Lagos GMT
EY
UBA House, 10th and 13th Floors 57 Marina Lagos Nigeria
Indirect tax contacts
Akinbiyi Abudu +234 (1) 631-4554 akinbiyi.abudu@ng.ey.com
Olumide Akinpelumi +234 (1) 463-0479 olumide.akinpelumi@ng.ey.com
Olabisi Bello +234 (1) 631 4631 olabisi.bello@ng.ey.com
A. At a glance
Name of the tax
Value-added tax (VAT)
Local name Value-added tax (VAT)
Date introduced 1 December 1993
Trading bloc membership Economic Community of West African States (ECOWAS) African Continental Free Trade Area (AfCFTA)
Administered by Federal Inland Revenue Service (FIRS)
VAT rates
Standard 7.5%
Others Zero-rated (0%) and exempt
VAT number format 01012345-0001
VAT return periods
Thresholds
Monthly
Registration NGN25 million
Recovery of VAT by non-established businesses No
B. Scope of the tax
VAT applies to the supplies of goods and services other than those specifically exempt under the VAT Act as amended by the Finance Acts 2019 and 2020, as well as those included in the VAT modification order 2021.
From 1 January 2021, the sale, rental or lease of land and building are deemed as outside the scope of Nigerian VAT.
C. Who is liable
Taxable persons are persons that make supplies of goods and services. They are expected to register for VAT. The following are examples of taxable persons:
• Individuals or bodies of individuals, families, corporations with one shareholder, trustees or executors that carry out economic activities
• Persons exploiting tangible or intangible property for the purpose of obtaining income from the property in the course of a trade or business, including persons from or agencies of the government performing such actions
The following are required to deduct VAT on their suppliers’ invoices and remit the VAT to the Federal Inland Revenue Service (FIRS):
• Oil and gas companies including oil-service companies
• Governments and government ministries, agencies and departments
• Resident entities engaging in transactions with nonresidents carrying on business in Nigeria
Exemption from registration. The VAT law in Nigeria does not contain any provision for exemp tion from registration.
Voluntary registration and small businesses. Only taxable persons who make or expect to make taxable supplies of NGN25 million and above are required to register for tax, charge, collect, remit the tax and file monthly returns to the FIRS. 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 NGN25 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.
Group registration. Group VAT registration is not allowed in Nigeria.
Non-established businesses. A non-established business who makes a supply of taxable goods or services in Nigeria or to a Nigerian resident is required to register for VAT with the FIRS and obtain a tax identification number (TIN). The non-established business is to use the address of the person to whom it is making the supply, as its Nigerian address, for the purposes of corre spondence relating to the tax. The non-established business must include VAT on its invoice for the supply of goods or services made. The recipient of the goods or services in Nigeria is required to withhold and remit the VAT due on the invoice to the FIRS in the currency of transaction.
Non-established businesses making a supply of goods and services in Nigeria may choose to appoint a representative for the purpose of its filing obligations in Nigeria (see the subsection below Tax representatives).
The significant change made in relation to non-established businesses relates to the inclusion of the supply of goods (not services only) as a requirement for non-established businesses to regis ter for VAT. This change takes place from 1 January 2021. However, at the time of preparing this chapter, discussions regarding the implementation process for this provision is currently ongoing with the FIRS.
However, if a non-established business has a fixed base (permanent establishment) in Nigeria, it 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.
Tax representatives. Tax representatives are allowed in Nigeria, but not mandatory. A taxable person may register for VAT and file returns directly in person or appoint an accredited tax rep resentative to act on its behalf, which includes non-established businesses.
Reverse charge. There is a self-account mechanism in Nigeria for all supplies for which VAT was not charged. The self-account provision imposed a duty to withhold and remit VAT on a taxable person to whom a supply is made in Nigeria where the following are met:
• The supplier is a person exempt from charging VAT under the Act or otherwise failed to charge VAT
• The supplier is a foreign company without a fixed base (permanent establishment) in Nigeria, whether or not VAT is included in the invoice
The taxable person must 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 service, indicating the tax identification numbers of the suppliers in the schedule.
Please note that where a taxable person receives taxable supplies for which VAT was not charged from either a person below the threshold of NGN25 million or any other person, the taxable person receiving the supplies must self-charge and account for the VAT due. Also, the return for VAT self-accounted or self-charged must be separated in the form prescribed by the service.
Domestic reverse charge. There are no domestic reverse charges in Nigeria.
Digital economy. The Nigerian VAT Act does not make specific provisions for the digital econo my. However, nonresident companies that render taxable supplies of goods and services to Nigeria are required to register for tax in Nigeria and obtain a TIN, while the taxable person to whom the supplies are made in Nigeria is required to withhold the VAT at source and remit same to the tax authority in the currency of the transaction.
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 nonresident companies to collect the VAT portion on such supplies and remit the VAT directly to the Revenue Authority to prevent loss of tax revenue. Nonresident companies may appoint a tax representative for the purpose of complying with the VAT obligations in Nigeria.
The rules for nonresident companies cover all taxable supplies made to Nigeria, regardless of the place or means of supply, for both business-to-business (B2B) and B2C supplies. As such, this provision applies to electronically supplied services, remote services and other types of taxable services.
Online marketplaces and platforms. The tax authority released a clarification circular in April 2020 wherein they clarified provisions of the Finance Act. The tax authority specifically stated that 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 service; and services rendered remotely, online or by other virtual means to Nigerian residents or persons in Nigeria are liable to VAT in Nigeria.
Registration procedures. To register for VAT in Nigeria, the taxable person is required to complete the VAT registration forms and provide its company registration documents to the tax authority. Upon completion, a tax identification number is assigned to the taxable person within one to two weeks. This process is the same for both resident and nonresident businesses.
The following documents are required for the VAT registration for resident businesses:
• Memorandum and articles of association (MEMAT)
• Certificate of incorporation
• Scanned particulars of a director of the company (e.g., identification card)
• Utility bill (to verify that the company is a resident company)
• VAT application letter on the business or tax representative’s letterhead
• Completed VAT registration form
• Completed tax registration questionnaire
• Letter of notification of appointment of tax consultants
The following documents are required for the VAT registration for nonresident businesses:
• Memorandum and articles of association (MEMAT)
• Certificate of incorporation
• Scanned particulars of a director of the company (e.g., identification card)
• Utility bill (to verify that the business is nonresident)
• Completed VAT registration form
• Completed standard questionnaire
• Letter of notification of appointment of tax consultants (on the company’s letterhead)
Deregistration. Where a taxable person permanently ceases to carry on a trade or business in Nigeria, the taxable person must notify the tax administration of its intention to deregister for tax purposes within 90 days of such cessation of the trade or business.
Changes to VAT registration details. A taxable person must notify the tax authorities of any change to its address within 30 days of the change.
D. Rates
The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of VAT, including the zero rate. In addition, Section of 46 of the VAT Act as amended by the Finance Act defines taxable supplies as any transaction for sale of goods or the performance of a service for a consideration in money or money’s worth.
The VAT rates are:
• Standard rate: 7.5% (with effect from 1 February 2020)
• Zero-rate: 0%
The standard rate of VAT applies to all supplies of goods and services unless a specific measure provides for the zero rate or an exemption.
Examples of goods and services taxable at 0%
• Goods and services purchased by diplomats
• Goods and services purchased for humanitarian donor-funded projects
The term “exempt supplies” refers to supplies of goods and services that are not liable to VAT and that do not qualify for input tax deduction.
Examples of exempt supplies of goods and services
• All exported goods and services
• Medical goods and services and pharmaceutical products
• Basic food items
• Locally produced sanitary napkins
• Books and educational materials
• Petroleum products, renewable energy equipment, gas supplied to electricity generating com panies (GENCOs) and electricity distribution companies (DISCOs)
• Airline transportation tickets, shared passenger road transport services
• Commercial aircraft, aircraft engines and spare parts
• Plant, machinery and goods imported for use in free-trade zones
• Plant, machinery and equipment purchased for the utilization of gas in downstream petroleum operations
• Tractors, plows and agricultural implements purchased for agricultural purposes
• Services rendered by unit micro-finance banks and mortgage institutions
• Plays and performances by educational institutions as part of learning
• 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; this exemption will only last 10 years from a commencement date of 2 January 2012
The detailed list of VAT-exempt goods with respective Common External Tariffs (CET) codes can be found in the VAT modification order 2021.
Option to tax for exempt supplies. The option to tax exempt supplies is not available in Nigeria.
E. Time of supply
The time when VAT becomes due is called the “time of supply.” Section 13A(2) of the 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.” For the purposes of VAT, a service is supplied when it is performed or an agreed milestone is reached, and when goods are supplied upon delivery or transfer of risk, whichever occurs first.
Provided that 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.
Deposits and prepayments. There are no special time of supply rules in Nigeria for deposits and prepayments. As such, the general time of supply rules apply (as outlined above).
Continuous supplies of services. There are no special time of supply rules in Nigeria for supplies of continuous supplies of services. As such, the general time of supply rules apply (as outlined above).
Goods sent on approval for sale or return. There are no special time of supply rules in Nigeria for supplies of goods sent on approval for sale or return. As such, the general time of supply rules apply (as outlined above).
Reverse-charge services. There are no special time of supply rules in Nigeria for supplies of reverse-charge services. As such, the general time of supply rules apply (as outlined above).
Leased assets. The time of supply rules for the supply of leased assets is when such asset becomes available for the use of the recipient.
Imported goods. VAT on imported goods is payable at the time of importation.
F. Recovery of VAT by taxable persons
A taxable person may recover input tax that is charged on business purchases by offsetting it against output tax that is charged on taxable supplies. If the input tax exceeds the output tax, the taxable person is allowed to claim a refund of the excess input tax. An input tax refund may be claimed in any of the following manners:
• Credit method
• Direct cash refund
• By both credit method and direct cash refund
The most common practice is the credit method under which the taxable person may offset the excess input tax against the output tax in the subsequent month. This practice is expected to continue until the input tax amount is fully recovered.
The direct cash refund involves applying to the tax authorities for a VAT refund. This usually triggers a tax audit and could take years to complete. In this case, proper documentation of trans actions relating to the recoverable input tax should be made readily available.
There is no set time limit for a taxable person to reclaim input tax in Nigeria. This means that, effectively, the input tax (VAT credit) may be carried forward indefinitely until its complete recovery.
Input tax is deductible from output tax if it relates to goods purchased or imported directly for resale and goods that form the stock-in-trade used for the direct production of any new product on which the output tax is charged. Refund is also available for input tax paid on zero-rated goods and services.
Nondeductible input tax. A taxable person cannot reclaim VAT paid on goods and services used for nonbusiness purposes. In addition, input tax incurred on the purchase of fixed assets and expenses such as general administration and overhead costs, cannot be recovered from output tax.
Recovery of input tax is not allowed with respect to the supply of services and exempt supplies.
VAT on fixed assets should be capitalized together with the cost of the assets, but VAT on gen eral administration, overhead costs and services should be expensed in a company’s profit-andloss account.
Examples of items for which input tax is nondeductible
• Supply of services
• Plant and machineries
• Rent
Examples of items for which input tax is deductible (if related to a taxable business use)
• Raw materials used in production of a taxable good
• Taxable goods purchased for resale
Partial exemption. There are no specific provisions in the Nigerian VAT Act with respect to par tial exemption in the VAT Act. Any taxable person whose input tax meets the requirements for recoverability is required to provide a schedule of input tax recovered when submitting its returns to the tax authority. The tax authority may also request for an input tax schedule during a tax audit.
If the total input tax incurred by the taxable person relates to goods allowable for deduction (i.e., taxable) and goods not allowed for deduction (i.e., exempt), the taxable persons is required to devise an allocation method that accurately shows how much VAT was incurred on the goods imported or purchased for resale or used in the production of a new product on which output is charged.
Based on the strict interpretation of Section 17, as outlined above, the tax authority would ordi narily expect the taxable person to calculate the input tax on its cost of sales (for goods only as VAT on services is not recoverable). However, in practice, if the cost of sales cannot be easily allocated for input tax recoverability purposes (i.e., the input tax incurred on a purchased good cannot be easily traced to the goods produced and sold out), in practice, an argument can be made to the tax authority that the input tax can be calculated on the purchases (rather than cost of sales).
Approval from the tax authorities is not required to use any partial exemption method of appor tionment.
Capital goods. Based on the provisions of the VAT Act input tax on capital expenditure/fixed assets should be capitalized along with the cost of the asset. For capital assets, the input tax should be capitalized along with the cost of the asset. As such, no input tax deduction is allowed for such assets (depreciable), sold or used in the production of the goods.
Refunds. The FIRS Establishment Act provides for a cash refund within 90 days, subject to a refund application by the taxable person and an appropriate audit by the FIRS.
Pre-registration costs. Input tax incurred on pre-registration costs in Nigeria is not recoverable.
Bad debts. Output tax accounted for on supplies that do not get paid by the recipient (i.e., a bad debt) can be recovered in Nigeria. However, based on accounting principles, there should be appropriate supporting documentation and approval(s) available to support the write-off of such bad debts to avoid this treatment being challenged in the event of a tax audit.
Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in Nigeria.
G. Recovery of VAT by non-established businesses
Input tax incurred by non-established businesses in Nigeria is not recoverable.
H. Invoicing
VAT invoices. A taxable person that makes a taxable supply is required to furnish the purchaser with a tax invoice for that supply. A tax invoice must be issued at the time of supply, regardless of whether payment is made at the time of supply. VAT is payable in the currency of the transac tion.
Credit notes. There are no specific provisions on credit notes in the VAT Act. However, as a principle in accounting, a VAT credit note should be used if the VAT payable on a supply is reduced or reversed because of a subsequent allowance or discount or an error. In practice, an annual reconciliation of total VAT per audited account with total VAT per monthly returns filed is carried out to ensure accurate VAT accounting and remittances. Accordingly, it will be helpful to have in place a credit note indicating a reversal of revenue and VAT initially recognized and accounted for.
The details of information to be contained in the credit note are essentially the same as that required in a tax invoice. However, the credit note should give a description of the initial invoice, the amount of which is reversed or reduced for ease of reference.
Electronic invoicing. Electronic invoicing is allowed in Nigeria, but not mandatory. There are no specific provisions in the VAT Act on electronic invoices. However, in practice, electronic invoic ing is allowed in Nigeria. However, the tax authorities rely on paper invoices during a tax audit. This does not mean invoices cannot be invoiced electronically, they just must be made easily accessible to the tax authority in paper format or electronically upon request.
Simplified VAT invoices. Simplified VAT invoicing is not allowed in Nigeria. As such, full VAT invoices are required.
Self-billing. Self-billing is not allowed in Nigeria.
Proof of exports. There are no specific provisions in the VAT Act on proof of exports. However, in practice, documentary evidence that goods physically left Nigeria and evidence within the accounting system to confirm that a transaction took place should suffice. This documentation should be kept accessible should the Nigerian tax authority request this. In the event that no document is provided on request by the tax authority, a company may be required to account for VAT on an export sale.
Foreign currency invoices. Invoices can be issued in the domestic currency, which is the Nigerian naira (NGN), or a foreign currency. There is no preference in the VAT Act as to which currency should be used to issue invoices.
Supplies to nontaxable persons. There are no special invoicing rules for supplies to nontaxable persons in Nigeria. As such, full VAT invoices are required.
Records. Examples of records that must be kept for VAT purposes include, but not limited to:
• Filed VAT returns
• VAT schedules
• Sales invoices (and purchase invoices)
• General ledgers and trial balance
Such records can be kept anywhere (i.e., in or outside of Nigeria), as long as they are made eas ily accessible to the tax authorities during a tax audit and upon request at any time. Please note that holding records outside of Nigeria does not need to be approved by the tax authorities.
Record retention period. The statute of limitation for document retention is six years. Furthermore, the tax provisions provide that tax audits may be conducted on accounts dating as far back as six years. As such, tax documentation should be retained for at least six years.
Electronic archiving. There are no specific provisions with respect to the form in which records should be archived in Nigeria. This would depend solely on the policy of the organization. In practice, electronic archiving is not allowed in Nigeria. Archiving must be made in paper form only, as the tax authorities rely on paper invoices during a tax audit.
I. Returns and payments
Periodic returns. VAT returns must be submitted monthly on VAT Form 002. A taxable person is required to submit a VAT return on or before the 21st day of the month following the month in which supplies are made.
Periodic payments. A taxable person must pay the tax due by the due date when filing the VAT returns, i.e., by the 21st day of the month following the month in which supplies are made. Payment must be made via a bank-certified check/draft or wire transfer through designated banks to the local tax office that issues a receipt after confirmation of such payment.
Electronic filing. Electronic filing is mandatory in Nigeria for all taxable persons.
Payments on account. Payments on account are not required in Nigeria.
Special schemes. No special schemes are available in Nigeria.
Annual returns. Annual returns are not required in Nigeria. However, it is recommended that such annual returns (true-up filing) for reconciliation purposes are done at the end of the reporting period, ahead of desk examination review or tax audit conducted by the FIRS, to avoid addi tional tax liabilities being imposed.
Supplementary filings. The VAT return must be accompanied by a schedule containing details of the supplies made and received within the tax period. For VAT deducted at the source by tax agents, there is a need to attach the schedule containing the details of the related transactions to the VAT return.
Correcting errors in previous returns. Corrections can be made by way of adjustments in the returns filed for subsequent months.
Digital tax administration. There are no transactional reporting requirements in Nigeria.
J. Penalties
Penalties for late registration. The VAT Act as amended by the Finance Act states that all taxable persons are required to register for VAT upon commencement of business. A taxable person who fails to register with the service within the time specified (as outlined in the Registration proce dures subsection above) is liable to pay a penalty of NGN50,000 in the first month the failure occurs and NGN25,000 for each subsequent month in which the failure continues.
Penalties for late payment and filings. A taxable person who fails to submit a return will be liable to a fine of NGN50,000 in the month of default and NGN25,000 for every month in which the default continues.
If a taxable person does not remit the tax on or before the 21st day of the month following the month in which the purchase or supply was made, a sum equal to 10% of the tax not remitted per annum is levied as a penalty. Interest at the prevailing Central Bank of Nigeria minimum rediscount rate shall be added to the tax not remitted and the provision of this Act relating to col lection and recovery of unremitted tax, penalty and interest shall apply.
Penalties for errors. The failure to issue tax invoice results in, on conviction, a fine of 50% of the cost of the goods or services for which a tax invoice was not issued.
The failure to notify or late notification to the tax authorities of a change to a taxable person’s address will attract a penalty of NGN50,000 for the first month in which the failure occurs and NGN25,000 for each subsequent month in which the failure continues.
The failure to notify or late notification to the tax authorities of a change to a taxable person’s taxable activity (i.e., it permanently ceases to carry on a trade or business) will attract a penalty of NGN50,000 for the first month in which the failure occurs and NGN25,000 for each subsequent month in which the failure continues.
For further details please see the subsection above Changes to VAT registration details.
Penalties for fraud. Furnishing a false document results on conviction to a fine of twice the amount underdeclared. There are no specific provisions on the implication of such action for the tax advi sors.
Personal liability for company officers. Company officers cannot be held personally liable for errors and omissions in VAT declarations and reporting in Nigeria.
Statute of limitations. The statute of limitations in Nigeria is six years. In practice, the tax authorities have the power to review and audit the taxable person’s returns and impose penalties (where necessary) going back six years. The taxable person may voluntarily correct errors in previous VAT returns before the tax audit commences.