Tuesday, April 27, 2021 / 02:39 PM /by Wole Obayomi / Header Image Credit: Noor Book

The Federal Inland Revenue Service (FIRS) recentlyissued Information Circular No.: 2021/04 ("the Circular") to provideclarification on what will constitute a supply of taxable services by financialinstitutions (FIs), in line with the provisions of the VAT Act, Cap. V1, LFN,2004 (VATA).

We have provided below, a summary of the key aspectsof the Circular:

1.         Definitions of FIs

The Circular defines FIs as "any bank, individual,body, association or group of persons, whether corporate or unincorporated,licensed under Banks and Other Financial Institutions Act (BOFIA) and any otherrelated Act which carries on the business of a discount house, finance company,money brokerage and those whose principal objects include factoring, projectfinancing, equipment leasing, debt administration, fund management, privateledger services, investment management, local purchases, order financing,export finance, project consultancy, financial consultancy, pension fundmanagement and such other business as the Central Bank of Nigeria, NigeriaDeposit Insurance Corporation, Pension Commission and other regulatory bodymay, from time to time, designate".

Further, the Circular defines the various types of FIsincluding banks, insurance companies, pension fund administrators, discounthouses, and brokerage firms.

2.       VATable services and non-VATable incomes

The Circular provides that only the income of FIsarising from charges, such as commissions and fees, for services provided tocustomers will be liable to VAT.  Therefore, incomes from activities thatconstitute return on investments or consideration for risks are exempt fromVAT.  The exempt incomes of FIs include dividends, gains on disposal ofsecurities, interest on loans, advances, savings accounts, bank deposits,interbank placements, and premium on insurance policies.

Consequently, FIs are required to charge VAT on theirnon-exempt services and remit the tax to the FIRS, in line with the relevantprovisions of the VATA.

3.       Registration and rendition of returns

The Circular provides that all FIs, except thoseexempted under the First Schedule to the VATA, are obligated to register withthe FIRS, obtain tax identification numbers for VAT purposes, and file theirmonthly VAT returns as prescribed in the relevant provisions of the VATA.

4.       Treatment of input VAT

The Circular provides that the claim of input VAT byFIs shall be in accordance with the provisions of Section 17 of the VATA. Specifically, Section 17 of the VATA provides that, "allowable input VAT shallbe limited to VAT on goods purchased or imported directly for resale, and goodswhich form stock-in-trade used for the direct production of any new product onwhich output tax is charged."

Therefore, input VAT on fixed assets are to becapitalised with the cost of the assets, while input VAT on overheads, generaladministrative expenses and services are to be expensed in the statement ofprofit or loss account.

5.       Obligation to account for VAT

Based on the provisions of the VATA, the obligation tocharge and remit the VAT on services falls on the person providing the service. However, the Circular clarifies that this obligation may be transferred to theFIs in the following instances:

• where they act as intermediaries between the service providers and thecustomers, as an agent or broker, the FIs are required to charge and remit theVAT on the services;
• wherethe agent or broker cannot charge VAT due to being either an individual(including staff of the FIs) or a person below the VAT threshold;
• where theagent or broker fails to charge VAT;
• where thebroker or agent fails to charge and collect VAT or charges and collects the VATbut fails to remit the tax, the penalties for non-compliance prescribed in therelevant tax laws shall apply to the FI.

Comments

We commend the FIRS for providing a detailedclarification on the administration of VAT on services provided by FIs. However, the imposition of penalties on FIs where their broker or agent failsto charge and collect VAT or charges and collects the VAT but fails to remitthe tax is inconsistent with the provisions of VATA.  Specifically, VATArequires the service provider to charge and account for VAT on supply of taxable services, except in instances where the service provider operates inthe oil and gas industry, is a government ministry, department or agency, or anon-resident person. It is, therefore, expected that the FIRS will be guidedaccordingly in its implementation of the guidelines to avoid the imposition oftax obligation on the FIs where none exists in the tax law.

Credits

* Thisstatement was first published in the Issue 4.9/ April 2021 Newsletter of KPMGof Tuesday, April 27, 2021. For further enquiries, please contact the author, Wole Obayomi via [email protected]

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