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Removing uncertainty in Nigeria’s tax administration 14 Oct 2020

Nigerian Minister of Finance, Budget and National Planning Zainab Ahmed

The Tax Appeal Tribunal (TAT), in two separate decisions delivered in September 2020, gave differing positions on the applicability of Value Added Tax (VAT) on lease and tenancy agreements. It is important to highlight that the tribunal did not put the amendments in the Finance Act 2019 into consideration in arriving at its conclusions in both decisions. This was because the appeals adjudicated on tax assessments carried out before the Finance Act came into force.

As the Nigerian government seeks to increase its revenue through taxation, it is expected that issues and disputes on tax matters would increase. It is, therefore, very important for the revenue collection agencies, especially the Federal Inland Revenue Service (FIRS), State Boards of Internal Revenue (SBIR) as well as the TAT, to be able to properly apply the different tax laws in order to prevent confusion and misinformation. Their effective application of tax laws would have a direct impact on tax compliance.

The first of the two judgments was delivered by the Benin division of TAT on September 9, 2020 in the case of Chief J.W. Ellah, Sons & Company Ltd vs FIRS. In the decision, TAT expressly stated that tenancy and leases were subject to VAT. The tribunal relied on the FIRS Circular No. 9701, dated January 1, 1997, which excluded residential leases from VAT.

The second decision was delivered by the Lagos division of TAT, a day after the Benin judgement was announced. It was the case of Ess-ay Holdings Limited vs FIRS. The Lagos division of TAT held that, “rent derived from the lease of real properties whether for residential or commercial purpose is outside the scope of VAT.” Unlike the Benin case, which dealt with several issues with only a little portion of the judgment devoted to the issue of VAT on leases, the entire bedrock of the judgment in the Lagos case was on the VATability of lease agreements.

There is, thus, much more reasoning and elucidation in the judgment on Ess-ay Holdings Limited vs FIRS. This might be part of the reasons for its preference by some tax practitioners and lawyers, including me.

As indicated by the two cases referred to above, the position of the law had been unsettled with regard to applicability of VAT on land transactions, including leases and tenancy agreements, prior to the Finance Act 2019. In the popular case of Federal Board of Inland Revenue vs Ibile Holdings decided in 2010, the VAT Tribunal (the predecessor of TAT) had held that transactions involving the building, selling and leasing of properties were classified as ‘goods’ under the VAT Act and, thus, liable to VAT.

However, the Federal High Court held that while services rendered in developing the land would qualify as supply of services and be liable to VAT, the sale of land itself does not constitute supply of goods and is, thus, not VATable. This was the court’s decision in the case of Momotato Nigeria Limited vs UACN Property Development Company.

Also, in the case of CNOOC Exploration and Production Nigeria Limited vs Attorney General of the Federation & Ors, decided in 2011, the Federal High Court held that the transfer of rights in an Oil Mining Lease (OML), being an incorporeal right, does not qualify as supply of goods and services and is, thus, not liable to VAT.

The conflicting positions came from the interpretations given to the meaning of supply of goods and services in the VAT Act, which is one of the laws amended by the Finance Act 2019. Prior to its amendment, the VAT Act did not define what constituted ‘goods’ and ‘services.’ It defined ‘taxable goods and services’ as “goods and services not listed in the First Schedule to this Act.” The First Schedule to the Act listed the goods and services exempted from VAT. Adjudicators, therefore, relied on the definition of ‘goods’ by external sources.

In Ess-ay Holdings Limited vs FIRS, for instance, the TAT relied on the definition of ‘goods’ in the Black’s Law Dictionary, the Sale of Goods Act 1893, the Sale of Goods Law of Lagos State and the United Kingdom’s Sale of Goods Act 1979 to reach its conclusion that for a thing to be regarded as ‘goods’, it must be moveable and where it is on land, it must be severable from the land. It is based on these definitions that some of the decisions have exempted transactions where only intangible rights are not classified as goods such as in CNOOC E&P Nigeria Limited vs AGF & Ors.

The Finance Act 2019 has certainly clarified some of these issues. First, it has expressly defined the terms: ‘goods’ and ‘services.’ It has further included rights in intangible products in its definition of goods. The Finance Act has defined goods as: “(a) all forms of tangible properties that are moveable at the point of supply, but does not include money or securities; and (b) any intangible product, asset or property over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another, excluding interest in land.”

It is clear from the amendments to the VAT Act that CNOOC’s case and the case of Ibile Holdings – as they relate to sale of their properties – would have been decided differently under the regime of the Finance Act 2019.

The amendments in the Finance Act could, however, be made clearer. As currently stated in the law, what constitutes ‘interest in land’ can be subjected to varying interpretations and misinterpretations by both an overzealous revenue collection agency and members of Nigeria’s low tax-compliant society. Unlike Nigeria’s Finance Act, which lists exemptions in its schedule, the schedule in the United Kingdom’s VAT Act 1994 lists matters to be treated as supply of goods and services. Hence, the latter deals with both what is liable to VAT and exempted. For example, with regard to matters relating to land, the UK Act provides that: “The grant, assignment or surrender of a major interest in land is a supply of goods.” It further clarifies that any building or part of a building is exempt from VAT.

In order to encourage tax compliance in Nigeria, it behooves the FIRS and SBIR to clarify and simplify the provisions of the law with respect to taxes payable by citizens and businesses. Tax education is still relatively low in the country. The tax agencies must bear in mind that the duty to inform, clarify and educate through notices and circulars does not pertain to notifying the public about new charges or rates as the FIRS did in July 2020. The agency released a notice through its Director of Communications and Liaison Department, Abdullahi Ahmad, stating a charge of 6 per cent stamp duty on all tenancy and lease agreements executed.

Part of the issues raised in Ess-ay Holdings Limited vs FIRS was the enforceability of circulars released by the FIRS. As rightly held by TAT, circulars are useful tools by which administrative bodies disseminate information and issue guidance to the public. They do not, however, constitute laws or regulations. Circulars cannot be used to modify or alter the existing provisions of legislation; they are to give effect to the law, not to amend it.

Certainly, an Act can sometimes delegate the power to amend parts of a law or schedule to an office or institution. For instance, Section 38 of the VAT Act empowered the Minister of Finance to, by order published in the gazette, amend the rate of tax chargeable and amend, vary or modify the list set out in the First Schedule to the Act. Under such circumstances, the TAT has held that such delegated authority can only be exercised to give effect to the enabling legislation and not to override it.

A situation where the FIRS, by its circular, provides for a rate to be charged as stamp duty on all leases without consideration to the tenures of such leases contradicts the provisions of the Stamp Duties Act. By all means, such a situation must be clearly avoided. The Stamp Duties Act clearly provides for different rates to be charged as stamp duties depending on the tenure of the leases. This kind of situation only causes taxpayers to lose confidence in the agency.

In the coming months and years, Nigeria would rely more and more on taxation as a source of revenue. For a long time, the nation has relied heavily on revenue generated from natural resources. The inflow of petrodollars led to low tax collection rates, weak tax compliance and a huge trust deficit in government and its revenue collection agencies. Hence, there is a lot of work and engagement to be done with the citizenry to ensure smoother tax administration.

Beyond mere enforcement, which seems to be the sole focus of the current tax administration, the FIRS must ensure accurate interpretation and education of tax laws and obligations, transparent assessments, provision of easy compliance channels, and engagement with all stakeholders. Better engagement with the stakeholders – legislature, adjudicators and taxpayers – would eliminate or reduce instances of uncertainties in our tax regime.