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May 14, 2021
2021-0988

Nigeria VAT registration required for foreign suppliers of taxable goods and services

Executive summary

The Finance Act, 2020 (the Act) was signed by the President of the Federal Republic of Nigeria in December 2020 and took effect from 1 January 2021. From a Value Added Tax (VAT) perspective, the Act intends to reinforce existing VAT rules and introduce new rules, among others.

As the 23rd largest consumer market globally with close to 200 million consumers, the new rule regarding services rendered to businesses and individuals in Nigeria will impact many global service suppliers with customers in Nigeria.

Detailed discussion

The changes introduced by the Act impact many facets of VAT operations in Nigeria. However, this Alert specifically addresses the obligations of nonresident companies (NRCs) supplying taxable goods and services to Nigerian customers, which includes physical, remote or electronic/digital supplies of goods and services.

The required obligations for such NRCs are summarized below.

VAT registration of foreign suppliers of taxable goods and services to Nigeria

From a VAT perspective, the Act intends to reinforce the provision of section 10 of the VAT Act (the Principal Act), which requires foreign suppliers of taxable goods and services in Nigeria to register for VAT and include VAT on invoices issued to Nigerian customers, effective February 2020. The VAT charged on an invoice is required to be withheld and remitted to the Federal Inland Revenue Service (FIRS), by the Nigerian customers (traditionally).

At the time the above provision was enacted, it was not anticipated that there would be any form of tax leakage with respect to such taxable transactions. However, most business to consumer (B2C) customers are not tax registered and therefore they are not taxable persons for VAT purposes. Consequently, they are unable to remit the VAT directly to the FIRS. As a result, in practice, for B2C sales, the FIRS expects the NRCs to collect the VAT portion on such supplies and remit the VAT directly to the Revenue Authority to prevent loss of tax revenue.

NRCs may appoint a representative for compliance purposes

In line with the amendments introduced by the Act, NRCs may appoint a representative for the purpose of complying with their VAT obligations in Nigeria. An example is provided below.

Example

ABC Germany makes both B2B (business-to-business) and B2C supplies to Nigerian customers. Based on the provision of the law, ABC Germany is required to register for VAT in Nigeria, issue tax invoices with a VAT charge at 7.5% (i.e., the standard VAT rate) and submit monthly VAT returns to the FIRS. While the B2B customers are required to withhold the VAT charge on invoices issued to them, and remit the same directly to the FIRS as they are tax registered, there is no practical mechanism for similar compliance by B2C (Nigerian customers) i.e., for remitting the VAT charged on invoices to the FIRS since they are not tax registered.

As such, the FIRS expects NRCs to collect the VAT portion on B2C supplies and remit same directly to the Revenue Authority.

Summary of obligations

ABC Germany makes B2B and B2C supplies of taxable services in Nigeria.

  • ABC is now required to register for VAT in Nigeria
  • ABC is required to charge VAT at 7.5% on its invoices to its Nigerian customers (i.e., B2B and B2C) after registration

For B2B supplies:

  • Nigerian B2B customer is responsible for accounting for the VAT on ABC’s invoice(s), it settles ABC’s invoice net of the VAT i.e., it withholds the VAT charged on the invoice(s)
  • Nigerian B2B customer remits the VAT withheld on payments made to ABC
  • ABC submits a monthly VAT return to the FIRS showing the amount withheld at source by the Nigerian B2B customer

For B2C sales (FIRS expects the following):

  • Nigerian B2C customer pays ABC (inclusive of VAT)
  • ABC to collect the VAT and remit the same to the FIRS
  • ABC submits a monthly VAT return showing the VAT amount collected and remitted to FIRS

It appears that the FIRS is currently working on a circular that will mandate foreign companies providing goods and services to customers in Nigeria through an online or digital platform to collect VAT from their customers, regardless of whether they are B2B or B2C. This is mainly to prevent the possible loss of tax revenue.

It is important to note that VAT registration does not in itself trigger a permanent establishment (PE) exposure or income tax implications. There are specified criteria for determining the PE status of an NRC. As such, if the foreign supplier does not meet any of the various criteria for establishing a PE, mere registration for VAT purpose should not expose a company to a PE risk.

However, NRCs supplying goods and services to Nigerian residents, should proactively review and document their Nigerian tax position to prevent an unanticipated tax position at a later stage.

Other changes made by the Act in respect of VAT, include but are not limited to:

  • Inclusion of incorporeal right in the definition of taxable supply of service
  • Definition of time of supply
  • Exclusion of land and building, lease, outright sale or interest in land from the scope of VAT
  • Exemption of hire, rental or lease of tractors, ploughs and other agricultural equipment for agricultural purposes from VAT

Action steps for NRCs

Affected NRCs are required to comply with the following obligations:

VAT obligation

Penalty

Registration for VAT in Nigeria

NGN50,000 (US$131) in the first month of failure and NGN25,000 (US$66) for each subsequent month in which the failure continues

Issue tax invoices to Nigerian customers

50% of the invoice amount

Prepare and file monthly VAT returns from February 2020 to date

NGN50,000 in the first month of failure and NGN25,000 for each subsequent month in which the failure continues.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Nigeria, Lagos

Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

Ernst & Young LLP (United States), Pan African Tax Desk, New York

 

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