The Federal Inland Revenue Service (FIRS) has issued an information circular to give clarification on the implementation of changes to Value Added Tax (VAT) in the Finance Act, 2019 that came into effect from 1st February, 2020. The circular provides clarification on the following provisions:
- Definition of Goods & Services – Section 2
The Finance Act provide that, goods shall be deemed to be supplied in Nigeria if:
- the goods are physically present in Nigeria at the time of supply, imported into Nigeria for use of by a person, installed or assembled in Nigeria OR
- the beneficial owner of the rights over the goods is a taxable person in Nigeria and the goods or right is situated and exercisable in Nigeria.
In respect of services, the Act provides that a service will be taxable in Nigeria if:
- the services are rendered in Nigeria by a person physically present in Nigeria at the time of service provision OR
- the services are provided to a person in Nigeria, regardless of whether the services are rendered within or outside Nigeria.
FIRS reiterates that the above provisions clarify that:
- VAT is chargeable on both tangible and intangible goods or properties. Examples like, articles of trade, rights in mineral resources, copyrights, trademarks, oil wells etc. were given.
- Regardless of the residence of a service provider, services provided in Nigeria to a person in Nigeria is liable to VAT
- Regardless of the medium of service delivery, services provided to persons in Nigeria is to liable to VAT in Nigeria.
FIRS further clarifies that, services rendered to and consumed by a Nigerian resident while physically outside Nigeria, is not liable to VAT in Nigeria.
The Finance Act, however, specifically excludes securities and interest in land from the definition of goods.
2. Rate of Tax – Section 4
The Finance changed the rate of VAT from 5% to 7.5%. The Federal Government announced that the new rate becomes effective from 1st February, 2020, meaning that transactions from the 1st of February 2020 is liable to 7.5%.
FIRS provides the following clarification on the transitional issues:
Section 13A (2) of the Value Added Tax (VAT) Act, Cap V1, LFN 2004 (as amended) states that: “A tax invoice shall be issued on supply whether or not payment is made at the time of supply’’
Therefore, for the purposes of VAT:
- A service is supplied when it is performed or an agreed milestone is reached.
- Goods are supplied upon delivery or transfer of risk, whichever occurs first.
- Where it is not practicable to determine the time of supply as aforesaid, the Service may rely on the dates indicated on the relevant invoices, bills, debit notes, goods-received notes, waybills, journal entries, etc.
- The VAT rate for taxable supplies made prior to the 1st of February 2020, is 5%;
- For a contract of taxable supplies signed prior to 1st of February 2020 and supplies or performance occurred on or after the 1st of February 2020, applicable VAT is 7.5%;
- For continuing contracts for which supplies or performance is measured on the basis of milestone achieved, VAT rate for milestones achieved on or after the 1st of February 2020, is 7.5%; and
- For all taxable supplies made from 1st of February 2020, VAT rate is 7.5%
3. Registration and De-registration – Section 8
- The Finance Act now makes it mandatory that a taxable person must immediately register for VAT upon commencement of business.
- The Act increases the penalty for failure to register as follows:
N50,000 in the first month in which the failure occurs;
N25,000 for each subsequent month in which the failure continues
- A taxable person who permanently ceases to carry on trade or business in Nigeria shall notify the Service of such cessation within 90 days of such cessation.
FIRS clarifies that:
- Taxable supplies made after cessation shall be deemed to have been made on the day immediately preceding cessation
- Penalties for failure to file returns will continue to apply where the taxpayer fail to notify the Service of cessation of business
4. Registration by Non-Residents
The Finance Act provides that:
- A non-resident company that carries on business in Nigeria shall register for tax with FIRS, using the address of the person with whom it has a subsisting contract, as its address for the purpose of correspondence relating to the tax.
- A non-resident company shall include VAT on its invoice for the supply of goods and services.
- The person to whom the supply is made in Nigeria shall withhold and remit the tax directly to FIRS in the currency of payment.
FIRS clarifies that:
- A non-resident company which have a fixed base (permanent establishment) in Nigeria is required to comply with registration, charging, filing, payment and other requirements as if it is a Nigerian company. As such, such company must register using the address of its place of business in Nigeria (fixed base), issue VAT invoice, file return, remit the tax, submit itself to tax examinations, etc. in accordance with the provisions of the VAT Act.
5. Self-account provision – Section 14
The Finance Act introduced a self-charge provision, whereby:
- A taxable person in Nigeria to whom a supply is made from a non-resident company is to withhold and remit VAT. FIRS clarifies that the non-resident would a non-resident that has no fixed base in Nigeria
- A taxable person in Nigeria who received a taxable supply is issued an invoice on which no tax is charged, shall self-account for the tax payable and remit the VAT to FIRS
FIRS emphasized that:
- Where a taxable person receives taxable supplies for which VAT was not charged from either a person below the threshold of N25m or any other other person, the taxable person receiving the supplies shall self-charge and account for the VAT due.
- Return for VAT self-accounted or self-charged shall be separated made in the form prescribed by the Service
6. Introduction of VAT threshold – Section 15
The Finance Act introduced a VAT threshold whereby it is only taxable persons with an accumulated or singular turnover of N25,000,000 or more in a year or expect to have such annual turnover, that should charge, collect, remit the tax and file monthly returns to FIRS.
The Service has provided a detailed clarification on the implementation of this provision as follows:
- A taxable person who has made taxable supplies of
N25 million prior to the introduction of the VAT threshold shall continue to charge, collect, remit the tax and file monthly returns even if it has not made N25million taxable supplies in the current year.
- A taxable person who did not attain the
N25 million taxable supplies before 1st of February 2020, shall immediately commence to charge, collect, remit the tax and file monthly returns upon attaining the threshold of N25million taxable supplies at any time within the year;
- A taxable person may voluntarily register, charge, collect, remit the tax and file monthly returns to the FIRS at any time even without attaining the
N25 million threshold. Such a person shall notify the FIRS prior to doing so and shall be subject to all the provisions of the VAT Act applicable to persons above the threshold.
- A taxable person who has not attained the
N25million threshold but expects to attain the threshold at a future date within the calendar year shall immediately commence to charge, collect, remit the tax and file monthly returns to the FIRS.
- A taxable person who makes taxable supplies amounting to
N25million and above within a calendar year is required to file monthly VAT returns to the FIRS, even if part or the whole of such supplies are exempt under the VAT Act or not. (Please note the definition of taxable supplies).
The Service also emphasized on the definition of Taxable supplies as “any transaction for the sale of goods or the performances of a service, for a consideration in money or money’s worth”. As such, the value of taxable supplies is the gross inflow of economic benefits (cash, revenues, receivables, other assets, etc) arising from economic activities, including sales of goods, supply of services, rents, royalties, fees, rights, etc. However, it shall not include a taxable supply of the capital asset, and the sale of the whole or part of the business.
7. Business sold or transferred – Section 45
- The Act has exempted from VAT any asset employed in trade or business sold or transferred, where a trade or business carried on by a company is sold or transferred to a Nigerian company for the purposes of better organisation of that trade or business or the transfer of its management to Nigeria.
- The entities will however qualify for this concession subject to the following conditions:
i. The company must prove, to the satisfaction of the Service, that one company has control over the other or that the companies are controlled by some other person or are members of a recognized group of companies;
ii. The entities involved must have been related for not less than a consecutive period of 365 days before the reorganization; However, where assets transferred in the reorganization are further disposed within 365 days after the reorganization, the VAT exemption granted shall be withdrawn and the applicable VAT shall be recovered. As such, VAT that is chargeable upon the transfer shall be treated as due but unpaid from the date it ought to have been paid if there was no concession; and the penalty and interest shall be charged accordingly.
8. Definition of exported service
The Finance Act defines Exported service as a service rendered within or outside Nigeria by a person resident in Nigeria, to a non-resident outside Nigeria. Provided that a service supplied to the fixed base or permanent establishment of a non-resident person shall not qualify as exported services.
FIRS clarifies that, for a service to be treated as exported service under this provision:
i. the service must be provided by a Nigerian resident to a non-resident;
ii. the non-resident person to whom the service is provided must be outside Nigeria when consuming the service.
iii. where the non-resident is in Nigeria or consumes the service in Nigeria, such service will be liable to VAT.
iv. where a non-resident contracts a third party to provide a service to its permanent establishment or fixed base (branch or any other physical presence) within Nigeria, such service will be liable to VAT accordingly.
v. where a non-resident company provides a service through its fixed base in Nigeria, such will not be an exported service.
vi.where a non-resident company provides a service to a person in Nigeria, such service shall not be considered an exported service.
vii.a person is understood to have consumed a service, where the service is provided to such person who is the actual consumer of the service in Nigeria. Accordingly, where a service is provided to a consumer in Nigeria “for” or on behalf of a non-resident, such service will not qualify as an exported service.
9. The new penalty regime
FIRS reiterates the new penalties introduced in the Finance Act as follows:
i. Failure to register – Section 8 of VAT Act
ii. Failure to notify FIRS of change of address or permanent cessation of trade or business
iii. Failure to submit tax returns – Section 35 of VAT Act
The prescribed penalty for each of the above offence is N50,000 for the initial month and N25,000 for each of subsequent months of default.
iv. Failure to remit VAT – Section 19: Tax + 10% of tax + interest of CBN Minimum Redisount Rate (MRR)
FIRS has informed taxpayers, practitioners and the general public that the information circular amends, updates or replaces contents of any circular, notice or other publication previously issued by the Service that is inconsistent with its contents to the extent of such inconsistency.
FIRS added that the Service may, at any time, withdraw or replace this Circular or publish an amended or updated version.