May 28, 2021
On 31st March, 2021, the Federal Inland Revenue Service (“FIRS” or “the Service”) issued an Information Circular providing clarifications on the chargeability of Value Added Tax (VAT) on services rendered by financial institutions.
Section 2 of the VAT Act (“the Act”) imposes tax on the supply of all goods and services in Nigeria other than those listed in the First Schedule to the Act. Part 2 of the First Schedule to the Act exempts services rendered by microfinance banks, peoples’ banks and mortgage institutions from VAT. This Circular clarifies that all other financial institutions are required to charge VAT on their services.
The Circular defines financial institutions to include banks, insurance companies, pension fund administrators, discount houses and brokerage firms. Based on the Circular, commission, fees and other charges for services rendered by these financial institutions are liable to VAT. Ancillary services such as documentation and perfection of loan or overdraft agreements are also subject to VAT but the interest chargeable on loans and advances provided by banks are not liable to VAT.
The Circular also states that fees or commissions earned by insurance companies’ brokers, agents, loss adjusters, surveyors and other providers of services rendered to insurance companies, are liable to VAT. The burden of VAT in this instance is to be borne by the insurance companies. However, the premium received on policies is not liable to VAT.
Furthermore, the Circular states that a distinction should be made between activities that constitute return on investment and consumption of services rendered by financial institutions in arriving at what constitutes a VATable service. To this end, the following charges were expressly included as VATable in the Circular:
Furthermore, the Circular stated that income of financial institutions from activities that result in a return on investment such as those listed below are not liable to VAT:
As financial institutions are taxable persons, the FIRS in this Circular, reiterates the obligation to register for tax, obtain Tax Identification Number (TIN) and file returns monthly. Furthermore, the Circular explains that Input VAT payable in respect of assets purchased for use by the financial institutions should be added to the cost of the assets on which capital allowances may be claimed.
In addition, all VAT payable in respect of services consumed by financial institutions should be regarded as part of normal operational expenses chargeable to Statement of Profit or Loss Account. Thus, input VAT on such items should not be claimed or deducted from output VAT collected. However, where financial institutions suffer input tax on goods supplied to customers, such input tax shall be allowed against the output tax on those goods.
The Circular also states that the primary obligation to charge and remit the VAT on services falls on the person providing the service. However, this obligation may shift in certain instances as provided below:
The issuance of this Circular indicates the FIRS’ intention to ensure that financial institutions are compliant with VAT provisions. As microfinance banks, peoples’ banks and mortgage institutions are exempt from VAT, it is important for other financial institutions to be aware which category they fall into and ascertain if the services they provide are liable to VAT.
Taxpayers are advised to engage with their tax consultants and advisors to fully understand their obligations under the law and how to comply in order to avoid any disputes with the tax authorities and any sanctions for non-compliance.