VALUE ADDED TAX ON IMPORTED SERVICES IN NIGERIA: UNDERSTANDING

THE LAW AND EASING THE CONFLICTS

Dr. Jerome Okoro*
Abstract
This paper seeks to create an insight into the intendments of the Nigerian Value Added Tax Act
on taxation of supplies by non-residents to Nigerian residents, and the ideal approaches for
amelioration of the controversies. Analyses of laws and judicial decisions in the paper find that
the Destination Principle and the Reverse Charge Mechanism endorsed by Nigerian courts
which have been severely criticized in legal opinion circles as alien to Nigerian law are
actually contained in the law, albeit impliedly. Thus the problem of Value Added Tax on
imported services in Nigeria seems to be more of poor appreciation of the law, than of the
contents of the law. Hence, awareness creation on the law, revival of the criminal provisions,
executive measures, and contractual innovations are the main recommendations to ameliorate
the controversies.

Keywords: Value Added Tax, Supplies, Non-residents, Destination Principle, Reverse Charge
Mechanism

1.0 Introduction
Administration of the Nigerian Value Added Tax (“VAT”) Act1 has encountered heated
controversies including lawsuits that contested its constitutionality, and hence threatened its
very existence.2 But perhaps, the longest-drawn-out of the VAT dissensions are the currently
raging issues on taxation of imported goods and services under the Act. Judicial decisions
which strove to resolve the issues have produced further conflicts of thought rather than a
consensus.

These judicial decisions which are discussed in details in later pages lean towards the reasoning
that services imported into Nigeria by whatever means are subject to VAT in Nigeria. While
this reasoning aligns with the Destination Principle, a principle of the Organization for Economic
Cooperation and Development (OECD) that envisages the charging of VAT on goods and services
in the country where they are supplied, critics contend on the contrary that the VAT Act, having

*
PhD, Energy Law, Tax Lawyer and Partner at Hermon Law, Lagos. Email address: jerome@hermonlaw.com
1
Cap. V1, Laws of the Federation of Nigeria, 2004 (as amended in 2007).
2
In Attorney General, Lagos State. v. Eko Hotels Limited (2018) 7 NWLR (Pt. 1619) P.518, the Supreme Court
upheld the constitutionality of the VAT Act and its overriding effect on the Sales Tax Law of Lagos State based
on the doctrine of covering the field.

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not mentioned the principle expressly in its Section 10 or elsewhere could not have intended
its applicability in Nigeria. The courts have also held the Nigerian-based receivers of the
services liable to VAT in spite of the failure of the non-resident service providers to include
VAT element in their fee invoices. This judicial pathway attunes with the Reverse Charge
Mechanism that requires the service receiver to pay VAT at source to the revenue authourity
and simply pay the provider his fees. Critics also argue that Section 10 of the VAT Act relating
to services received from non-residents is devoid of the term, Reverse Charge, and so could
not have alluded to the mechanism. These two points of discord summarize the controversies
of VAT on imported services in Nigeria. This paper analyses the issues and proffers responses.

2.0 The Legal Basis for VAT

Section 2 of the VAT Act is the legal basis for charge of VAT in Nigeria. By that Section,
every supply of goods or services in the country, except those specifically exempted under the
First Schedule to the VAT Act, is liable to VAT.

By Section 2, the rule for determining whether a particular good or service is taxable under the
VAT Act is whether it is specifically exempted in the First Schedule. Thus in the absence of
express exemption, the item of goods or service would be assessed to VAT. Section 46 of the
VAT Act buttresses this position by defining “taxabe goods and services” as “the goods and
services not listed in the First Schedule to this Act.”

In principle, VAT is universally acknowledged as a consumption tax. Its liability is borne by

the final consumer of goods and services.3 In practical terms however, the tax is on supply and
not consumption, as the receiver of the goods or services so supplied need not use or derive
any benefit from them to attract VAT. VAT arises at the moment of supply, and is often paid
instantaneously, as seen in regular purchases. As the various provisions of the VAT Act on
supply would indicate, the consumption criteria attributed to VAT is only deemed. Section 2
of the Act provides that, “the tax shall be charged and payable on supply of all goods and
services”; Section 10(2) of the Act also refers to supply of goods or services; while Section 46
defines “supply of services” to mean “any service provided for a consideration”.

3
Dongban-Mensem, J.C.A. held in Attorney-General, Lagos State v. Eko Hotels Ltd (2008) ALL FWLR
(Pt. 398) 235 at 259 held:“The actual beast of burden of the Value Added Tax/sales tax is the consumer, and the
tax is charged on consumable items...”

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3.0 VAT on Imported Services

While Section 2 generally provides for VAT liability, Section 10 provides specifically for VAT
on foreign supply of goods and services into Nigeria by non-resident companies. According to
Section 10:

“1. For the purpose of this Act, a non-resident company that carries on business in
Nigeria shall register for the tax with the Board, using the address of the person
with whom it has a subsisting contract, as its address for purposes of
correspondence relating to the tax.
2. A non-resident company shall include the tax in its invoice and the person to
whom the goods or services are supplied in Nigeria shall remit the tax in the
currency of the transaction.”

The above provision places a duty on the non-resident supplier of goods or services into Nigeria
to register for VAT with FIRS and add the VAT element in his invoice, while the receiver in
Nigeria shall remit the VAT to FIRS. The problem with the provision as would be seen in the
decided cases, arose where some non-resident suppliers neither registered for VAT nor added
VAT to their invoices for the services. The salient issues before the court in those cases, and
indeed the major points of debate among tax lawyers and consultants are: 1) what mode of
supply into Nigeria can be brought under the purview of Section 10 above for VAT liability to
arise under that Section in the first place, as physical presence or entry into Nigeria by the
supplier was argued to be a sine qua non to VAT liability under Section 10; and 2) whether the
duties of the supplier to register for VAT and add the VAT to its invoice are conditions
precedent to the duty of the receiver to pay the VAT, or whether the latter duty is independent
of the former. These yielded the yet knottier issues of whether Nigerian law provides for the
Destination Principle4 referred to and applied by the Nigerian courts, which holds the country
of supply rather than the country of origin as the VAT base in cross-border supply of goods
and services. Another ancillary issue is whether the Nigerian law provides for the Reverse VAT

4
OECD International VAT/GST Guidelines (OECD Guidelines), 2017 provides that the destination principle
should apply to internationally traded services and intangibles.

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Charge Mechanism which seeks VAT payment from the receiver rather than the supplier
especially when the latter is non-resident in the jurisdiction of the supply.5

The two concurring decisions of the Federal High Court are discussed below, followed by the
writer’s attempt to resolve the emanating issues.

4.0 Judicial Decisions in FIRS v GAZPROM and VODACOM v FIRS

In FIRS v. Gazprom Oil & Gas Nigeria Limited,6 Gazprom engaged a number of non-resident
companies to render consultancy services to it for use in its operations in different parts of
Africa. Gazprom paid the foreign entities, but neither filed VAT returns nor remitted VAT on
the payment. FIRS discovered the transaction through an audit exercise and issued VAT Re-
assessment Notices on Gazprom. The Tax Appeal Tribunal held that the non-resident
consultants were not carrying on business in Nigeria as the VAT Act envisaged, and that by
the failure to issue invoices reflecting VAT elements on Gazprom by the consultants, Gazprom
was not liable to pay the VAT. The Federal High Court, in its appellate judgment on 19 June
2018, reversed this position and held that the non-resident consultants, by their provision of the
consultancy services to Gazprom in Nigeria, were carrying on business in Nigeria, and so were
bound to register for VAT in Nigeria. The court relied on the definition of “carrying on
business” in EDICOMSA International Inc. & Associates v. CITEC International Estates
Ltd.7 It further restated the duty of the foreign entities to issue VAT invoices on Gazprom, but
held that the absence of such invoices did not detract from Gazprom’s liability to pay the VAT,
as the liability is made mandatory in Section 10(2) of the VAT Act.

In Vodacom Business Nigeria Limited v. FIRS,8 Vodacom, a Nigerian resident company had
a contract with New Skies Satellite, a non-resident company, for the supply of bandwidth
capacities. New Skies neither registered for VAT nor issued a VAT invoice on Vodacom.
Vodacom also did not pay the VAT. In its appellate judgment in the appeal on 19 December
2017, the Federal High Court held in consonance with the earlier decision of the Tax Appeal
Tribunal that Vodacom was bound by Section 10(2) of the VAT Act to pay the VAT,
notwithstanding the failure of New Skies to register for VAT and issue invoice with VAT

5
The VAT laws of the United Kingdom (UK), and South Africa provides for the Reverse Charge Mechanism.
See Section 8 of the UK Value Added Tax Act, 1994, and Section 7(1) (c) of the South African VAT Act, 1991,
which mandates self-assessment and payment of VAT on the receiver of imported services.
6
FHC/ABJ/TA/1/2015. Certified True Copy of the Judgment of the Federal High Court, Abuja, delivered by
Hon. Justice A.R. Muhammed on June 19, 2018.
7
(2006) 4 NWLR (Pt. 969) 114.
8
FHC/L/4A/2016.

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element on Vodacom. His Lordship’s copiously expressed basis for the Vodacom decision was
the United Kingdom VAT regime which dispenses with registration by the non-resident
supplier, and focuses on recovering the tax from the resident receiver.

The judgments in Gazprom and Vodacom have provided ample clarity on taxation of supplies
to Nigeria by non-resident entities. However, while the former focused on interpretation of the
VAT Act, with heavy leaning on the products of that interpretation to show that the Act has
covered much more grounds than perceived, the latter relied a lot on the UK system with little
highlight of the pertinent reflections of that system on the Nigerian VAT Act. This must have
engendered the views that the VAT Act is still lacking in the principles applied in the Vodacom
judgment, despite the staring cogency of those principles.9 The two judgment, nonetheless,
remain the authourities on VAT treatment of supplies to Nigeria by non-resident entities,
pending a contrary decision at any appellate stage.10

5.0 Modes of Service Importation in the Context of the VAT Act

Among the arguments raised in the Vodacom case was that the physical act of rendering the
service has to be performed in Nigeria for it to be liable to VAT. From the lenses of Section
10, VAT Act however, the physical act of rendering the service must not take place in Nigeria.
Section 10, with the mention of “supply,” is merely interested in conveyance of the service to
the receiver in Nigeria. It is the act of getting the service to the Nigerian purchaser that fulfills
Section 10, not the act of producing the service.

Modern technology and innovations have created uncountable means of cross-border supply
of services in the context of Section 10(2) of the VAT Act which dispense with the physical
presence of the supplier in Nigeria. In consultancy services, the consultant can stay in
Netherlands, sources for his consultancy materials in Netherlands, conduct his research, and
even draft his consultancy reports in Netherlands; but he has not yet supplied his service in
Nigeria. It is when he conveys the consultancy report vide postal, e-mail, phone, fax, or internet
to the client in Nigeria who would pay him for it that he has supplied his service in Nigeria. In
legal services, the lawyer can stay in England, conduct his research in his library in England,

9
Oyedele, T. Akinla, F. and Odekuma, O. Court rules that companies should self- charge VAT on imported
services. PWC Tax Alert. September 2018. https://pwcnigeria.typepad.com/files/pwcs-tax-alert_fhc-on-vat-and-
imported-services_sep2018.pdf?utm_source=Mondaq&utm_medium=syndication&utm_campaign=in.
Accessed on 23 May 2019.
10
The Vodacom judgment is currently on appeal before the Court of Appeal, Lagos in Vodacom v. FIRS
(CA/L/556/2018).

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prepare his legal opinion/advice in England, but he has still not rendered legal service in Nigeria
until the legal opinion gets to the client in Nigeria in Nigeria that the lawyer can be said to have
supplied legal service in Nigeria. A speaker resident outside Nigeria who has been engaged to
deliver a lecture in Nigeria also makes a sound example. The contract may or may not specify
his means of delivering the lecture. He may come into Nigeria and deliver the lecture orally;
or he may deliver it electronically from outside Nigeria and it would be viewed and heard by
the Nigerian audience in live transmission through skype video, with an interactive session
enabled by that means. In either case, the service is supplied at the time he viewed and
interacted with the Nigerian audience. Therefore, in the skype alternative, the service is
supplied in Nigeria, but the lecturer never stepped on the Nigerian soil. Section 10(2) of the
VAT Act does not consider where the lecture or speech was researched and prepared or how it
got to the receivers in Nigeria. All the section is concerned with, is that the service was received
in Nigeria.

6.0 Supplier’s Duties of VAT Registration and VAT Invoice Issuance, and Receiver’s
Duty of VAT Payment: The Distinction

A cursory look at the above words clearly shows that Section 10 creates three statutory duties,
namely: the two duties of the non-resident company to register for VAT and include the tax in
its invoice, and the duty of the person to whom the goods or services are supplied in Nigeria to
remit the tax.

The duties of the non-resident supplier and that of the Nigerian receiver are both mandatory
but mutually independent. In other words, the non-resident supplier must register for VAT and
issue the VAT invoice, but his failure to do so does not exonerate the Nigerian recipient of the
goods or services who fails to remit the tax. Indeed, with the stipulation of the VAT rate at 5%
in the VAT Act,11 failure of the non-resident supplier to insert the VAT in the invoice is not a
ground for failure of the Nigerian receiver to pay the tax.

The liability for VAT arises the moment the supply is made. It would not matter whether or
not the supplier registered for VAT and included VAT in the invoice for payment. There are
two reasons for this position. Firstly, Sections 5 and 6 of the VAT Act set the modalities for
determining the value of taxable goods or services for the purpose VAT computation without

11
Section 4.

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any reference to VAT invoice. In fact, Section 5(2) applies market value as the yardstick for
determining the value when the goods or service is for non-monetary consideration. This
implies that VAT can be assessed and collected even in the absence of monetary payment for
the goods or services supplied. Secondly, the investigative power of FIRS under the FIRS
(Establishment) Act, 200712 makes the VAT invoice dispensable.

7.0 Nigerian Law and the Destination Principle

The OECD International VAT/GST Guidelines provides for the application the Destination
Principle to VAT on cross-border services with the rationale of maintaining neutrality of VAT
regimes in such transactions.

On account of legal sovereignty, the guidelines, being an international legal instrument, would
not bind Nigeria. However, the Nigerian constitution only limited, but did not prohibit the
applicability of international instruments. It prescribes legislative adoption of such instruments
before their application and enforcement in Nigeria.13 The destination principle reflects in
Section 10(2) of the VAT Act by virtue of the phrase, “supplied in Nigeria” as used in that
section which underscores the applicability of the principle. In effect, goods and services
“supplied in Nigeria” are subject to VAT in Nigeria, for Nigeria is their destination,
irrespective of their origin. This is the distinction between the destination and the origin
principles.

Section 46 of the VAT Act includes the phrase “sale and delivery of taxable goods or services”
in the definition of “supply of goods” in Section 10(2). This reinforces the presence of the
Destination Principle in the VAT Act. By that definition, supply entails sale and delivery. Sale
and delivery takes place when the goods or services are received and paid for by the consumer.
By the definitions in Section 46, goods or services are only supplied when they reach the
consumer. Hence, determining VAT by the criterion of supply as Section 10(2) does, indicates
the Destination principle. The Origin Principle, on the other hand, focuses on production rather
than supply. Production of goods or service starts and ends with the producer, and does not
involve the consumer as supply does.

12
Section 8(1) (t).
13
Section 12 of the Constitution of the Federal Republic of Nigeria, 1999 (as amended).

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However, to avert the long-drawn dissonance that usually greets the use of that term by
implementing authourities, Section 10(2) of VAT can be applied with no mention of
Destination Principle, and the effect of the principle would be actualized all the same.

8.0 Imported Services and the Reverse Charge Mechanism under the VAT Act

Section 10(2) of the VAT Act also provides for the Reverse Charge Mechanism, albeit
impliedly. The regular mode of VAT assessment and payment is for the service provider to
charge VAT in his invoice alongside his fee for the service, clearly distinguishing the VAT
amount. He so claims the VAT from the service receiver, and then remits it to FIRS.

In the Reverse Charge Mechanism however, the receiver of the service pays the VAT directly
to FIRS, and only pays the supplier his fees, thereby saving the supplier the burden of VAT
remittance. The VAT Act expressly provides for this mechanism for supplies to government
ministries,14 departments and agencies, and later oil and gas companies.15

While it may be argued that Section 10(2) does not specifically mention Reverse Charge
Mechanism, the Section replicates that mechanism for VAT on goods and services by non-
resident suppliers. The deduction and remittance of VAT at source which that Section requires
of the Nigerian receiver of the service is akin to the Reverse Charge Mechanism.

9.0 Conclusion/Ideal Approaches

The common mention of seemingly extraneous principles like the Destination Principle and
the Reverse Charge Mechanism in judicial decisions, and in FIRS’ administration of the VAT
Act is often without corresponding reference to supportive provisions of the VAT Act. This
offers a comfortable ground to the assumption that the principles are alien to the Act. On the
contrary, the VAT Act contains those “alien principles” by necessary implications and with
substantial clarity. The Act even took a pragmatic approach to the principles by concentrating
on their operational mechanisms. What the Act lacks is only their appellations.

The VAT Act also indicates the distinctness and mutual independence of the duties of the non-
resident supplier to register for VAT and raise VAT invoice from that of the resident receiver
to pay the VAT. This was observed by the Federal High Court in FIRS v Gazprom16 where it

14 Section 13(1).
15Section 13(2) by virtue of the 2007 amendment to the Act. Also for oil and gas companies, FIRS in 2007,
released an Information Circular No. 02/2007 - 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.
16 Fn.6 Supra. See Page 22 of the judgment.

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held that if the resident entity’s duty to pay the VAT depended on the non-resident supplier’s
VAT registration and VAT invoice, then all that the former would need to escape VAT payment
is to persuade the latter not to register for VAT or issue the invoice, and by such connivance,
VAT which was certainly incurred would be lost.

It is opined here that while the VAT Act contain most of the principles applied by the court
and FIRS, the implied form of these contents engender the controversies of VAT on foreign
supplies to Nigeria. Perhaps by simply embellishing the VAT Act with the names, “Destination
Principle” and “Reverse Charge Mechanism,” the provisions would become express, and hence
save further doubts and dissensions. In addition, or in the meantime, much of the duty of
clarifying the law lies on FIRS. This they can achieve with information circulars, explanatory
notes and through seminars. As a preemptive measure, Nigerian parties to contracts for cross-
border supply of goods or services into Nigeria should ensure the inclusion in such contracts,
of mandatory clauses for VAT registration, and issuance of VAT invoice by the foreign
supplier. FIRS should liaise with the Ministry of External Affairs and the relevant embassy or
High Commission to petition the home government of a defaulting supplier about the default
on tax obligations in Nigeria, and also invoke the penal provisions in Sections 29 and 32 of the
VAT Act for failure to issue VAT invoice, and failure to register, respectively. The image threat
from that can deter similar defaults in future by non-resident suppliers of goods or services.

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