Under Nigerian law, value added tax (VAT) is chargeable on the supply of VATable goods and services, at the rate of 5% per transaction. It is important to note that the laws regulating VAT in Nigeria exempt certain goods and services from VAT liability, and also classify certain goods and services as zero rated, i.e. VAT is charged on such items at the rate of 0%.
VAT is largely regulated by the Value Added Tax Act CAP V1, LFN 2004 (as amended), and the Avoidance of Double Taxation Agreements. The following laws are also relevant to the administration of VAT in Nigeria:
- Value Added Tax (Amendment) Act 2007
- Value Added Tax (Modification) Order 2018
- Value Added Tax (Amendment) Bill 2018. The provisions of this law will only take effect when it has been passed by the National Assembly.
Nigerian VAT laws are ordinarily applicable to residents of Nigeria, and require all taxable persons to register with the Federal Inland Revenue Service (FIRS) for the purpose of collection and remission of VAT. However, a non-resident company that carries on business in Nigeria is also required to register for VAT purposes using the address of the person with whom it has a subsisting contract in Nigeria. A non-resident company is to include VAT in its invoice and this VAT shall be remitted by the person to whom the goods and services were supplied in Nigeria.
Before the recent amendments, the following goods and services were VAT exempt:
- All medical and pharmaceutical products;
- Basic food items;
- Books and educational materials;
- Baby products;
- Fertilizer, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment;
- All exports;
- Plants, machinery and goods imported for use in the Export Processing Zone or Free Trade Zone;
- Plant, machinery and equipment purchased for utilization of gas in downstream petroleum operations;
- Tractors, plows and agricultural equipment and implements purchased for agricultural purposes;
- Proceeds from the disposal of short-term federal government of Nigeria securities and bonds;
- Proceeds from the disposal of short-term state, local government and corporate bonds (including supranational bonds);
- Medical services;
- Services rendered by community banks, the People’s Bank and mortgage institutions;
- Plays and performances conducted by educational institutions as part of learning;
- All exported services.
The following items were zero- rated:
- Non-oil exports;
- Goods and services purchased by diplomats;
- Goods and services purchased for use in humanitarian donor-funded projects.
Further to the 2018 amendments introduced by the Value Added Tax (Modification Order) 2018, the following items are now exempt from VAT:
- Leases and rentals on residential property;
- Transport services for public use;
- Life insurance;
- Education and training conducted by public or non-profit educational institutions;
- Services rendered by unit microfinance banks and mortgage institutions.
Other amendments introduced by the VAT Amendment Bill 2018 (note that these amendments will only become effective when the bill has been duly passed by the National Assembly), include the following:
- The scope of exempt and zero-rated goods and services is now limited to oil exports only. It implies that other export goods and services will now only be zero-rated instead of being exempted from VAT.
- The tax net for VAT has also been expanded to include intangible properties, meaning that activities such as assignment of rights are now VATable.
- The obligation on the recipient of foreign services to deduct VAT on payments due to such non-resident company is now specifically spelled out.
- A taxable person who fails to issue an invoice for supply of services will now be required to self-account for the tax on the value of the transaction to the relevant tax authority.
Implications of the amendments on non-resident companies
Further to the above-mentioned amendments, non-resident companies carrying on business in Nigeria are required to note the following obligations:
- Residential property leases and rentals, transport services for public use, life insurance, education and training conducted by public or non-profit educational institutions, services rendered by unit microfinance banks and mortgage institutions are now excluded from VAT.
- Non-resident companies shall now be required to charge VAT on exports of goods and services (except oil exports) at the rate of 0%.
- Non-resident companies that have assigned their subsidiary resident companies the right to use their trademark are now required to charge VAT on such arrangements.
- Non-resident companies will be unable to escape VAT liability on services rendered to resident companies as the VAT is now required to be deducted at source.
- Non-resident companies that are liable to deduct and remit VAT from taxable transactions will now be held responsible for the tax in the event they fail to do so.