Nigeria

FG waives VAT and Customs Duties on gas and gas equipment

FIRS postpones commencement of the automated collection of VAT on imported goods purchased through digital platforms

Nigeria's 2024 Proposed Budget - Budget of renewed hope

No VAT on the rent of buildings even before recent tax law amendments, says the TAT

NGX Real Estate Limited (the “Company”) is a Nigerian real estate company in the business of acquiring, leasing, hiring, or part-exchanging real property. The Company earned rental income from real properties in 2020 and did not pay Value Added Tax (VAT) on the income. The Federal Inland Revenue Service (FIRS) audited the Company’s 2020 financial records and issued a tax assessment of N36,185,564.25 for an unremitted VAT. 

Issues considered include:

Whether or not the FIRS was right to have imposed VAT on the Company’s activities. The Company argued that the definition of “goods” in the VAT Act as amended by the Finance Act (FA) 2019, excluded the transfer of interest in land, and therefore VAT should not apply on the sale of buildings, being extensions of land. However, the FIRS contended that “land” and “buildings” were separate concepts and the exemption available to land did not extend to buildings. The FIRS argued that this was the reason that the exemption was expanded in the following year by the FA 2020 to cover both land and buildings.

The TAT’s ruling has clarified that VAT was exempt on the sale of interest in land and buildings in 2020, following the FA 2019 amendment. Further amendments by FA 2020 in the subsequent year have removed ambiguities in the reading of the law. There is no distinction in the VAT treatment with regards to the transfer of interest in residential or commercial real estate, as they are both VAT exempt based on the law. However, assessments need to be done in certain instances such as providing packaged accommodation e.g “serviced apartments”, “short lets”), provision of office space as a service and so on, as these may not meet the exemption criteria in the VAT Act.

Considerations on the Quick Wins Report by the Presidential Fiscal Policy and Tax Reforms Committee

The Presidential Fiscal Policy and Tax Reforms Committee (“the Committee”) was inaugurated on 8 August 2023 and tasked with the mandate of addressing critical challenges around 3 main pillars:

1. Fiscal Governance
2. Revenue transformation
3. Economic growth facilitation

The Committee streamlined its objectives under these pillars into 3 phases/milestones -

• Quick wins (to be completed within 30 days),
• Critical tax reforms (to be completed within 6 months), and
• Implementation (to be completed within 1 year).

The Committee, on 24 October 2023, presented its report to the President on the quick wins recommendations. The recommendations covered key economic matters such as foreign exchange management, multiplicity of taxes and efficiency of collection, quality of spending, stimulation of local production, facilitation of economic growth e.t.c. 

TAT rules that VAT applied on the supply of software licences prior to recent amendments to the VAT Act, among other matters

The Tax Appeal Tribunal (TAT) has ruled that Value Added Tax (VAT) was chargeable on the supply of all goods and services in Nigeria including software licences, even prior to the Finance Acts (FAs) which expanded and clarified the definitions of “goods” and “services” for VAT purposes. The TAT ruled that only items listed as exempt in the VAT Act remain VAT exempt. 

This ruling was issued in the case between the Federal Inland Revenue Service (FIRS) and MTN (or the “Company”), further to a review carried out on the Company by the Office of the Accountant General of the Federation (OAGF) for the 2007 to 2017 accounting periods. The OAGF provided a report on the review to the FIRS, which subsequently assessed MTN to outstanding taxes (including penalty and interest) of $135m.

One of MTN's arguments was that prior to the VAT Act amendments by the FAs, the supply of software licences were intangibles/incorporeal rights which did not meet the definition of goods or services in the VAT Act and therefore were VAT exempt. Such intangibles were only included as “VATable” by the recent amendments and as such, the amendments should not be applied retrospectively.

The TAT classified the supply of software licences as a service, and ruled that they were subject to VAT pre- FAs.

Prior to the tax law amendments introduced by the FAs from 2020, the definitions of “supply of goods” and “supply of services” in the VAT Act were not elaborate and therefore were given their literal meaning to exclude intangible property. This was confirmed by the Federal High Court in CNOOC vs FIRS where it was ruled that the transfer of interest in an Oil Mining Licence was an intangible property which fell outside the scope of goods and services. The TAT did not analyse whether the supply of software licences could be classified as goods or services within their ordinary meaning, or whether there was a distinction between the intangibles considered to be exempt in the CNOOC judgement and the nature of software licences in this case.

TAT rules on the validity of the Income Tax (Country-by-Country Reporting) Regulations 2018

In March 2022, the Federal Inland Revenue Service (FIRS) served Check Point Software Technologies B.V. (Check Point) with notices of administrative penalties for the late filing of its Country by Country Reporting (CbCR) notification forms for the 2019 and 2020 financial years. These penalties were levied as stipulated in the Income Tax (Country by Country Reporting) Regulations 2018 (CbCR Regulations). Check Point objected to the notices on the basis that the CbCR Regulations were invalid because they were not issued following the due process required by law. The FIRS refused to withdraw its penalty notices and, as a result, the company approached the Tax Appeal Tribunal (TAT) for a decision.

In a judgment delivered on 17 August 2023, the TAT generally agreed with Check Point and ruled that the penalties served by the FIRS were unconstitutional and void.

Tax Appeal Tribunal (TAT) rules on the conditions for deductibility of expenses and claim of input value-added tax (VAT)

The Federal Inland Revenue Service (FIRS) audited Chi Limited and issued a tax assessment of about 585 million Nigerian naira (NGN). In arriving at the assessment, the FIRS:

• Disallowed certain expenses for corporate income tax (CIT) (purposes including expenses for sales promotion, bad and damaged goods, repairs and maintenance, and statutory fees paid to the Abia State Government Advertising Agency). The FIRS also disallowed foreign exchange losses on usance adjustments, exports and loan revaluations, and subjected certain exchange gains to tax. According to the FIRS, the expenses were not justifiably proven to have been wholly, reasonably, exclusively, and necessarily (WREN) incurred for business purposes.
• Adjusted the company’s input VAT claimed on raw and packaging materials on the basis that input VAT should only be claimed when the relevant output has been sold. The FIRS also adjusted input VAT in respect of discounts granted by Chi to its distributors.
• Calculated penalty and interest on the assessment.

The TAT ruled in favour of the FIRS on all issues. This judgement re-emphasises the need to keep adequate support documentation. The expenses were disallowed largely due to the failure to provide enough support documents on the part of the taxpayer. Companies that incur significant write offs due to obsolescence or damaged goods should also maintain a company policy and endeavour to carry out other reasonable procedures to justify the expenses, as this is an area typically scrutinised by the FIRS.

FIRS and Lagos State Internal Revenue Service (LIRS) agree to establish joint audit and investigation framework

The FIRS and LIRS signed a Memorandum of Understanding (MoU) to establish a Joint FIRS and LIRS Audit and Investigation Team (JAIT or ’the Team‘) on 6 February 2023. The JAIT implementation committee organised a sensitisation meeting on 10 August 2023 to educate stakeholders on the guidelines for successful implementation of the collaborative framework. The objective of the MoU is to harmonise the tax procedures between the FIRS and LIRS, foster collaboration, promote exchange of information, and reduce time and cost for relevant stakeholders. There are perceived concerns about the likelihood of success of the JAIT initiative, considering the short-lived nature of a similar policy introduced in 2017 that aimed to harmonise audits among the FIRS and all the State Internal Revenue Services (SIRSs). However, carrying out a pilot with only the FIRS and LIRS under the JAIT is more practical. 

Federal High Court (FHC) upholds Tribunal’s ruling on the taxation of income earned by non-resident shipping companies in Nigeria

CMA CGM Delmas SA (the ’Company‘ or ’CMA-CGM‘) is a French shipping company that transports freight from foreign countries to Nigeria and vice versa. The FIRS audited the Company’s tax returns for the 2014 and 2015 years of assessment (YOAs) and assessed the Company to additional tax of about NGN 1 billion in respect of damages, cleaning fees, Shipper’s load, stow and count (SLAC), NIMASA Environmental Levy, and bonded terminal commission.

The Company objected to the assessment on the grounds that the income items constitute income from the operation of ships in international traffic, which are exempt from CIT based on the Nigeria-France Double Taxation Agreement (DTA).

TAT rules that the FIRS can appoint non-resident digital platform providers to fulfil VAT obligations on behalf of their customers

Bolt Operations OU (‘Bolt‘ or ’the Company‘) is a non-resident company that operates a ride-hailing app to help drivers and restaurants to find customers to transport and deliver food, respectively. The Company charges a commission to the drivers and restaurants subscribed to its ride hailing and food delivery platforms as its fee for using the app. The Company charges, collects, and remits VAT on its commission. The drivers and food vendors provide their services directly to the customers and collect their cash directly from the customers or allow Bolt to collect their fees on their behalf for debit or credit card transactions. In summary, the people who procure food or book a ride on the platform are customers of the drivers and food vendors, not Bolt.

In 2021, the FIRS, relying on section 10(3) of the VAT Act, appointed the Company as its agent to charge, collect, and remit VAT on the services provided by the drivers and restaurants who find customers using the Company’s app. Subsequently, the FIRS released a Guideline stating that supplies facilitated through the Company’s platform are to be deemed as supplies made directly by the Company. The Company objected to this appointment on the basis that there is no deeming provision in the VAT Act (as amended), and it cannot fulfil the self-assessment obligations for another party.

FIRS issues assessments to international petroleum tankers and transport vessels

In a recent turn of events, the FIRS has begun to issue assessments to companies operating ocean-going petroleum tankers, based on intelligence obtained from regulators. The letters have been addressed to International Petroleum Vessel Companies (IPVCs) deemed to have ’conducted business‘ in Nigeria. In the assessment letters, the FIRS either apply a 6% tax plus a 10% penalty and 19% interest on perceived freight income earned by the IPVCs from periods as early as 2011 or assume a treaty rate, which is lower in most cases. In some of those assessments, the FIRS includes a tax on demurrage and detention charges earned on vessels chattered. There are no public details of how the income earned by the IPVCs was determined.

The FIRS stated that if the IPVCs assessed fail to submit their tax returns or make payments, it will be considered as tax evasion. The FIRS also mentioned that they are prepared to activate international cooperation mechanisms with foreign jurisdictions to enforce the tax payments.

International shipping companies need to evaluate whether they are required to register and pay taxes in Nigeria and determine the extent of their revenue subject to Nigerian tax. This is now more critical, considering new tax law amendments that require international shipping companies with Nigerian operations to submit their Tax Clearance Certificates (TCCs) upon request by the regulators.

Highlights of Nigeria’s 2023 Fiscal Policy Measures

The Federal Government has approved the Fiscal Policy Measures 2023 (FPM 2023). The FPM 2023, which is dated 20 April 2023 with an effective date of 1 May 2023, replaces the Fiscal Policy Measures 2022 (FPM 2022) and comprises:

• Supplementary Protection Measures (SPMs) for the implementation of the Economic Community of West African States (ECOWAS) Common External Tariff (CET) 2022 to 2026
• an import prohibition list, applicable only to certain goods originating from non-ECOWAS member states
• changes in excise duty rates on certain items, such as tobacco and alcoholic beverages
• introduction of green taxes on single- use plastics and certain categories of vehicles, and
• reduced import duty rates on certain manufacturing items available to verifiable manufacturers.

There are some concerns around the matters included in FPM 2023. Government needs to consider suspending the FPM 2023 and engage stakeholders to address the various concerns raised, clarify potential ambiguities, and prepare detailed regulations to accompany the FPM before implementation.

TAT ruling for deduction of product losses and taxpayer's right to claim capital allowance below the maximum threshold

Ardova Plc, in the normal course of its business as a petroleum marketing and distribution company, incurs product losses and shrinkages. The company expenses the losses in its financial statements and takes a tax deduction in its tax returns. The company filed its 2014 and 2015 financial year tax returns reflecting the above deductions. Thereafter, it filed amended tax returns adjusting the capital allowances claimed to be lower than the maximum threshold of 2/3rd as prescribed in the 2nd Schedule of the Companies Income Tax Act (CITA).

The FIRS conducted a tax audit and disallowed part of the shrinkages and product losses on the ground that it exceeded the acceptable industry benchmark. It also disallowed the adjustments made to the capital allowance brought forward based on the revised capital allowance claims. The dispute was escalated to the TAT for determination. The Tribunal held that where an expense has passed the WREN test under CITA it is deductible, and CITA does not subject such expense to any industry average or benchmark. Also, CITA does not give FIRS the discretion to allow only a quantum of the said expense.

The FIRS has introduced new changes to TaxPro Max VAT filing procedure

The FIRS has announced new updates to the VAT filing procedures on the TaxPro Max system. The aim is to increase the efficiency of the input VAT claim, sales adjustment entries, and output VAT filing procedures. The changes take effect from the April 2023 filing period.

The FIRS is seeking to seamlessly match output VAT collection to the input VAT claimed by businesses and promote transparency in VAT compliance. To educate the public on the process and the increased data requirements to file a complete VAT return, the FIRS released illustrative videos on YouTube, documented guides, and also held a sensitisation event on 18 April 2023 targeted at various stakeholders.

The FIRS mentioned that the changes are in their pilot phase, but there is absolute commitment from management towards full implementation and adoption by taxpayers.

TAT rules that withholding tax (WHT) applies at 5% on security services, among other matters

In 2018, the FIRS audited McKinsey & Company Nig. Global Limited (McKinsey or ‘the Company‘) and raised assessments covering CIT, WHT, and VAT relating to a number of varying issues. Following an objection by the Company and a subsequent Notice of Refusal to Amend (NORA) issued by the FIRS, the Company filed a Notice of Appeal to the TAT.

Among other rulings, the TAT held that security services are not professional in nature and attract WHT at 5%. In making this ruling, the TAT relied on definitions in the FIRS Circular 2009/01 and Black Law’s Dictionary. The TAT also highlighted that NSCDC does not license individuals or provide for any specific type of training or certification for private security personnel.

TAT rules that Information Technology (IT) Levy does not apply to network facilities providers

A telecommunication infrastructure company carries on the business of infrastructure sharing and colocation, i.e. operates telecom facilities (e.g. masts, towers, and related equipment) and gives telecom companies access to these facilities. The Company drew the attention of the FIRS to the automatic assessment of IT Levy (1% of its profits before tax) as part of the Company’s 2021 tax returns filed on the FIRS’ e-filing platform (TaxPro Max).

After reconciliation meetings, the FIRS issued an official notice of assessment in this regard, which the Company objected to. The FIRS subsequently issued a Notice of Refusal to Amend this liability, after which the Company filed an appeal at the TAT.

TAT says certain legal costs and employee remuneration are not deductible

A Bank set up a reward scheme (the ’Programme‘) for exceptional employees. The Programme entailed subsidising the interest on mortgage loans taken by qualifying employees, and the Bank recognised these costs in its books. The FIRS disallowed expenses relating to the Programme.

Also, the Bank incurred legal expenses in respect of a Court of Appeal (COA) suit against the Financial Reporting Council of Nigeria (FRCN) and the National Office for Technology Acquisition and Promotion (NOTAP). The FIRS also disallowed the legal costs on the grounds that they were avoidable and were not necessarily incurred in the course of the Bank’s business. In an interesting turn of events, the Tribunal ruled in favour of the FIRS and held that the Bank was liable to the additional assessments in both instances.

Nigeria Startup Act - Positioning the country for the 4th Industrial Revolution

On 19 October 2022, the Nigeria Startup Act was signed into law and took effect immediately. The Startup Act complements and provides a legal framework for the National Digital Economy Policy and Strategy (NDEPS) launched in 2019. The NDEPS is anchored on eight pillars, i.e. Developmental Regulation, Digital Literacy and Skills, Solid Infrastructure, Service Infrastructure, Digital Services Development and Promotion, Soft Infrastructure, Digital Society and Emerging Technology, and Indigenous Content Development and Adoption.