Nigeria VAT obligations for B2C and B2B digital supplies from non-residents

Obligations for foreign-based companies with online sales to register in Nigeria increased when new VAT rules came into effect in January 2021.

The 2021 development added to compliance obligations from rules introduced a year earlier. It effectively placed the obligation for the collection and remittance of VAT on non-resident digital businesses for B2C and B2B sales. Previously, Nigeria’s Finance Act, 2019, introduced a provision for non-resident digital businesses to apply VAT on their B2C invoices to customers in Nigeria. The original intention was for these customers to then remit the VAT to the tax authorities. Implementation commenced in January 2020. However, there were significant issues, including the non-collection of VAT, with this approach.

As a result, affected digital businesses now need to register for VAT in Nigeria and collect and remit the tax on their B2C and B2B sales. Based on this registration, the businesses collect and remit VAT (at a rate of 7.5%, a rate raised from 5% in February 2020) on their sales to customers in Nigeria. 

There is no sales threshold to registration meaning affected digital businesses must register for Nigerian VAT purposes from their first sale to customers based in Nigeria. Registration does not trigger the requirement to set up a local entity. However, there is no simplified online registration process. 

We also understand that Nigeria’s Federal Inland Revenue Service (FIRS) is working on how to communicate these responsibilities with affected non-resident digital businesses. 

Practical impacts of Nigeria VAT rule change

We understand that there have been some challenges in complying with the VAT rules in Nigeria as they apply to the cross-border sale of digital services.

Here is a snapshot of the challenges:

• Scope: The list of digital services affected by VAT legislation are vague. This uncertainty leads to difficulties for non-residents in understanding if they actually have compliance obligations in Nigeria. 
• Registration: There is no simplified online registration process. This leads to manual processes in attempting to register, and the sharing and input of multiple documents
• Invoicing: It is not clear from Nigeria’s VAT legislation if non-resident digital businesses must apply invoicing rules to B2C sales. This uncertainty leads to implementation issues and is also a drain on resources. 
• Filing and remittance: we are also aware of complications when it comes to the filing of VAT returns and the remittance of the VAT that is due to the FIRS. 

Background to Nigeria VAT on digital sales

Nigeria had been investigating its options into the collection of Value Added Tax (VAT) on online sales for a significant period of time. 

Back in August 2019, executive chairman of Nigeria’s FIRS, Mr Babatunde Fowler, was quoted by Nigeria’s Premium Times website saying that Nigeria would start charging VAT on online sales from January 2020. Mr Fowler made the comments at an African Tax Administration Forum (ATAF) Technical Workshop on VAT. 

Mr Fowler stated that “with the existing laws in Nigeria, we can appoint the banks as agents. First of all, all those who make payments for purchases online using bank cards and instruct their bankers to pay, we will tell the banks that, going forward, everyone who gives instructions for service for purchase online, they should deduct five per cent VAT.”

This was the thought process of the FIRS executive chairman back in August 2019 but the final design of the rules introduced in January 2020 differ. This initial proposal is similar to rules in place in many South American tax jurisdictions where the obligation to collect and remit VAT on digital sales from non-residents lies with local banks or local credit card companies. Note again that Nigeria’s VAT rate has since increased to 7.5%. 

In an earlier interview, Mr Fowler explained that such a move was part of measures by FIRS to meet its NGN8 trillion (USD22.2 billion) revenue target for 2019.

Note: This article was published for the inclusion in a special Taxamo report on developments in Africa.

Image credit: Nupo Deyon Daniel on Unsplash

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