Nigeria: Views And Vires: FIRS' Public Notice On Deducting Withholding Tax (WHT)/Value Added Tax (VAT) At Source On Commission Paid To Distributors And Sales Agents

Introduction

On 14th August 2019, the Federal Inland Revenue Service (FIRS) issued a Public Notice (the FIRS Notice) in Nigerian newspapers, titled "...Deduction at Source of Withholding Tax (WHT)/Value Added Tax (VAT) on Compensation Paid to Agents, Dealers, Distributors and Retailers by Principal Companies". The FIRS Notice stated: "It has come to the notice of the Service that some companies do not deduct WHT/VAT from the compensation paid to their distributors contrary to the provisions of the Companies Income Tax (Rates, Etc. Deduction at Source (Withholding Tax) Regulations S.I 10 1997 and Paragraph 3.8 of [FIRS] Information Circular 2006/02 of February, 2006, which states that 'commission earned by distributors/dealers will be subjected to WHT and VAT.' "¹

The FIRS Notice further stated that: "Following this discovery, the Service hereby puts all companies, particularly those in the Fast Moving Consumer Goods (FMCGs) Sector, on notice that compensation due to their distributors and customers in the form of Commission, Rebates, etc. and by whatever means of payment, whether by cash, credit note or even goods-in-trade must be subjected to WHT/VAT at the appropriate rates and remit same to the FIRS accordingly on or before the 21st of every month..."²

Further to the FIRS Notice, many FMCGs scrambled to communicate the FIRS' position to their relevant counterparties (Counterparties) in apparent preparation for commencing VAT deduction at source, on commission and other compensation payable to such Counterparties.³ They also requested the counterparties to provide evidence of their respective back VAT remittances for stated/relevant periods. Notably, the issue of WHT deduction is not in contention.⁴

Unexpectedly, many Counterparties contested the basis of FMCG's proposed actions on VAT source deductions, arguing that the FIRS' request is itself incongruous with the provision of the tax laws, particularly Value Added Tax Act⁵ (as amended, VATA). The Counterparties argued that on current state of the law, the requirement for deduction of VAT at source is only applicable to transactions with: (a) companies in the oil and gas sector; (b) non-resident companies; and (c) government ministries, statutory bodies and other agencies of government (MDAs).⁶ Counterparties also challenged any potential VAT deduction at source because of the risk cum possibility, of Counterparties suffering VAT deduction on unsold stock, even though VAT is meant to be borne by the ultimate consumer.

Given such feedback from the Counterparties, coupled with FMCGs' need to shield itself themselves from potential FIRS enforcement exposure for non-compliance, many FMCGs considered approaches on appropriate actions to resolve the issue. These were essentially satisfactory cum feasible, reputational risk-free resolution that is fully consistent with their rights whilst cognisant of critical relationships with their two 'conflicting' stakeholders: the FIRS and Counterparties.

This article delves into the various issues under the headings hereinafter appearing, within the context of the relevant regulatory framework.

The Nigerian VAT & VAT Source Deduction Regulatory Framework

The Nigerian VAT regulatory framework is primarily comprised in the VATA and its subsidiary legislation and the FIRS (Establishment) Act⁷ (FIRSEA). Essentially, VAT as a consumption tax applies to all goods and services at 7.5% of the consideration except those on the VAT exempt list in Schedule 1 VATA.⁸ Since the targeted FMCGs' transactions are clearly subject to VAT, and the focus of our discourse is VAT compliance bordering on entitlement to effect VAT source deduction, we will limit our discussions accordingly.⁹

What are the categories of VAT deduction at source transactions?

Whilst all "tax payers" are statutory VAT agents, incurring input VAT (on purchases), charging output VAT (on sales), mandated to file VAT returns and generally pay the excess of their output tax over input tax to the FIRS, there are three categories of VATable transactions which the law mandates VAT deduction at source for remittance to FIRS.

The first two (public sector contract payments and oil and gas transactions) are discoverable in section 13(1) and (2) VATA, which provides that:

The third category is vide section 38 FA 2020 (introducing a new section 10 VATA) on Nigerian company counterparties in VATable transactions with non-resident companies. However, this duty predated the enactment of FA 2020 which merely amended the erstwhile provision by including a new section 10(3) VATA.¹¹

The present issue arises from FIRS purport to apply a section 13(2) VATA situation to FMCGs. Section 13(2) empowers FIRS to issue a notice pursuant to which oil and gas transactions will suffer VAT deduction at source upon issuance of such notice. To the best of our knowledge, there is no equivalent of section 13(2) VATA applicable to FMCGs on the basis of which FIRS can demand VAT deduction at source by FMCGs.¹² Again, the two subsidiary legislation referenced in the FIRS Notice are totally inapplicable because they cannot be reasonably construed to directly or indirectly authorise FIRS to mandate VAT deductions by FMCGs in the manner contemplated by the FIRS.¹³ We discuss the ramifications of these below.

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Footnotes

1. Emphasis supplied.

2. Incidentally, the FIRS Notice misrepresented Para 3.8, FIRS 2006 Information Circular as basis for VAT deduction at source. Para 3.8 reads as follows: "3.8. Where a manufacturer delivers its normal products to its distributors and dealers for Sale: In this situation, the income accruing to the manufacturer will not be liable to withholding tax (WHT) as it is regarded as transaction in the ordinary course of business, but the Commission earned by the distributors/ Dealers will be subjected to WHT."

3. It is unclear whether the FIRS has approached the FMCGs directly further to the Notice, or FMCGs are acting pursuant to the Notice, without any further contact from FIRS on the issue. This is a significant point because if the FIRS wrote FMCGs to demand compliance or issued an assessment in respect thereof, FMCGs would need to formally object within 30 days in line with Paragraph 13(2), 5th Schedule FIRS (Establishment) Act, Cap. F36, Laws of the Federation of Nigeria (LFN) 2004 to be able to successfully challenge such assessment or FIRS decision.

4. Although doubts have been expressed whether the FIRS can validly enforce a WHT obligation on other forms of compensation apart from commissions such as rebates, the Counterparties might as a matter of strategy want to focus only on the VAT deduction, so applicability of WHT deduction on rebates is moot and therefore not covered in this article.

5. Cap. V1, (LFN) 2004.

6. By the new section 10(3) VATA (introduced vide Finance Act 2020), taxpayers are obliged to include VAT on invoices from vendors where such fail to include VAT, and self-account for the VAT to the FIRS. However, such scenario does not apply in the instant case as FMCGs/Counterparties' invoicing arrangement already includes VAT. The only issue at hand is whether FMCGs can deduct VAT on commission to Counterparties.

7. Cap. F36, LFN 2004.

8. For a detailed discussion of the VAT regulatory context and compliance obligations, see Afolabi Elebiju and Ayooluwatunwase Fadeyi, 'Issues and Dimensions: Nigerian VAT and the Informal Sector', chapter contribution to forthcoming CITN publication, 'VAT Collection, Remittance – Policy, Legal, Administrative Issues and Options for Reform in Nigeria'. The authors stated inter alia: "The introduction of Value Added Tax (VAT) in Nigeria vide the enactment of the ...VATA in 1993 was a watershed in the history of Nigerian taxation. ... The most recent VAT regulatory event is the enactment of sections 33 – 47 Finance Act 2019 which significantly amended the VATA. ...."

9. Whilst the general rule is that all goods and services (save on the VAT exempt list) are subject to VAT (at currently 7.5%, but before 1st February 2020, at 5%), the issue before us is whether the FIRS can expand the categories of taxpayers VAT compliance obligations, in the absence of clear legislative basis therefor. Both FMCGs and the Counterparties respectively are "taxable persons" for VAT purposes, charge and pay VAT pursuant to VATA, particularly section 12. Cf. with Vodacom Business Nigeria Limited v. FIRS, where: the Tax Appeal Tribunal (TAT, (2016) 23 TLRN 80); the Federal High Court (FHC, (2018) 35 TLRN 1); and the Court of Appeal (CA, (2019) 44 TLRN 1), all held that the supply of satellite network band-with capacities by a non-resident to a Nigerian company, was liable to VAT.

10. The FIRS issued the requisite notice vide Information Circular No. 02/2007, titled 'Notification of Guidelines on the Implementation of VAT Deduction (Reverse Charge) and New Payment Arrangement with Respect to Fees, Levies and other Charges Payable by Companies in Oil and Gas Industry', available at:

https://taxaide.com.ng/files/Guidelines%20on%20Deduction%20of%20VAT%20at%20Source%20and%20New%20Method%20of%20Payment.pdf (accessed 09.05.2020).

11. Per the new section 10 VATA: "(a) A non-resident company shall include the tax on its invoice for the supply of taxable services; and (b) the person to whom the services are supplied in Nigeria shall withhold and remit the tax directly to the Service in the currency of payment. (c) Where a person to whom taxable supplies is made in Nigeria is issued an invoice on which no tax is charged, such a person shall self-account for the tax payable and remit the output tax to the Service within the timeline prescribed under Section 15 of this Act."

12. Cf. with WHT Regulations made pursuant to substantive provisions in the Companies Income Tax Act (CITA), Petroleum Profits Tax Act (PPTA) and Personal Income Tax Act (PITA), which provides a basis for WHT compliance requirements.

13. See for example, Information Circular No. 2006/02 of February 2006 which is self-described as relating to only WHT: 'Further Explanatory Comments on Withholding Tax Principle and Operation' (2006 WHT Circular), available at:

https://www.firs.gov.ng/sites/Authoring/contentLibrary/978a7f92-1743-4b1b-839d-2bdb9f685f01RE6.FURTHER-EXPLANATORY-COMMENTS-ON-WITHHOLDING-TAX-200602.pdf (accessed 09.05.2020).

Originally published May 2020

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