FHC Upholds Destination Principle Application on VAT Collection

Federal High Court Upholds Application of Destination Principle in VAT Collection for Non-Resident Suppliers in Nigeria



On 19th December 2017, the Federal High Court/FHC (Honourable Justice Babs Kuewumi) delivered judgment in a dispute regarding Value Added Tax (VAT) remittance in transactions involving non-resident suppliers. In the case – (Vodacom Business Nigeria Limited (Vodacom) v. the Federal Inland Revenue Service Appeal No. FHC/L/4A/2006), Vodacom executed a contract with NSS – a non-resident company, in which NSS supplied bandwidth services to Vodacom. The bandwidth was received in Vodacom base stations in Nigeria. Under the contract, Vodacom is under obligation to pay all taxes due from NSS to FIRS. FIRS assessed Vodacom to VAT for the transaction – an assessment Vodacom objected to on the ground that as the receiver of the service it has no obligation to remit VAT. Vodacom also contended that NSS is not under any legal obligation to register for VAT in Nigeria based on the provision of the VAT Act and therefore that VAT liability cannot be said arise from the contract. The TAT ruled in favour of FIRS. The TAT held that based on the destination principle, Vodacom is liable to VAT on account of the bandwidth services supplied and received in Nigeria.

Dissatisfied, Vodacom appealed against the decision of the TAT at the Federal High Court (FHC). The FHC in upholding the decision of the TAT further held that Nigeria has impliedly adopted the destination principle and that in all vatable transactions relating to non-resident suppliers, the reverse charge mechanism should be adopted.

Issues for Determination

 The court formulated two issues for determination as follows:

  1. Whether contracts for the supply of goods and services by a non-resident supplier are subject to VAT in Nigeria.
  2. Whether VAT registration is a condition precedent for VAT liability.


The court resolved both issues in favour of FIRS and held as follows:

(i)   Contracts for supply by a non-resident are subject to VAT

The court held that all transactions are subject to VAT except those which have been expressly exempted from VAT under the First Schedule to the VAT Act. Every other transaction, including transactions with non-resident suppliers are subject to VAT. According to the court, three tests must be applied to determine whether a transaction is subject to VAT:

  1. did the transaction give rise to supply of goods or services;
  2. was there a consideration; and
  3. is the supply exempted under the First Schedule to the VAT Act

The court held that it is immaterial that the goods/service is physically brought into Nigeria or that the service was not actually rendered in Nigeria. The primary consideration is that the service/goods was received in Nigeria.

(ii)  VAT registration is not a condition precedent for VAT liability

The court held that VAT registration is not a condition precedent for the imposition of VAT. The court observed that to make VAT registration a condition precedent would defeat a major objective of the VAT Act because a non-resident supplier of goods/services would be able to avoid VAT simply by refusing to do his VAT registration.

The court held that where services are supplied from outside Nigeria, the reverse charge mechanism should be adopted so that VAT is collected from the recipient of the service. In such circumstances, the non-resident supplier is not required to undertake VAT registration.

The court further held that a non-resident supplier need not expressly transfer/contract its VAT obligations to its Nigerian customer. As long as a non-resident supplier is involved, the recipient of the goods/service in Nigeria will be liable for any VAT arising from the transaction.

The court also held that a transaction will still be subject to VAT whether the supply in question was of a continuous nature or a one-off transaction.

Implications of the Decision

  1. This decision brings added certainty to the treatment of VAT arising from transactions with non-resident suppliers of goods/services. Companies and persons doing business with non-resident suppliers of goods/services are advised to calculate the VAT arising from the transaction and deduct same before paying the supplier.
  2. It should also be noted that frequency is not a factor in determining whether a transaction is subject to VAT. Also, non-resident suppliers are subject to VAT whether supplier has done its VAT registration or not. The only basis upon which a transaction may be exempted from VAT is if the transaction is set out among exempted vatable goods and services in the First Schedule to the VAT Act.

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This Legal Alert contains information on tax /legal issues. It does not constitute legal or professional advice on such issues. Where specific legal advice is needed, the services of a solicitor/tax adviser should be sought.

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