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

In addition, and contrary to the Appellant’s arguments on the point, Allan Gray International (which is resident outside Nigeria) was NOT the recipient of the services provided by the Appellant under the Agency Agreement. Allan Gray International was rather the beneficiary of the services provided by the Appellant under the Agency Agreement. The actual recipients of the services provided by the Appellant under the Agency Agreement were third parties who are resident in Nigeria. Further, assuming without conceding, that Allan Gray International was in fact the recipient of the service, the transaction envisaged in the Agency Agreement was structured in a manner that enabled Allan Gray International to conduct business in Nigeria and earn profit therefrom through the Appellant as its agent. It therefore had a presence in Nigeria; and was for the purposes of the Agency Agreement, resident in Nigeria. The transaction envisaged in the Agency Agreement consequently failed to satisfy the crucial condition that the recipient of service must be resident outside Nigeria. 

In the course of the Allan Gray trial, the Appellant also sought to establish that the TAT decision in Vodacom v FIRS, is applicable to, and supports its case on the ground that the destination principle referenced by the Tribunal in Vodacom v FIRS further amplified its case. In resisting the Appellant’s line of argument in that regard, FIRS contended that: (a) The TAT’s decision in Vodacom v FIRS is not applicable to the Appellant’s case in Allan Gray, as the facts and circumstances in Vodacom v FIRS are completely different from those of Allan Gray, and (b) even assuming, without conceding, that the TAT decision in Vodacom v FIRS is applicable to the peculiar facts and circumstances of Allan Gray, and the reference to the destination principle is relevant, both the decision in Vodacom v FIRS and the reference to the destination principle do not help the Appellant’s case in Allan Gray. The points on which FIRS based these contentions are that –  

1. While the key issue in Allan Gray relates to “exported service”, Vodacom v FIRS dealt with “imported service”. Also, while the service involved in Vodacom v FIRS was supplied by a foreign entity to a Nigerian entity, the service involved in Allan Gray was supplied by the Appellant (a Nigerian entity) to third parties (customers resident in Nigeria) on behalf of or for the benefit of its non-resident parent entity (Allan Gray International);

2. The TAT recognised in Vodacom v FIRS that Nigeria operates the destination principle which requires that the place where a taxable event occurs; that is, where the actual consumption of the service supplied occurs, should have jurisdiction to tax the event;

3. The elements of the destination principle are satisfied in Allan Gray as the Africa Fund was marketed and distributed in Nigeria, by the Appellant, on behalf of or for the benefit of Allan Gray International, to third parties (persons resident in Nigeria), who are the ultimate final consumers of the service, as shown in the Appellant’s financial statements for the Period, and the facts established at the trial; and

4. Nigeria being the destination where the final consumption of the services provided by the Appellant occurred, the Appellant is obliged in law to remit the VAT elements of its transactions to the FIRS.

The Tribunal agreed with FIRS and essentially 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 outside Nigeria do not constitute exported service for tax purposes in Nigeria. The Tribunal 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, is accordingly liable to satisfy the tax obligations of that non-resident person in Nigeria. The Tribunal consequently arrived at the conclusions that: (i) Allan Gray International was essentially carrying on business in Nigeria and earning profit therefrom through the Appellant as its agent; (ii) the Appellant, as Allan Gray International’s agent in Nigeria, was liable to satisfy the tax obligations of Allan Gray International in Nigeria in relation to VAT obligations arising from the services performed under the Agency Agreement; and (iii) the decision in Vodacom v FIRS is not applicable to the peculiar facts and circumstances of Allan Gray. The TAT accordingly dismissed the appeal and upheld the FIRS’s VAT assessments on the Appellant for the Period. In arriving at its decision in Allan Gray, the TAT did not ignore the purpose of the services provided by the Appellant under the Agency Agreement. Indeed, its decision was largely driven by its careful consideration of the purpose of the service; that is, Allan Gray International’s marketing and distribution of the Africa Fund to customers resident in Nigeria for profit-making purposes, through the Appellant as its agent in Nigeria.

Commentary

The TAT decision in Allan Gray is novel and will continue to set the tone for construction of what species of transactions constitute “exported service” for tax purposes under Nigerian VAT law. Of particular interest is the Appellant’s argument that the place of performance or consumption of service is immaterial for the purpose of determining existence of exported service for tax purposes; and all that is required is that the service provider is resident in Nigeria and the recipient of service is resident outside Nigeria. This argument of the Appellant was however misconceived.

The issue of the place of performance or consumption of the service was quite irrelevant to the substance of FIRS’s argument in Allan Gray. FIRS’s argument was not that the place of performance or consumption of service determines the existence or non-existence of “exported service” for tax purposes in Nigeria. FIRS’s argument was rather that the service provided by the Appellant under the Agency Agreement did not satisfy the statutory conditions for exported service and is therefore taxable under the VAT Act. Indeed, contrary to the Appellant’s submissions on the point, the Appellant did not provide the marketing and distribution services to Allan Gray International under the Agency Agreement. The Appellant rather provided the marketing and distribution services to third parties (persons resident in Nigeria) on behalf of or for the benefit of Allan Gray International under the Agency Agreement. The legal distinction between these two species of transactions is very crucial as the implication is that the transaction contemplated in the Agency Agreement failed to meet the threshold for exported service under the VAT Act and is therefore liable to VAT under Nigerian tax law.