 of the VAT Act specifically refers to "services rendered in Nigeria", with an apparent intention to restrict the definition to services performed in Nigeria.
The judgement also explicitly contradicts the decision of the Abuja TAT (a court of equal standing than the Lagos TAT) on 10 June 2015 in the case of Gazprom vs FIRS, which dealt with advisory and research services performed outside of Nigeria by a NRC. It was held that services rendered to Nigerian entities by NRC are not liable to Nigerian VAT, except if such services were performed in Nigeria. Furthermore, a Nigerian company is only required to account for and remit VAT on such services once it has received a VAT invoice from the foreign service provider.
The Lagos TAT was of the opinion that "Gazprom cannot guide us" as "the emphasis by the parties on section 10 was exaggerated and misplaced".
Worryingly, it would appear that, in appealing to the TAT, taxpayers cannot rely on precedents set by other TAT courts of equal standing, but should wait until clarity is provided by a Federal High Court on appeal.
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