Introduction
The Finance Act 2020 (the "FA 2020"/ "the Act") was signed into law on 31st December, 2020 and took effect from 1st January 2021. The Act introduced changes to 14 (fourteen) different laws, including the major tax laws which had initially been amended by the Finance Act 2019. Notable among these changes are the amendments made to the Value Added Tax Act1 (the "VAT Act"), which have effectively broadened the tax base whilst retaining the same tax rate of 7.5%.
Highlights of Changes to the VAT Act
In our previous publication titled "The New Face of VAT in Nigeria: What Nigerian Businesses and Consumers Should Know", we reviewed the changes introduced by the Finance Act of 2019 to the VAT Act. These changes, which were far reaching, included an increase in the VAT rate from 5% to 7.5%; the introduction of eligibility thresholds for exemption from VAT; the introduction of a self-charge mechanism and a reverse-charge regime; application of VAT to asset transfers between related parties; establishment of the destination principle; and the expansion of the scope of taxable services and supplies. In this article we focus on two further amendments that were made to these changes, considering their implications on cross border transactions and their effect on the tax base for VAT in Nigeria.
"Supply" to Include Consumption and Utilisation
Under the VAT Act2, tax is charged and payable on the supply of all goods and services in Nigeria other than those listed in the first Schedule to the VAT Act. The Finance Act 2020 has modified this provision, first by stating that tax shall be charged and payable on all supplies of goods and services in Nigeria, and also by expanding the scope of what constitutes "supplies" to include goods and services consumed or otherwise utilised in Nigeria. Furthermore, the FA 2020 amends the VAT Act by broadening the circumstances under which a taxable supply would be deemed to have taken place in Nigeria.
Prior to the enactment of the FA 2020, a taxable supply was deemed to be made in Nigeria if: (a) in respect of goods: (i) the goods are physically present in Nigeria at the time of supply, imported into Nigeria for use by a person, assembled in Nigeria, or installed in Nigeria, or (ii) the beneficial owner of rights over the goods is a taxable person in Nigeria, and the goods or right is situated, registered, or exercisable in Nigeria; and (b) in respect of services, where services are rendered by a person in Nigeria or by a person who is physically present in Nigeria or if the services are provided to a person in Nigeria, regardless of whether the services are rendered within or outside Nigeria.
The FA 2020 now states in respect of services, that a taxable supply shall be deemed to have been made where (i) the service is rendered to a person in Nigeria by a person physically present in Nigeria at the time of providing the service; (ii) the service is provided to and consumed by a person in Nigeria, regardless of whether the service is rendered within or outside Nigeria or whether or not the legal or contractual obligation to render such service rests on a person within or outside Nigeria. Therefore, persons cannot avoid payment of VAT merely on the grounds that by virtue of any contract or agreement, the obligation to render such service rests on a person outside Nigeria, provided that the services in question are provided to and consumed by a person in Nigeria. In addition to the above, a taxable supply of services shall also be deemed to have been made where the service is connected with immovable property located in Nigeria. These services include services of agents, experts, engineers, architects and valuers etc.
A new classification has now been introduced under the FA 2020 to cover incorporeal rights. Thus, a taxable supply of incorporeal rights would be deemed to have taken place where: (a) the exploitation of the right is made by a person in Nigeria; (b) the right is registered in Nigeria, assigned to or acquired by a person in Nigeria, regardless of whether the payment for the exploitation is made within or outside Nigeria; or (c) the incorporeal is connected with a tangible or immovable asset located in Nigeria. This inclusion has expanded the reach of the VAT Act to incorporeal rights. These amendments further expand the jurisdiction of the tax authorities and will increase government revenue through the collection of VAT.
Mandatory Registration by Non-Resident Companies and Appointment of a Representative
Prior to the FA 2020, a non-resident company carrying on business in Nigeria was required to do the following; (a) register with the FIRS using the address of the person with whom it has a subsisting contract, (b) include the tax in its invoice for the supply of taxable services. as the person to whom the supply was made had (and still has) the obligation to withhold and remit the tax on those taxable supplies. Practically, this provision allowed non-resident companies to avoid tax registration in Nigeria where they make taxable supply of goods and services as long as the local entity to whom the supplies was made deducts and remits the applicable tax on their behalf.
The FA 2020 has however, introduced an amendment which now makes it mandatory for non-resident companies to register with the FIRS and obtain a Tax Identification Number for VAT purposes in Nigeria. Non-resident companies can no longer rely on a resident person or entity's fulfillment of these tax payment obligations as an excuse for non- registration. To aid compliance, the FA 2020 now allows a non-resident company to appoint a representative for the purposes of its tax obligations under the VAT Act. Therefore, ultimately, the non-resident companies would need to be registered (even if by a designated representative) and still be assigned their individual tax identification numbers. This amendment is in line with the Federal Government's drive to increase the ease of doing business in Nigeria and also track taxable transactions.
Definition of "Goods" and "Services" in relation to rent and share transfers
The FA 2019 amended the definition of "goods" and "services" for VAT purposes. "Goods" were defined to mean all forms of tangible properties that are movable at the point of supply, other than money or securities; and any intangible product, asset or property over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another, other than interest in land. "Services" were defined to mean anything other than goods, money or securities which is supplied, excluding services provided under a contract of employment.
The FA 2020 has introduced a new and broader definition for "Goods" and "Services". Under the FA 2020, "Goods" include "all forms of tangible properties, movable or immovable, other than land and buildings, money or securities". Also, "Services" are now defined as "anything other than goods or services provided under a contract of employment, including any intangible or incorporeal product, asset, or property over which a person has ownership rights, or from which he derives benefits, and which can be transferred from one person to another, other than interest in land and buildings, money or securities". Although the definition of goods and services under the FA 2020 is slightly similar to what existed under the Finance Act 2019, this new definition of goods and services seeks to address the conflicting views about the charge of VAT on commercial rent and shares.
Prior to FA 2019 rent for residential purposes was exempted from VAT, whereas rent for commercial purposes was not. The charge of VAT on commercial rental was controversial because it was neither a "good" nor was it a "service" according to the VAT Act. The FA 2019 sought to address this gap by expanding the definition of goods to exclude "interest in land". This however did not provide the certainty required by taxpayers regarding the application of VAT to commercial rent. By excluding 'interest in land and buildings' from what constitutes "services" for VAT purposes, the FA 2020 has addressed the issue and it is now settled that VAT is not applicable to commercial rent.
Under the Finance Act 2019, the definition of goods excluded "money or securities" but included "any intangible product, asset or property over which a person has ownership or rights". This created uncertainty as to whether shares should be deemed taxable goods. The FA 2020 has addressed this uncertainty by deleting reference to intangible products under the definition of goods, and by expressly excluding securities in the definition of goods and services.
New Exemptions
Commercial aircrafts, commercial aircraft engines, and commercial aircraft spare parts (as defined in the Act); airline transportation tickets issued and sold by commercial airlines registered in Nigeria are now exempted from VAT. Also exempted from VAT are hire, rental or lease of tractors, ploughs and other agricultural equipment for agricultural purposes.
Related Party Transactions, Time of Supply
Transfers between related parties will be deemed taxable even where invoices are not issued. With regard to the timing, a supply shall be deemed to take place at the earlier of the time an invoice or receipt is issued by the supplier; or payment of consideration is due to, or received by the supplier in respect of that supply.
CONCLUSION
The changes introduced by the FA 2020 have broadened the base of VAT by widening the scope of what constitutes supply, taxable goods and services, eliminating the relevance of the place of delivery and shifting focus on where a good or service is consumed or used. It has also allowed non-resident companies appoint a representative to handle their tax obligations, thereby ensuring that non-resident companies do not avoid registering with the tax authorities.
Footnotes
1. (Chapter V1) Laws of the Federation of Nigeria 2004 (as amended)
2. Section 2
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.
