Tax Appeal Tribunal Delivers Landmark Decision On Threshold For Exported Service Under Nigerian Tax Law

Introduction

The Tax Appeal Tribunal, Lagos Zone (“TAT” or the “Tribunal”), recently held that services which flow from service providers in Nigeria to third parties (such as, persons resident in Nigeria) on behalf of or for the benefit of persons resident outside Nigeria do not constitute exported service for tax purposes in Nigeria. It also held that a Nigerian resident through whom a non-resident person carries on economic activity in Nigeria for profit-making purposes, is effectively an agent of the non-resident person in Nigeria for tax purposes; and, accordingly, liable to satisfy the tax obligations of that non-resident person in Nigeria. These landmark decisions were reached in the case of Allan Gray Investment Management Nigeria Limited v Federal Inland Revenue Service (unreported judgment of the TAT delivered on Wednesday, November 13, 2019 in Appeal No. TAT/LZ/VAT/019/2018) (“Allan Gray”).

The TAT decision in Allan Gray is beyond reproach and constitutes a locus classicus; as it is the first authoritative pronouncement of either the Tribunal or a regular Nigerian court on what constitutes “exported service” for tax purposes in Nigeria.

The decision is also logical and unassailable in principle, as it provides a sensible and business efficient basis for the determination of what constitutes exported service in Nigeria; in a manner that is commercially fair to both the taxpayer and the Nigerian government. The decision also does not contradict the Court of Appeal decision in Vodacom v FIRS (unreported judgment of the Court of Appeal, Lagos Division, delivered on June 24, 2019 in Appeal No. CA/L/556/2018) (“Vodacom v FIRS”), on what constitutes “imported service” for tax purposes in Nigeria.

The Allan Gray case

In Allan Gray, the FIRS audited the Appellant’s tax and financial records for the 2015 – 2017 accounting years (the “Period”) and discovered that the Appellant had been filing unsubstantiated nil Value Added Tax (“VAT”) returns for the Period. It accordingly raised VAT assessments on the Appellant for the Period. 

Aggrieved, the Appellant approached the TAT, challenging the VAT assessments on the ground that the services it provided within the Period qualify as exported service exempt from VAT under the Value Added Tax Act[1] (the “VAT Act”). The Appellant relied on a Marketing and Distribution Agency Agreement executed on November 5, 2013 (the “Agency Agreement”) between the Appellant and its South African parent company, Allan Gray International Proprietary Limited (“Allan Gray International”), wherein it was appointed as the sole and exclusive representative of Allan Gray International’s equity fund products in Nigeria, that is, the Africa Fund, with a mandate to market and distribute the Africa Fund in Nigeria on behalf of Allan Gray International.

Paragraph 4 of Part II of the First Schedule to the VAT Act exempts taxpayers from the payment of VAT on “all exported services” in Nigeria. The VAT Act defines “exported service” to mean “service performed by a Nigerian resident or a Nigerian company to a person outside Nigeria”. The Appellant’s argument was that exported service for tax purposes does not contemplate the place of performance or consumption of service and that all that is required is that the service provider is a Nigerian resident and the recipient of service is a non-Nigerian resident. The Appellant contended that since it is a Nigerian company which provided the marketing and distribution of the Africa Fund services under the Agency Agreement to Allan Gray International (which is a non-resident company), the said services provided pursuant to the Agency Agreement constitute exported service for tax purposes under the VAT Act and are therefore exempt from VAT.

FIRS, on the other hand, argued that the Appellant’s marketing and distribution of the Africa Fund to third parties who are resident in Nigeria on behalf of or for the benefit of Allan Gray International did not qualify as exported service for tax purposes in Nigeria, since the Appellant performed the services to customers in Nigeria, on behalf of or for the benefit of Allan Gray International. It did not perform the services to Allan Gray International as required by the VAT Act.

It is significant to note that FIRS’s argument was not that the services were not exported because the Appellant did not leave Nigeria to South Africa to perform the services. Rather, FIRS’s argument was that the issue of the place of performance or consumption of service is merely tangential and quite irrelevant to the point. What is relevant is that for exported service to exist, (i) the service provider must be resident in Nigeria, (ii) the recipient of service must be resident outside Nigeria, and (iii) the service provided must flow directly from the Nigerian resident or company to the non-resident person. The definition of “exported service” in the VAT Act does not contemplate a transaction where the service provided flows from a Nigerian resident to third parties resident in Nigeria on behalf of or for the benefit of a person resident outside Nigeria. FIRS also specifically noted that the position would have been different had the VAT Act defined “exported service” to mean “service performed by a Nigerian resident or a Nigerian company for a person outside Nigeria”.

The implication here is that while the transaction envisaged in the Agency Agreement satisfied the first statutory condition for exported service, that is, that the service provider must be resident in Nigeria (this is because the Appellant as the service provider in the Agency Agreement, is resident in Nigeria); the transaction did not satisfy the second and third statutory conditions for exported service in Nigeria, that is, that the recipient of service must be resident outside Nigeria and the service provided must flow directly from the Nigerian resident or company to the non-resident person. The service provided by the Appellant under the Agency Agreement flowed from the Appellant to third parties (that is, persons resident in Nigeria) on behalf of or for the benefit of Allan Gray International (a person resident outside Nigeria). It did not flow from the Appellant to Allan Gray International as required by law, and therefore failed to satisfy that crucial statutory condition for exported service in Nigeria.

1 Cap. V1 Laws of the Federation of Nigeria 2004 (as amended in 2007).