Tu esday, april 27, 2021 / 02:39 PM /by Wole Obayomi / Header Image Credit: Noor Book
The Federal Inland Revenue Service (FIRS) recently issued Information Circular No .: 2021/04 (“the Circular”) to clarify what will constitute a provision of taxable services by financial institutions (FIs), in accordance with the provisions of the VAT Act, Cap. V1, LFN, 2004 (VATA).
We have provided a summary of the main aspects of the circular below:
1. Definitions of FIs
The circular defines FIs as “any bank, individual, organization, association or group of persons, whether it is a company or not, authorized under the Law on Banks and Other Financial Institutions (BOFIA) and any other related law that carries on the activities of a discount house, finance company, money brokerage and those whose main objects are factoring, project financing, equipment leasing, l ” debt administration, fund management, private ledger services, investment management, local purchasing, order finance, export finance, project advice, financial advice, fund management and such other enterprise as the Central Bank of Nigeria, the Nigerian Deposit Insurance Corporation, the Pensions Commission and any other regulatory body may from time to time designate “.
In addition, the circular defines the different types of FIs, including banks, insurance companies, pension fund administrators, discount houses and brokerage firms.
2. VAT services and non-VAT income
The circular provides that only income of FIs resulting from fees, such as commissions and fees, for services provided to clients will be subject to VAT. Consequently, income from activities which constitutes a return on investment or a counterpart of risks are exempt from VAT. Exempt income of FIs includes dividends, gains on the disposal of securities, interest on loans, advances, savings accounts, bank deposits, interbank investments and premiums on insurance policies.
Therefore, FIs are required to charge VAT on their non-exempt services and remit the tax to FIRS, in accordance with the relevant provisions of VATA.
3. Registration and return of returns
The circular states that all FIs, except those exempt under the first annex of VATA, are required to register with FIRS, obtain tax identification numbers for VAT purposes and to file their monthly VAT returns in accordance with the relevant VATA provisions.
4. Processing of input VAT
The circular provides that the input VAT request by FIs must comply with the provisions of Article 17 of the VATA. More specifically, Article 17 of the VATA states that “the admissible input VAT is limited to the VAT on goods purchased or imported directly for resale, and goods which constitute the stock-in-the-trade used for the direct production of any new product on which the exit tax is charged. “
Therefore, input VAT on fixed assets should be capitalized with the cost of assets, while input VAT on overheads, general administrative costs and services should be expensed in the income statement. .
5. Obligation to account for VAT
Based on the provisions of VATA, the obligation to invoice and remit VAT on services lies with the person providing the service. However, the circular specifies that this obligation can be transferred to FIs in the following cases:
- when acting as intermediaries between service providers and clients, as agent or broker, FIs are required to charge and pay VAT on services;
- when the agent or broker cannot charge VAT because he is either a natural person (including FI staff) or a person below the VAT threshold;
- when the agent or broker does not charge VAT;
- where the broker or agent does not invoice and collect VAT or charges and collect VAT, but do not remit the tax, the penalties for non-compliance prescribed in the relevant tax laws apply to the FI .
We commend FIRS for providing detailed clarification on the administration of VAT on services provided by FIs. However, imposing penalties on FIs when their broker or agent does not invoice and collect VAT or invoice and collect VAT but fail to remit it is incompatible with the provisions of VATA. Specifically, VATA requires the service provider to charge and account for VAT on the supply of taxable services, except in cases where the service provider operates in the oil and gas industry, is a ministry, department or agency. government agency, or a non-resident person. It is therefore expected that the FIRS will be guided accordingly in its implementation of the guidelines in order to avoid the imposition of tax obligations on FIs where none exist in the tax law.
For more information, please contact the author, Wole Obayomi via [email protected]
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