The Federal Inland Revenue Service (“FIRS”) recently issued a circular, Value Added Tax (VAT) on Services Rendered by Financial Institutions No: 2021/04 (“the Circular”), to clarify the VAT treatment of services rendered to and by Financial Institutions (“FIs”) in Nigeria. Pursuant to section 2 of the Value Added Tax Act 2004 (“the Act”) as amended, all FIs are required to charge VAT on their services except for microfinance banks, people’s banks and mortgage institutions whose services are VAT-exempt.
We have summarized the salient points in the Circular below:
- Scope
The Circular only applies to services rendered to, received by and the income of FIs in Nigeria. FIs are defined in the Circular, as any “bank, individual, body, association or group of persons corporate or non-corporate licensed under the Banks and Other Financial Institutions Act (“BOFIA”) and/or other related Act; that carries on the business of a discount house, finance company, money brokerage and those whose principal objects include factoring, project financing, equipment leasing, debt administration, fund management, private ledger services, investment management, local purchases, order financing, export finance, project consultancy, financial consultancy, pension fund management and such other business as the Central Bank of Nigeria, Nigeria Deposit Insurance Corporation, Pension Commission and other regulatory body may, from time to time, designate”. The Circular also describes the services that banks, insurance companies, pension fund administrators, discount houses and brokerage firms typically provide that qualify them as FIs under the relevant legislation.
- Taxable services
Services rendered by FIs are categorised as activities that constitute a “return on investment or generation of risk” and “consumption of services” in the Circular. Income earned by FIs from the former category include interest on loans, advances, savings accounts, bank deposits, interbank placements, dividends, insurance premiums, gains on disposal of securities, etc. and are VAT-exempt. Thus, FIs are not required to charge customers from whom such income is earned VAT.
Whereas income earned by FIs from the “consumption of services” category is VATable. Such income includes fees (including fees paid to perfect loan or overdraft agreements), commissions and charges earned by FIs from the provision of financial services to its customers. The Circular provides an inexhaustive list of these services as guide to taxpayers.
- Compliance obligations
- The Circular restates the VAT Act’s requirement for all taxpayers, including FIs exempt from charging VAT on their services, to register for, charge and file monthly VAT returns.
- FIs that pay VAT (input) on the purchase of goods or services shall only recover the VAT paid from VAT (output) charged, to the extent that the VAT Act provides. Accordingly, recoverable input VAT is limited to VAT paid on “goods purchased or imported directly for resale, and goods which form stock-in-trade used for the direct production of any new product on which output tax is charge”. VAT paid on the purchase of assets or services shall be capitalised with the cost of the asset or charged as an expense to the taxpayers’ income statement, respectively.
- The Circular confirms that the VAT Act generally imposes the obligation to charge, collect and remit VAT on the person providing the service. Notwithstanding, the Circular introduces new circumstances under which the obligation to account for VAT may shift from the service provider to an FI:
- Where the FI acts as an intermediary (agent or broker) between service providers and customers, the FI will have the obligation to charge and remit VAT on the service.
- Where the agent or broker is unable to charge VAT in his capacity as an individual or as a person whose revenue falls below the VAT-charge threshold, the FI shall become responsible for self-accounting and remitting VAT.[1]
- Where the agent or broker simply fails to charge VAT, the FI shall assume the obligation to self-account and remit the VAT.
- Where the agent or broker either fails to charge and collect VAT or charges and collects but fails to remit VAT, that FI becomes liable to the punitive measures contained in the relevant sections of the Act.
Conclusion
The FIRS’ initiative to refresh its initial circular on the subject, VAT on Services of Banks and other Financial Institutions No: 9503, is laudable considering that the VAT Act has been amended since issuing the first circular 1995. However, the Circular’s clarification on shifting the liability to account for VAT from a service provider to an FI may benefit from a re-examination vis-à-vis the VAT Act and further clarification.
Specifically, requiring an FI who acts as a transaction agent or broker to account for the VAT payable by its principal arguably contradicts the law. The law only requires a taxpayer to collect and remit VAT on the service that it renders (or receives). There is no obligation on a taxpayer to account for another person’s VAT liability on a transaction, regardless of whether the taxpayer facilitated the transaction as an agent or broker. Accordingly, an FI is by law only responsible for the VAT on its agent’s commission or broker’s fee. There is no legal basis for requiring an FI, who is an agent or broker, to account for its principal’s VAT on the underlying transaction.
It will also be useful for the FIRS to clarify why an FI will be held liable for VAT that has been collected but not remitted by its agent or broker. Such imposition amounts to double taxation on the same transaction. Further, the law clearly states that a person who collects VAT but fails to remit shall be liable for the tax and any associated penalties.
Credit: Ibrahim Moshood, Associate, Centurion Law Group
[1] Section 38 of the Finance Act 2019, sets a threshold for VAT purposes by providing that persons dealing with taxable supplies of less than 25 Million Naira, are exempt from making VAT returns. Taxable supplies in this regard include all economic benefits (cash, receivables and other assets); and exclude the taxable supply of a capital asset and the sale of the whole or a part of a business.
