On 13 January 2020,  the President of the Federal Republic of Nigeria passed into law, the Finance Act 2019 (the Finance Act), an omnibus legislation amending seven (7) substantive tax laws in Nigeria including the Value Added Tax (VAT) Act[1], to provide for the review of tax provisions and make them more responsive to tax reform and other related matters.[2] One of the highlights of the Finance Act was the upward review of the VAT rate from 5% to 7.5%.[3] As a tax chargeable on the supply of all non-exempt goods and services, VAT affects more transactions than other taxes and has wider interest. The Finance Act expanded the scope of the VAT Act and made additions to exemptions under the Act. These amendments and exemptions by the Finance Act has been described by taxpayers as unclear because the relevant provisions in the Finance Act leave some gap in respect of its interpretation and application.

In order to provide clarity on the VAT provisions and the implementation process, the Federal Inland Revenue Service (FIRS) issued the Clarification on the Implementation of the Value Added Tax (VAT) Provisions in the Finance Act 2019 dated 29 April 2020 (the Circular)[4], and this replaces all previous circulars, orders and publications relating to VAT.

Taxable Goods, Services and Taxable Supplies

Under the VAT Act, “taxable goods and services” are broadly defined as those goods and services other than those listed in the First Schedule to the VAT Act[5]. However, the Finance Act in making this definition less ambiguous and more specific provides what may constitute goods and services for the purpose of paying VAT and what constitutes taxable supplies. Under the Finance Act, “Goods” is defined to mean:

  • all forms of tangible properties that are movable at the point of supply, but does not include 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, excluding interest in land.”

On the other hand, “services” is defined as “anything other than goods, money or securities which is supplied, excluding services provided under a contract of employment” while “taxable supplies” means “any transaction for the sale of goods or the performance of a service, for a consideration in money or money’s worth”.[6]

Goods deemed to be supplied in Nigeria

The Finance Act provides that goods shall be deemed to be supplied in Nigeria, for VAT purposes, if 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 if the beneficial owner of the rights in or over the goods is a taxable person in Nigeria and the goods or right is situated, registered or exercisable in Nigeria.[7] This provision when read together with the definition of goods and services and other relevant provisions of the Finance Act confirms that VAT is chargeable on:

With respect to the above, the Circular provides that VAT is chargeable on:

  • goods (including tangible or intangible property) and articles of trade, and on rights in goods or property (such as rights in mineral resources, copyrights, and trademarks).
  • property (movable or immovable) such as assets, motor vehicles, oil wells, rigs, aircrafts, ships, buildings, roads, jetties, or any other type of property;
  • services rendered in Nigeria by a person physically present in Nigeria at the time of providing the service, and on services provided to a person in Nigeria, regardless of whether the services are rendered within or outside Nigeria;
  • services performed in Nigeria to persons in Nigeria, irrespective of the residence status of the service provider;
  • services provided to persons while in Nigeria regardless of the medium of delivery of the services; and
  • services rendered remotely, online, or by virtual means to Nigerian residents or persons in Nigeria.

It is important to note that the Circular also provides that services rendered to and consumed by a Nigerian resident while physically outside Nigeria are not liable to VAT in Nigeria.[9]

Increase in VAT Rate

As earlier mentioned, one of the highlights of the Finance Act is the increment of the applicable VAT rate in Nigeria from the 5% to a rate of 7.5%. However, the Finance Act did not state a commencement date for the application [SF3] of the new rate. This caused some confusion as to when the effective date for the new rate. One argument was that the new rate became effective on 13 January 2020, the day the Finance Act was passed into law and another argument was that the new rate became effective on 1 February 2020, that is the date the Finance Act took effect. These arguments were however put to rest by the Circular which confirmed that the new rate became effective from 1 February 2020, and this clarification has resolved the confusion in respect of the effective date of the new rate.

Registration for VAT and Commencement of Business

Under the VAT Act, all taxable persons [SF4] [SF5] are expected to register with the FIRS within six (6) months of the commencement of business for VAT purposes or be subject to the following revised penalties[10]:

  • For the first month of default, the sum of N50,000 from the previous N10,000
  • Subsequent months in which default continues, the sum of N25,000 from the previous N5,000.[11]

However, the Finance Act[12] amends the above provisions of the VAT Act by removing the six (6) month period to register provided under the VAT Act and mandates a taxable person to register for VAT purposes upon the commencement of business in Nigeria. The question then becomes, when is a business deemed to have commenced business? According to the Finance Act[13], a business is deemed to have commenced business on the date it carries out its first transaction in Nigeria, which shall be the earliest of the date the business:

  • begins to market or first advertises its products or services for sale;
  • obtains an operating licence from a regulatory authority in Nigeria;
  • makes its first sale or purchase;
  • executes its first trading contract after incorporation;
  • issues or receives its first invoice;
  • delivers or receives its first consignment of goods; or
  • first renders services to its customers.

Deregistration of Business

Like the provision that requires all taxable persons to register with the FIRS for taxation purposes under the VAT Act, the Finance Act also requires all taxable persons who permanently cease to carry on trade or business in Nigeria to notify the FIRS of their intention to deregister within 90 (ninety) days of such cessation of the trade or business[14].

The Circular provides that taxable supplies made after such cessation shall be deemed to have been made on the day immediately preceding the cessation. It also provides that penalty for failure to file returns will continue to apply where taxpayers fail to notify the FIRS of cessation of business in accordance with the Finance Act.

Registration by Non-Residents

Section 10 of the VAT Act (as amended) provides that:

  • non-resident person who makes taxable supplies [SF6] to a person in Nigeria or to a Nigerian resident, is required to register for tax with the FIRS. The non-resident person is to use the address of the person to whom it is making the supply as its Nigerian address for the purposes of correspondence relating to the tax.
  • the non-resident person shall include VAT on its invoice for the supply of goods or services made; and
  • the person who receives the supply in Nigeria is required to withhold and remit the VAT due on the invoice to the FIRS in the currency of transaction.

The Circular notes that a non-resident company which has a fixed base or 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, that is the fixed base or permanent establishment, issue VAT invoice, file returns, remit the tax, and submit itself to tax examinations etc in accordance with the provisions of the VAT Act.

Time of Supply and Transitional Issues

Under the VAT Act, “a tax invoice shall be issued on supply whether or not payment is made at the time of supply[15]. However, the Circular gave some clarification as to what constitutes “the time of supply” for VAT purposes as follows:

  • a service is supplied when it is performed or an agreed milestone is reached; and
  • goods are supplied [SF7] upon delivery or transfer of risk, whichever occurs first.

In addition to the foregoing, the Circular provides that, where it is not practicable to determine the time of supply, the FIRS may rely on the dates indicated on the relevant invoices, bills, debit notes, goods-received notes, waybills, and journal entries etc to reach a decision. For this purpose, the Circular further made the following clarifications:

  • the VAT rate for taxable supplies made prior to February 1, 2020 is 5%;
  • for a contract of taxable supplies signed prior to February 1, 2020 and supply or performance occurred on or after February 1, 2020, the applicable VAT rate shall be 7.5%;
  • for continuing contracts for which supply or performance is measured on the basis of milestones achieved, VAT rate for milestones achieved on or after February 1, 2020 shall be 7.5%; and
  • for all taxable supplies made from February 1, 2020, the applicable VAT rate shall be 7.5%.

Self-Accounting Provisions

Section 14(3) & (4) of the VAT Act introduced a self-accounting provision for all supplies for which VAT was not charged. The self-accounting provision imposes a duty to withhold and remit VAT on a taxable person to whom a supply is made in Nigeria where:

  • the supplier is a person exempt from charging VAT under the Finance Act or otherwise failed to charge VAT; or
  • the supplier is a foreign company without a fixed base (permanent establishment) in Nigeria, whether or not VAT is included in the invoice.

To this end, the Circular confirms that the taxable person shall self-account and remit the tax due in the currency of transaction on or before the 21st day of the month immediately following the month of the transaction. The taxable person, in accounting and remitting the VAT, shall provide a schedule of all taxable transactions for which it is self-accounting, in the form prescribed by the FIRS, indicating the tax identification numbers of the suppliers in the schedule.

The Circular also states that where a taxable person receives taxable supplies for which VAT was not charged from a person with taxable supplies below the N25,000,000 (Twenty-Five Million Naira) threshold or any other person, the taxable person receiving the supplies shall self-charge and account for the VAT due. Additionally, any return for any self-accounted or self-charged VAT shall be separately made in the form prescribed by the FIRS.

VAT Threshold

The Finance Act established a threshold for taxable persons by exempting taxable persons with taxable supplies of less than N25,000,000 (Twenty-Five Million Naira) from accounting for VAT to the FIRS. [16] Such taxable persons are also exempt from penalties imposed for non-registration for VAT purposes. The question may now be, how will the threshold be determined? The Circular clarifies this by providing as follows:

  • a taxable person who has made taxable supplies of N25,000,000 (Twenty-Five Million Naira) prior to the introduction of the exemption shall continue to account for VAT, even if they have not made taxable supplies worth that amount in the current year;
  • a taxable person who did not attain N25,000,000 (Twenty-Five Million Naira) taxable supplies before 1 February 2020, are required to immediately commence accounting for VAT upon attaining the threshold at any time within the year;
  • a taxable person who is yet to attain the N25,000,000 (Twenty-Five Million Naira) threshold may voluntarily register and account for VAT (provided they give prior notification to the FIRS) and will be subject to all provisions of the VAT Act applicable to taxable persons above the threshold;
  • a taxable person who has not attained the N25,000,000 (Twenty-Five Million Naira) threshold but expects to attain the threshold at a future date within the calendar year shall immediately commence accounting for VAT; and
  • a taxable person who makes taxable supplies amounting to N25,000,000 (Twenty-Five Million Naira) and above within a calendar year are required to file monthly VAT returns to the FIRS, even if part or the whole of such supplies are exempt under the VAT Act.

The Circular further noted that a calendar year for the purpose of the threshold is a period of 12 months beginning on a day marking the start of that year.

Business Sold or Transferred[17]

Under the Circular, VAT is exempt on any asset employed in a 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 re-organisation of that trade or business, or the transfer of its management to Nigeria. It is important to note that the Circular states that the trade or business entity will qualify for this exemption subject to the following conditions:

  • the company must prove, to the satisfaction of the FIRS that one company has control over the other, or that the companies are controlled by some other person or are members of a recognised group of companies; and
  • the entities involved must have been related for not less than a consecutive period of 365 days prior to the reorganisation.

However, where assets transferred in the reorganisation are further disposed within 365 days after the reorganisation, 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 as if there was no exemption, and the penalty and interest shall be charged accordingly. [18]

The implication of this is that in order to benefit from the VAT exemption, trade or business entities that intend to embark on any kind of corporate reorganization must provide proof of their relationship for a period amounting to not less than 365 consecutive days and this must be to the satisfaction of the FIRS. In the event that these conditions are not satisfied, the exemption would be cancelled and the trade or business entity will be obligated to pay VAT, penalties and interest as the case may be.

Exported Service[19]

Under the VAT Act, exported services are exempt from VAT. However, “exported service” is defined in the Finance Act as;

a service rendered within or outside Nigeria by a person resident in Nigeria, to a non-resident outside Nigeria; provided that a service provided to the fixed base or permanent establishment of a non-resident person shall not qualify as exported service”.

Providing further clarification on this definition, the Circular states as follows:

  • the service must be provided by a Nigerian resident to a non-resident person;
  • the non-resident person to whom the service is provided must be outside Nigeria when consuming the service;
  • where a non-resident person is in Nigeria or consumes a service in Nigeria, such service will not qualify as exported service and so will be liable to VAT;
  • where a non-resident person contracts a third party to provide a service to its fixed base or permanent establishment (branch or any other physical presence) within Nigeria, such service and so will be liable to VAT;
  • where a non-resident company provides a service through its fixed base in Nigeria, such service shall not be considered to be an exported service and will be liable to VAT;
  • where a non-resident person provides a service to a person in Nigeria, such service will not be an exported service and will be liable to VAT; and
  • 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 be considered as an exported service and will be liable to VAT.

Penalty Regime[20]

The Circular summarizes the new penalty provisions for non-compliance with VAT related obligations in the Finance Act  as follows:

  • failure to register, submit returns, or notify the FIRS of change of address or permanent cessation of trade or business in Nigeria, attracts initial penalty of N50,000 (Fifty Thousand Naira) each, and subsequent penalty of N50,000 (Twenty-Five Thousand Naira) each for subsequent violations;[21]
  • failure to remit VAT attracts penalty of 10% of the payable VAT, plus interest at the prevailing Central Bank of Nigeria’s minimum rediscount rate.

In light of the foregoing, it is recommended that taxpayers seek professional legal advice to assess the penalty regime as it applies to them in order to prevent or reduce the risk of exposure to such penalties or interest that may apply in this regard.

Additional Comments

On taxable goods and services, we note that there was no clarification in the Circular as to whether the sale and transfer of shares and other securities will be vatable. Indeed, we believe that this clarification would be useful to shareholders and corporate organizations in respect of transactions which relates to or involves the sale or transfer of shares.

Additionally, on deregistration of businesses for tax purposes, the Circular states that a taxable trade or business entity is required to officially notify the FIRS of its intention to deregister upon the permanent and total cessation of all forms of trade or business in Nigeria. The clarity provided by the Circular is a welcome development as the wordings of the provisions of the Finance Act were not clear as to whether deregistration applied to the permanent cessation of a part of the business by the trade or business entity in Nigeria, or whether it meant a permanent and total cessation of the business activities in Nigeria by a trade or business entity.

Furthermore, the interpretation given to “exported service” aligns with the decision of the Tax Appeal Tribunal (Tribunal) in Allan Gray Investment Management Nigeria Limited (AGIMNL) v FIRS[22]. In reaching its decision, the Tribunal essentially ruled that where services are performed by a Nigerian resident to Nigerian customers, for and on behalf of a company not resident in Nigeria for profit making purposes, there would be deemed to be an agency arrangement, and such resident person shall be liable to satisfy the tax obligations of that non-resident person in Nigeria as its agent. The Tribunal also ruled that the basis for charging VAT in cross-border transactions is “where the service was [SF8] performed and not the location of the consumer” and therefore since AGI, performed its services in Nigeria, such services were not exported and should be subject to VAT.

With respect to registration by non-residents, it does appear that the Circular has subjected non-resident persons who supply taxable goods and services to persons in [SF9] Nigeria or to Nigerian residents to the statutory requirement of registration as a vatable person. What this means in effect is that the act of carrying on business in Nigeria for VAT purposes is not necessarily tied to the presence of that business in Nigeria, as non-resident persons or businesses who make taxable supplies to persons or businesses that are resident in Nigeria may be validly regarded as having carried on business in Nigeria within [SF10] the meaning of the VAT Act.

Finally, the new provisions for self-accounting for VAT may occasion compliance difficulty for taxpayers as all that the Circular provides is that the taxpayer shall calculate and remit the tax on or before 21st of the relevant month. The Circular did not stipulate the formula or the method for calculating and submitting the relevant tax. It is therefore the expectation that the FIRS will further clarify this requirement for self-accounting provisions as well as the required formula for making and submitting the VAT returns.


The Finance Act is no doubt a landmark enactment aimed at curing the deficiencies of major tax legislations in Nigeria with the amendment of obsolete and contentious provisions and the introduction of far reaching reforms. Additionally, it is commendable that the FIRS issued a Circular which has provided some clarity on the new VAT provisions and would assist taxpayers to improve their understanding of the VAT Act. It is also expected that these clarifications will also enable tax authorities to correctly apply the VAT provisions as amended by the Finance Act and help to reduce the incidence of tax disputes arising from the ambiguous provisions of the law.

[1]           The seven (7) laws are: the Companies Income Tax Act, the Value Added Tax Act, the Customs and Excise Tariff (Consolidation) Act, the Personal Income Tax Act, the Capital Gains Tax Act, the Stamp Duties Act and the Petroleum Profit Tax Act.

[2]           Explanatory Memorandum and Section 1 of the Finance Act 2019

[3]           Finance Act, s. 34

[4]           “Clarification on the Implementation of the Value Added Tax (VAT) Provisions in the Finance Act 2019” “Federal Inland Revenue Service” www.firs.gov.ng/sites/Authoring/SiteAssets/Lists/Content/GetContent/2019%20FA%20Information%20Circular-VAT.pdf accessed online on 2 July 2020

The information and opinions in this publication are provided for general information only. They are not intended to constitute legal or other professional advice. If you would like additional information, please contact the author at [email protected]

© All Rights Reserved. Sefton Fross is a leading full-service law firm in Nigeria internationally recognised for its expertise in corporate, commercial and mergers and acquisitions.

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