Lagos
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
A. At a glance
Name of the tax
Local name
Value-added tax (VAT)
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 Monthly
Thresholds 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, 2020, 2021, and 2023, as well as those included in the VAT modification orders 2021 and 2024. With effect from 1 January 2021, the sale, rental or lease of land and building is deemed as outside the scope of Nigerian VAT.
A taxable person, as defined by VAT law, includes individuals or groups who supply goods and services. This encompasses individuals, families, corporations sole, trustees, executors and anyone engaged in economic activities. It also includes those exploiting tangible or intangible property to earn income through trade or business, as well as government agencies acting in that capacity.
Effective use and enjoyment. To avoid instances of non-taxation or double taxation, jurisdictions can apply “use and enjoyment rules” that allow a service that is “used and enjoyed” in the jurisdiction to be taxed or prevent a service that is “used and enjoyed” outside the jurisdiction from being taxed. If a service is taxed in the jurisdiction under the “use and enjoyment” provisions, a
non-established supplier of the service may be required to register for VAT in that jurisdiction where it has customers that are not taxable persons. In Nigeria, no services are subject to the “use and enjoyment” provisions.
In Nigeria the “destination principle” is used and is a concept that allows VAT to be retained by the country where the taxable goods or services are being consumed.
In Nigeria, goods are deemed to be taxable where the goods are physically present in Nigeria at the time of supply, imported into Nigeria, assembled in Nigeria or installed in Nigeria, or 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. In relation to services, taxable services are deemed to be supplied in Nigeria if the services are rendered in Nigeria by a person physically present in Nigeria, regardless of whether the service is rendered within or outside Nigeria or whether or not the legal or contractual obligation to render such service rests on persons within or outside Nigeria, or the service is connected with existing immovable property (including the services of agents, experts, engineers, architects, valuers, etc.). This applies where such property is located in Nigeria, and in respect of incorporeal, where the exploitation of the right is made by a person in Nigeria, the right is registered in Nigeria, assigned to or acquired by, a person in Nigeria, regardless of whether the payment for its exploitation is made within or outside Nigeria, or the incorporeal is connected with a tangible or immovable asset located in Nigeria.
Transfer of a going concern. The
sale of assets from a business that is either VAT-registered or eligible for VAT registration will be subject to VAT at the applicable rate. However, a transfer of a business as a going concern (TOGC) may be outside the scope of the tax under certain conditions. A TOGC is the sale of a business or part of a business capable of separate operation including assets. Where the sale meets the conditions, the supply is treated as outside the scope of VAT. In Nigeria, a TOGC is treated as outside the scope of VAT if the following conditions are met:
• The TOGC is between resident taxable persons, i.e., Nigerian companies incorporated and operating in Nigeria
• One company has control over the other
• Both are controlled by some other person
• The companies are members of a recognized group of companies, and have been so for a consecutive period of at least 365 days prior to the date of the reorganization
Provided that if the acquiring company were to make a subsequent disposal of the assets thereby acquired within the succeeding 365 days after the date of transaction, the treatment of the transaction as a TOGC shall be rescinded and the companies shall be treated as if they did not qualify for TOGC.
Transactions between related parties. In Nigeria, for a transaction between related parties, the value for VAT purposes is subject to the transfer pricing regulations. The scope of the transfer pricing regulations is applicable to the sale and purchase of goods and services (which applies for VAT). There are specific transfer pricing rules that applies to transactions between related parties, of which such transactions should be calculated using the arm’s-length principle. The VAT Act was recently amended by the Finance Act 2023 to introduce general anti-avoidance transfer pricing rules to combat fictitious agreements between related parties for VAT purposes. Section 7 of the VAT Act was amended to empower the Federal Inland Revenue Services (FIRS) to assess transactions to determine their credibility and competitive market value for tax purposes. The effective date of commencement of the Finance Act 2023 is 1 September 2023.
C. Who is liable
Taxable persons are those who provide goods and services and are required to register for VAT. Examples of taxable persons include the following::
• Individuals, bodies of individuals, families, corporations with one shareholder, trustees or executors that carry out economic activities
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. If 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%
• 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
• Educational books and materials
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 partial 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 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 person 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 ordinarily 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 input tax can be calculated on the purchases (rather than cost of sales).
No approval from the tax authorities is needed to apply any partial exemption method of apportionment.
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., bad debts) 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 that are not registered for VAT 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 transaction.
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 a credit note indicating a reversal of revenue and VAT initially recognized and accounted for.
The information required in a credit note is essentially the same as that in a tax invoice. However, the credit note should also include a description of the original invoice and the amount being reversed or reduced for easy reference.
Electronic invoicing. Electronic invoicing is mandatory in Nigeria for certain taxable persons.
Scope of electronic invoicing. For B2B, B2C and business-to-government (B2G) supplies, electronic invoicing is mandatory for certain taxable persons in Nigeria. There is no threshold beyond which taxable persons are required to adopt electronic invoicing in Nigeria. The requirements related to electronic invoicing are the same as those for paper invoicing.
There are no specific provisions in the VAT Act on electronic invoices. While in practice, elecronic invoicing is allowed in Nigeria, the tax authorities rely on paper invoices during a tax audit. This means that invoices must be made easily accessible to the tax authority in paper format or electronically upon request.
While there are no specific provisions in the VAT Act, per the FIRS circular entitled “Guidelines on Simplified Compliance Regime for Value Added Tax (VAT) for Non-Resident Suppliers” No. 2021/19 dated 11 October 2021, a nonresident supplier that makes taxable supplies for Nigeria electronically (goods, services or intangible) is required to issue an electronic tax invoice to its customer. Therefore, it is permissible for the invoice to be in the format utilized in the nonresident supplier’s jurisdiction; however, it must contain the following key information:
• Name and the TIN of the nonresident supplier
• Description of supply
• Date of supply
• Value of supply
• VAT charged
This is applicable to all taxable supplies consumed electronically (i.e., B2B, B2C and B2G). The general invoicing requirement as stipulated in the VAT act applies.
For all other supplies, electronic invoicing is allowed but not mandatory.
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 accouning system to confirm that a transaction took place should suffice. This documentation should be kept accessible should the Nigerian tax authority request this. If 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.
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. The statute of limitations does not apply to tax investigations that may be triggered in cases of willful default or suspected fraud.