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

We recall that the VAT Act defines “exported service” as “service performed by a Nigerian resident or a Nigerian company to a person outside Nigeria”. FIRS had argued in Allan Gray that the operative word in the statutory definition of “exported service” is the word “to”. FIRS also argued that the phrase “service performed by a Nigerian resident or a Nigerian company to a person outside Nigeria” means that the service must flow directly from the Nigerian resident or company to the person outside Nigeria. The statutory definition of “exported service” in the VAT Act accordingly does not contemplate a transaction where the service provided flows from a Nigerian resident or company to persons resident in Nigeria (or other third parties for that matter) on behalf of or for the benefit of persons resident outside Nigeria. 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”. 

Accordingly, the Appellant’s contention that the transaction envisaged in the Agency Agreement constituted “exported service” under the VAT Act was erroneous in principle as the contention effectively invited the Tribunal to interpret “exported service” under the VAT Act to mean “service performed by a Nigerian resident or a Nigerian company for a person outside Nigeria”, instead of “service performed by a Nigerian resident or a Nigerian company to a person outside Nigeria” as specified in the VAT Act. Neither the Tribunal nor any court of law in Nigeria for that matter has the jurisdiction to entertain an interpretation that effectively amends the provisions of the VAT Act without recourse to the legislature that enacted the statute[2]. It is now settled Nigerian law that tax statutes are accorded a strict and ordinary construction[3].  Accordingly, where upon strict construction of a taxing statute, the taxpayer falls within the statutory tax net, the relevant tax authority is entitled (and indeed, obliged in law) to dip the full length of the largest taxing shovels into the taxpayer’s accounts and scoop therefrom the full amount of taxes due on the taxpayer’s income or transactions. 

The word “to”, in ordinary English language, means “in the direction of”[4]. Indeed, the word “to” has been judicially construed to mean “towards”[5]. On the other hand, the word “for”, in ordinary English language, means “as a representative of” or “on behalf of”[6]. In the New Zealand case of Wilson & Horton Ltd. v Commissioner of Inland Revenue[7], a New Zealand Court of Appeal, while interpreting a provision of the New Zealand Goods and Services Tax Act 1985 dealing with provision of services “for and to” foreign clients, held that services provided “for” foreign clients refers to services provided (a) “on behalf of or on account of a foreign client”, or (b) “for the benefit of the foreign client or in favour of the foreign client”[8]. 

It is noteworthy that the Finance Bill 2019 (the “Bill”), recently passed by the Senate of the National Assembly on November 21, 2019, has proposed an amendment of the provisions of the VAT Act regarding the meaning of “exported service” for tax purposes. The Bill defines “exported service” to mean: “A service rendered within or outside Nigeria by a person resident in Nigeria to a person resident outside Nigeria.  Provided, however, that a service provided to the fixed base or permanent establishment of a non-resident person shall not qualify as exported service.” 

The Bill, if enacted into law, will clarify the point that exported service does not contemplate the place of performance of service. This, however, will not affect the efficacy of the TAT decision in Allan Gray. The reason for this conclusion is that while the definition of “exported service” in the Bill (if enacted into law) will clarify the point that the place of performance of service is not relevant for determining the existence of exported service for tax purposes, it does not address the key issues relating to: (i) relevance of the place of consumption of service to determining the existence of exported service for tax purposes in Nigeria, and (ii) the direction in which the services provided by the person resident in Nigeria must flow in order to constitute exported service for tax purposes under Nigerian VAT law.

In our view, the elements of “exported service” under the Bill are: (a) the service provider must be resident in Nigeria, (b) the recipient of service must be resident outside Nigeria, (c) the place of performance of service is immaterial, (d) the service provided must flow directly from the Nigerian resident to the person resident outside Nigeria, and (e) services provided to the fixed base or permanent establishments of non-resident persons do not constitute exported service for tax purposes in Nigeria. It will, therefore, still be validly arguable under the Bill (if enacted into law) that exported service does not contemplate a transaction where the service provided flows from a Nigerian resident to third parties on behalf of or for the benefit of non-resident persons in Nigeria. The position would have been different had the Bill defined “exported service” to mean: “a service rendered within or outside Nigeria by a person resident in Nigeria for a person resident outside Nigeria; provided, however, that a service provided to the fixed base or permanent establishment of a non-resident person shall not qualify as exported service”.

Also, of interest is the Appellant’s argument that the Court of Appeal’s decision in Vodacom v FIRS is applicable to and supports its case in Allan Gray. In making this argument, the Appellant contended that even though Vodacom v FIRS relates to imported services, the principles laid down by the Court of Appeal in the case are relevant to its case in Allan Gray. According to the Appellant, one of the issues determined by the TAT in Vodacom v FIRS was whether a foreign company with no physical presence in Nigeria was liable to tax under the VAT Act. And that in determining the issue, the Court of Appeal held in the case that the supply of satellite network bandwidth capacities qualify as “imported service” because it was supplied by a person outside Nigeria to a person inside Nigeria. The Appellant further contended that it is only fair and equitable that the same rule to be applied in determining what qualifies as “exported service” must be consistent with the rule applied in Vodacom v FIRS on the issue of what constitutes “imported service” under the VAT Act.  As such, what is relevant is the location of the parties to the transaction.

Our view is that the Appellant’s argument that the rule to be applied by the TAT in determining what constitutes “exported service” in Allan Gray must be consistent with the rule applied by the Court of Appeal in Vodacom v FIRS to determine what constitutes “imported service” under the VAT Act, is not only erroneous in principle, but hinged on faulty logic. While “imported service” is defined in the VAT Act to mean “service rendered in Nigeria by a non-resident person to a person inside 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 provisions of the VAT Act on the meaning of “imported service” and “exported service” are therefore very clear and unambiguous; and show a marked distinction between what constitutes “imported service” for tax purposes and what constitutes “exported service” for tax purposes in Nigeria.  While, for purposes of “imported service”, the service must be rendered in Nigeria by a non-resident person to a person inside Nigeria, “exported service” need not be rendered in Nigeria in so far as the service performed by the Nigerian resident or Nigerian company flows directly from the Nigerian resident or the Nigerian company to the person outside Nigeria. This clear distinction between both concepts is therefore an unassailable reason why the Appellant’s argument in Allan Gray that the same set of rules should apply to a determination of what constitutes both concepts cannot be correct in both law and fact.

2 See Basinco Motors Ltd. v Woermann Line & anor. (2009) 13 NWLR (Pt. 1157) 149.
3 See Federal Board of Inland Revenue v Halliburton (WA) Ltd. (2014) LPELR-24230(CA).
4 See Bernard S. Cayne, et al., The New Lexicon Webster’s Dictionary of the English Language, The Deluxe Encyclopedic Edition, p. 1037.
5 See Colledge v Harty (1851) 6 Exch. 205, 210, per Pollock CB.
6 See Bernard S. Cayne, et al., The New Lexicon Webster’s Dictionary of the English Language, The Deluxe Encyclopedic Edition, p. 366.
7 (1996) 1 NZLR 26, 32 – 33
8 It is settled Nigerian law that when there is no known Nigerian decision on a principle of law, the Nigerian courts and tribunals of law will be persuaded to follow decisions of foreign courts, particularly foreign courts that apply the common law. Thus, English case law (including case law of other jurisdictions that apply the common law) have strong persuasive effect on Nigerian courts and tribunals of law where the law and facts decided are similar (though not necessarily identical), and there is no known Nigerian decision on the same set of facts and principles of law (see Omega Bank Plc v Government of Ekiti State (2007) 16 NWLR (Pt. 1061) 445).