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May 14, 2021
Nigeria: VAT registration required for foreign suppliers of taxable goods and services
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.
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.
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.
For B2B supplies:
For B2C sales (FIRS expects the following):
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:
Action steps for NRCs
Affected NRCs are required to comply with the following obligations:
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