The taxation of services supplied by non-resident foreign companies (NRCs) to Nigerian companies has been an issue of great debate in recent times. On 24 June 2019, the Court of Appeal held, in the case between Vodacom Business Nigeria Limited (Vodacom) v Federal Inland Revenue Service (FIRS) that the supply of satellite bandwidth capacities from an NRC to Vodacom (a Nigerian based company) is subject to Value Added Tax (VAT) in Nigeria.
Based on the facts of the case (and only on that strength), the Court of Appeal in the Vodacom case was correct to have subjected supply of bandwidth capacities to Vodacom to VAT. However, the rationale used by the Court to then attempt (as it seemed to do), to assert that all imported services are liable to VAT in Nigeria, appears to be at variance with the express provisions of the VAT Act, which requires that imported services be supplied in Nigeria before VAT liability can arise.
In the Vodacom decision, the transaction qualified as a VATable supply under the VAT Act because Vodacom had received the bandwidth capacities with equipment located in Nigeria. Although and sadly so, the Court of Appeal in reaching this decision had jettisoned the distinction between the location of supply of a service and the location of receipt of such service and inadvertently interpreted the supply of a service and the receipt of a service to mean the same thing in determining the VATability of a transaction.
Therefore, following the Court of Appeal's decision, a number of stakeholders have taken a view that the decision has expanded the scope of the VAT liability of Nigerian resident companies to include all forms of services rendered by NRCs whether or not such services are physically supplied in Nigeria (by employees or via some form of equipment located in Nigeria). However, this position clearly contradicts the provisions of the VAT Act.
This Article analyses the Court of Appeal's decision in the Vodacom case vis-à-vis the relevant provisions of the VAT Act and also seeks to distinguish the Vodacom case from other forms of cross border transactions which do not require any form of physical presence in Nigeria.
Summary of the Vodacom Case
Vodacom challenged a VAT assessment imposed on it by the FIRS in respect of a transaction involving the supply of satellite network bandwidth capacities by a non-resident company. Although the bandwidth was received through Vodacom's transponders in Nigeria, Vodacom argued that the transaction was not subject to Nigerian VAT because Section 2 of the VAT Act only imposes VAT on services rendered in Nigeria and this supply was not performed in Nigeria but was only received in Nigeria.
Vodacom filed an appeal at the Tax Appeal Tribunal and subsequently at the Federal High Court (FHC) but Vodacom lost at both levels. Dissatisfied with the FHC's decision, Vodacom appealed to the Court of Appeal.
The Court of Appeal held that Vodacom was liable to self-assess and remit VAT on the said transaction. In giving its decision, the Court of Appeal recognized the fact that although the satellite network was in the orbit, the bandwith was received in Nigeria through Vodacom's transponders. Thus, the service was rendered in Nigeria and liable to Nigerian VAT.
A detailed review of the facts of the Vodacom case would reveal that in addition to the fact that the services were received in Nigeria, there was also an element of physical supply of the bandwidth capacities in Nigeria through Vodacom's transponders in Nigeria. As such, the Court of Appeal ought not to have relied solely on the fact that the services were received in Nigeria but to have focused more on the element of physical supply of the bandwidth capacities through Vodacom's transponders in Nigeria instead (relying on Sections 2, 10 and 46 of the VAT Act). Unfortunately, the Court did not apply the clear provisions of the law in determining the VATability of the transaction in this case.
The Position of the Nigerian Law on the VATability of Imported Services
Section 2 of the VAT Act provides that VAT is to be charged and paid on the supply of all goods and services except those expressly exempt under the VAT Act. However, Section 10 of the VAT Act provides that an NRC that carries on business in Nigeria should register for tax with the tax authorities and the person to whom the services are supplied to in Nigeria is to remit the tax to the FIRS. While Section 2 of the VAT Act is a general provision which provides for taxation of supply of goods and services, Section 10 of the VAT Act specifically speaks to the supply of services by NRCs.
It is trite that when a general rule of law is followed by a more specific rule, the specific rule should qualify the general. Thus, in the case between Martin Schroeder & Anor v Major & Company (Suit No: SC/84/1986), the Supreme Court upheld the principle that where there are two provisions, one specific and the other general, covering the same subject matter, a case falling within the words of the specific provision must be governed by the specific provision.
Relying on the foregoing, it is important to analyse whether a non-resident company has carried on business in Nigeria and whether such NRC has in fact supplied services in Nigeria in order to determine whether VAT applies to such transaction. To give credence to this position, Section 46 of the VAT Act defines "imported service" as a "service rendered in Nigeria by a non-resident person to a person inside Nigeria".
The definition of the phrase "carrying on business in Nigeria" has been in contention given that it was not defined under the VAT Act. In the case between FIRS v Gazprom Oil & Gas (Suit No: FHC/ABJ/TA/1/2015), an NRC provided advisory and consultancy services to a Nigerian company. The service was performed and completed outside Nigeria and the receipt of the service by the Nigerian company did not require any act of the NRC nor constitute the act of rendering advisory services.
In determining whether the NRC concerned carried on business in Nigeria, the Federal High Court referred to the case of Edicomsa International Inc. & Associates v CITEC Int'l Estates Ltd (2006) 4 NWLR Part 969 Page 114. In that case "carrying on business" was defined to mean the conduct or prosecution of a particular vocation or business either as a continuous operation or permanent occupation. Unfortunately, jettisoning the clear position it had so eloquently analyzed, the Federal High Court held that the NRC did not require any physical presence in Nigeria to carry on business of supplying consultancy and advisory services in Nigeria. Another judicial (rather than legislative) enactment of VAT obligations.
It is important to note that in Ahmadu v Governor, Kogi State (2009) 1TLRN 319 the Court of Appeal held that tax laws should be interpreted strictly and the language of a tax law should not be strained in order to tax a transaction which would have been covered by appropriate words if the legislature had thought of it. The Court went further to say "...in a taxing legislation, there is no room for any intendment, there is no equity about tax no presumption at all and nothing is to be read in and nothing to be implied".
As such, other rules of interpretation, which deviate from the literal interpretation of the tax laws should not be employed where the words are plain and unambiguous.
Based on the foregoing, the provisions of Section 10 and 46 of the VAT Act are clear and unambiguous and effect must be given to their ordinary and literal meaning. If the draftsmen of the VAT Act contemplated for all services supplied by an NRC to be subject to VAT even without physical presence in Nigeria, then the specific inclusion of the clause "that carries on business in Nigeria" would not have been included in Section 10 of the VAT Act. Thus, based on the strict provisions of the VAT Act, it is my view that transactions such as advisory, consultancy and other legal services wholly performed outside Nigeria are not liable to Nigerian VAT where there is no physical presence/element (such as Vodacom's transponders) in the delivery of such service in Nigeria.
So, in my opinion, there is no general rule in Nigeria that all imported services are liable to VAT. Each case still has to be considered on its facts.
In the final analysis, the courts should be minded to give effect to the clear provisions of statute and in the event of any ambiguity, such ambiguity is expected to be resolved in favour of the taxpayer.
In S.E Ola v Federal Board of Inland Revenue (2011) 5TLRN 136, the Supreme Court of Nigeria held that provisions of taxing statutes are always strictly interpreted and likewise that where ambiguities arise in the procedure in taxation matters, it is the construction or presumption that is more favourable to the assessee or that person chargeable to tax that should prevail or be adopted.
Thus, in the absence of any legislative amendment to the clear provisions of Sections 10 and 46 of the VAT Act, the provision of the law remains that an NRC must carry on business in Nigeria its services to be subject to VAT in Nigeria. In this regard, there must be an element of physical presence of the NRC in Nigeria in the performance of its services. On the facts, Vodacom affirmed rather than departed from this position of the law. Thus, transactions or services which are rendered completely outside Nigeria could not be regarded as business carried out in Nigeria for the purpose of VAT liability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.