Thread by @VAdegite

Hello friends! Let’s talk about VAT in Nigeria and some perspectives on the proposed hike to the VAT rate.
It’s a thread! #NigeriaVAT

1. We are all aware of the plan by the FG to increase VAT rate from the current 5% to 7.5% come 2020. While several “experts” and public affairs commentators have complained about how low our VAT rate is compared to other countries in Africa...

#NigeriaVAT

2. ...they have failed to appreciate the deficiencies of the Nigerian VAT system.
There are reasons why it may be wrong to compare VAT in Nigeria with that of other countries. Our VAT is not a proper VAT. It is more of a sales tax than VAT. #NigeriaVAT

3. What is VAT? VAT is a tax on the supply of goods and services, which is eventually borne by the final consumer but collected at each stage of the production and distribution chain. #NigeriaVAT

4. What is sales tax ? A sales tax is a consumption tax imposed by the government on the sale of goods and services. A conventional sales tax is levied at the point of sale, collected by the retailer, and passed on to the government. #NigeriaVAT

5. Across the world sales tax ranges could range from 1% to 10% and are levied by various arms of government. While VAT ranges from 5% to 25% and are centrally administered in most countries. #NigeriaVAT

6. As sales tax is a tax on the sales (i.e. sale price), the rates are often low. VAT is effectively levied on the “value added”, hence the relative high rates.#NigeriaVAT

7. We will proceed to examine the operations of a typical VAT system.
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8. VAT is levied at each stage of the supply chain. It is a tax on consumers (that is users of the output of the previous stage of production). However, it is typically operated with a credit mechanism (i.e., in the form of input VAT) ...#NigeriaVAT

9. ...such that each producer along the chain is allowed to claim the tax paid at the previous stage when passing the product of his effort to the consumer on the next level of the supply chain. #NigeriaVAT

10. The credit, however, stops at the stage where the product can no longer be passed further down (i.e., when it is purchased by the final consumer). Hence, the final consumer bears the tax fully at the final stage.
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11. Generally, the mechanism used for accounting for VAT is that each business offsets the total VAT paid on purchases (called ‘input tax’) in a given period against the total VAT charged on sales (‘output tax’), and pays any excess tax to the tax authority.#NigeriaVAT

12. Since the tax charged at the input stage is used to reduce the tax charged at the output stage, the difference between the output tax and input tax is the tax on the additional value added at that stage of the production. #NigeriaVAT

13. A typical supply chain would appear like this in the VAT system. Where a product moves from raw materials Producer A to Manufacturer B at N1,000, then to Wholesaler C at N 1,500. The product is then subsequently sold to Retailer D at N 2,000 ...#NigeriaVAT

14. ...and finally to the Consumer who pays N 2,500 to the Retailer. #NigeriaVAT

15. VAT of 5% will be charged and collected at each stage , that is N50 ( 5% of N1,000,) N75 ( 5% of N1,500), N100 (5% of N2,000) N125 (5% of 2,500). The interesting thing is that the collectors of these VAT are not expected to remit N350 but N125! #NigeriaVAT

16. At each stage, the VAT collector will offset its input VAT against the VAT collected (Output VAT) and remit the difference to the FIRS. #NigeriaVAT

17. From our example above Manufacturer B collects N75 VAT when he sells to Wholesaler C , however he had paid VAT of N50 to Producer A so he will only remit N25 ( N75-N50) . #NigeriaVAT

18. The example above is how VAT should work in all cases. However, the VAT law in Nigeria creates 3 categories of VATable goods and services. 1. Where you manufacture or buy for resale, you can claim your input VAT as explained above.#NigeriaVAT

19.

2. Where you buy fixed assets and pay VAT on same, you cannot claim input VAT on the purchase. You are permitted to capitalize it as part of the cost of the fixed assets.

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20.
3. Where you have paid VAT on services which forms part of your input in producing goods and services, you are not permitted to claim the Input VAT on this! This is where our VAT law behaves like a sales tax!

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21. Let's consider a call center in Lagos with 500 employees. The call center has incurred cost on services like data, telephone and transportation services for its workers. These services are key to its operations. #NigeriaVAT

22. The company pays 5% VAT on the services provided by its vendors. However, when the call center bills its own client, it will charge VAT at 5%. #NigeriaVAT

23.Typically, it is expected that the call center’s input VAT ( VAT suffered on data, telephone and transport services) is deducted from the VAT (output VAT) collected from its client and the difference paid to the FIRS. #NigeriaVAT

24. Based on the provisions of our VAT law, this not permitted!

The call center will have to remit the output VAT without the benefit of offsetting the input VAT. #NigeriaVAT

25. This is where we will stop this week !

If we have 1,500 retweets to this thread. We will continue next week and examine some special rules to Nigeria VAT and its challenges. END.

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When I asked for 1,500 retweets, I forgot to mention that the reweets are free and not VATable...😁😁😁#NigeriaVAT

Hello everyone. It has been a week of fantastic engagement on #NigeriaVAT. For those who missed last week’s thread, you can access it on medium.com/victor-adegite…

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Today we shall build on the understanding we gained last week and attempt to examine some special rules to Nigeria VAT and its challenges.

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1. Last week , we explained that the VAT payable along the supply chain is the difference between input VAT and output VAT suffered and charged by the VAT collector respectively.

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2.The VAT law has special rules for some categories of vendors/suppliers. a) Local companies are required to withhold VAT on the invoices received from non-resident vendors/suppliers.This is known as withholding VAT at source & totally different from Withholding Tax. #NigeriaVAT

3. Withholding Tax (an advance payment of income tax) is administered by the FIRS and the state internal revenue services.

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4. The VAT withheld at source is to be remitted to the FIRS by the local company in the currency of the transaction. #NigeriaVAT

5. For example, Firm A in Austria has provided VATable service to Company N in Nigeria. Firm A bills Company N $1,000 plus Nigeria VAT $50 making a total invoice amount of $1,050. #NigeriaVAT

6. Ordinarily, it is expected that Company N should pay Firm A $1,050 (Firm A will then remit $50 to the FIRS). #NigeriaVAT

7. However, under the special rule, Company N will only pay Firm A $1,000 and withhold the VAT on the service which is $50 and remit same on behalf of Firm A to the FIRS. #NigeriaVAT

8. b) Government ministries, statutory bodies and agencies are required to withhold VAT at source when paying vendors/ contractors. For example, if the Federal ministry of information awards a contract for the supply of computers to Company X worth N100m.
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9. Company X send its invoice of N105m to the ministry, the ministry pays Company X N100m and remits N5m to the FIRS. Remember ordinarily, Company X was supposed to collect N105m and remit N5m to FIRS. #NigeriaVAT

10. c) Companies in the oil and gas sector are expected to withhold VAT at source just like the examples given earlier. You may not appreciate the challenges this special rule poses until you consider a company in the oil and gas sector ...#NigeriaVAT

11...that has all its output VAT withheld thereby creating a situation where it cannot claim its input VAT. #NigeriaVAT

12. For example, Company M manufactures chemicals used in drilling operations by Company D, a drilling company. Company M would have paid VAT on the raw material it buys to produce the drilling chemicals. Company M is expected to recover the VAT it paid (input VAT) ...#NigeriaVAT

13. ...from the VAT it collects from Company D (output VAT) and remit the difference to the FIRS. #NigeriaVAT..

14. However, the special rule says , Company D should not pay the VAT it was charged by Company M but Company D should withhold and remit same to the FIRS on behalf of Company M.

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15. This creates a problem for Company M, the company now has input VAT for which it has to approach the FIRS for refund. This is where it gets crazy! As soon as Company M writes to the FIRS for VAT refund. #NigeriaVAT

16.The FIRS schedule the company for a tax audit with a view to ascertaining Company M’s claim. The tax audit may not be limited to VAT but may include all other taxes administered by the FIRS. This audit can last for several months. #NigeriaVAT

17. Eventually, if Company M successfully proves its “case” that a VAT refund is due, it will then have to wait some several months to receive the refund. #NigeriaVAT

18. There are however instances where the taxpayer seeking VAT refund becomes a “debtor” to the FIRS (this is a story for another day). #NigeriaVAT

19. Now let’s go back to where we started from. What are the implications of the proposed hike in VAT rate?

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20. Considering the fact that VAT is borne by the final consumer, it means VATable goods and services will cost more. Some may argue that it is only 2.5% increase! Yes, it is merely 2.5% but VAT is highly regressive. #NigeriaVAT

21. The burden is more on the poor than the rich as the poor spend a larger portion of their income on VATable goods and services. While the rich save and invest larger portion of their income. #NigeriaVAT

22. Another aspect to consider, is that of manufacturer who may not be able to fully pass on the additional VAT to the consumer. For instance, how easily can a bottler increase the unit price of a bottle of drink? #NigeriaVAT

23. Can a soap manufacturer easily adjust its price upwards to cater to the hike in VAT? For this category of manufacturer, VAT hike means reduction in margins. We all know what happens after that…

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24. Let’s take a walk down memory lane. On 23 May 2007, the then minister of finance Nenadi Usman announced a hike in VAT from 5% to 10%. Mrs Usman announced that the increase in VAT rate was necessary because Nigeria has the lowest rate in the African sub-region. #NigeriaVAT

25. That hike in VAT rate was effective for only 1 month. The business community and labour unions opposed the hike and it was reverted to 5% on 23 June 2007. #NigeriaVAT

26. In 2006 inflation was 8.2 % (CBN), GDP growth rate was 6.7% (IMF) and in 2007 inflation was 5.4% (CBN) and GDP growth was 7.3% (IMF). Fast forward to 2018, inflation was 12.1% (NBS) and GDP growth rate was 1.91% (NBS) #NigeriaVAT

27. while 2019 inflation is 11.3% (NBS) and GDP growth rate is 1.94% (NBS). #NigeriaVAT

28. Please take a minute to study the economic indicators quoted above. QUESTION – Is there a good justification for a hike in VAT rate as proposed by the government? #NigeriaVAT

29. This is where we will stop this week. Next week, God willing, we will conclude this #NigeriaVAT thread by examining the plans of the FIRS to impose VAT on online transactions from 2020. Thank you !

You can access this thread on the link below medium.com/@vadegite/vat-… #NigeriaVAT

This weekend we shall examine VAT on online transactions. #NigeriaVAT

If you subscribe to digital services provided by companies operating from outside Nigeria, this third and final thread on #NigeriaVAT should interest you.

1. Hello everyone. Welcome to the third and final thread on #NigeriaVAT

2. Today we shall unpack the proposal of the FIRS to impose VAT on online transactions from 2020. #NigeriaVAT

3. The Chairman of the FIRS on Monday 27 August 2019 announced that Nigerian banks would start charging VAT on local and foreign online transactions from January 2020. #NigeriaVAT

4. The above announcement generated a lot of questions and comments. Some of the questions revolved round whether Nigerians will be subjected to VAT twice on the same transactions.
Whether every transaction that goes through Nigerian banks will be subject to VAT.

#NigeriaVAT

5.Whether the banks will now be the sole agent of the FIRS/FG in terms of VAT collection.
To really understand what is going down in 2020 as regards the VAT on online transactions, we shall consider 4 scenarios. #NigeriaVAT

6. I am of the view that only 1 of the 4 scenarios is not covered by the Nigeria VAT law currently. #NigeriaVAT

7. So let’s get started!

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8.Scenario 1- If you buy a product or service subject to VAT from a brick and mortar store say Shoprite , Mobile phone airtime Kiosk, or a service company, you are charged VAT irrespective of the fact that you pay in cash, cheque, POS or online transfer.#NigeriaVAT

9.Scenario 2 – If you buy a product on a Nigerian ecommerce site like Jumia, you are charged VAT. Now there are two models of ecommerce platforms. The first being a model where Jumia holds inventory in its name and sells to its consumer. #NigeriaVAT

10.Such sales are VAT inclusive i.e. you are charged VAT on the purchase. Jumia accounts for this VAT monthly in its VAT returns to the FIRS.#NigeriaVAT

11.Scenario 3 – The second model of sale via eCommerce platform is the marketplace model. This is where Jumia makes its website available to third party vendors to promote and sell their products. Again sales made on this platform is subject to VAT. #NigeriaVAT

12.The third party vendors are required to account for the VAT collected on sales in their monthly vat returns. Jumia earns commission from the third party vendors for the use of the Jumia platform.Again Jumia accounts for the VAT on the commission in its VAT returns. #NigeriaVAT

13.Please note that the 3 scenarios explained above is already covered by the VAT law. Whether or not collection is optimal is a different issue entirely. #NigeriaVAT

14. It is however unclear if the FIRS wants to abandon the existing VAT system in favour of turning the banks into VAT collection agents of all VAT due to the government. #NigeriaVAT

15.We can only be sure when the new VAT law to back the FIRS’ intention is unveiled. We shall unpack that when it happens. #NigeriaVAT

16.Before we move on to Scenario 4, let me tell you a story.
Following the global financial crisis in 2008/2009, the #OECD and G20 commissioned a study of the global tax framework and what can be done to fix it and ensure it is aligned ...#NigeriaVAT

17...with current global economic realities of the digitalized and globalized world.

#NigeriaVAT

18.The foundation of the tax framework hitherto was laid over 100 years ago! That study is known as the Base Erosion and Profit Shifting(#BEPS) project.The #BEPS project consist of 15 Action Plans. #NigeriaVAT

19. BEPS Action Plan 1 centers on how to address the tax challenges of the digital economy. One of the outcomes of this effort which centers on VAT on digital services and products has introduced a new thinking to how the taxation of the digital economy should be done.#NigeriaVAT

20.The new thinking is that companies that render digital services and products – ebooks, songs, software, streaming services etc should charge VAT on these services and products and remit same to the tax authorities of the recipients’ (buyers) jurisdiction.#NigeriaVAT

21. So back to Secenario 4 – If you buy or subscribed to digital products and services e.g. Itunes song downloads, Neflix streaming service, Skype call service, Amazon eBooks, the seller or service provider should charge you VAT and remit it to the FIRS.#NigeriaVAT

22. Scenerio 4 is what has not been effectively covered by the current VAT laws. This is the scenario that easily lend itself to the proposed VAT on online transactions. #NigeriaVAT

23.Hence, persons enjoying digital services in Nigeria should understand that the irrespective of the uncertainties and questions around the introduction of VAT on online transaction by Nigeria, digital services will most definitely attract VAT forgoing forward.#NigeriaVAT

24.This is where we draw the curtain of #NigeriaVAT. Thank you ! Gracias ! Merci beaucoup ! Danke !