As the Federal Inland Revenue Service (FIRS) prepares to impose Value Added Tax (VAT) on online transactions, the questions on many lips is how can it work in Nigeria?
“What Nigeria (FIRS) needs to do is to first study digital economy; What does it mean? In which different areas do we have it? What are the issues, difficulties in collecting its taxes? What is the best practice that has been adopted around the world? “ So advised Mr Taiwo Oyedele, a partner with PwC on Tax and Regulatory services.
“It is difficult to deal with digital economy, e-commerce inclusive. Even the largest and the most powerful economy in the World, the US, is still struggling with this digital economy. But they have gone a little bit ahead of the rest of us. So we can then borrow from some of their initiatives,”Oyedele added.
The FIRS Chairman, Mr Babatunde Fowler, in far away New York, USA, recently said FIRS would soon begin collection of VAT on online transactions.
According to him, “soon, we will ask banks to impose VAT on online transactions for purchases of goods and services.” He explained that the online transactions tax is something not new. “It actually should be in existence. We will certainly follow up to make sure that every VAT that is due to be collected is collected, ” he stated, adding that the move was part of measures by FIRS to meet its N8 trillion revenue target for 2019.
To heed Oyedele’s advice, let’s see how this VAT model is being practised in some climes:
Remote sellers’ tax in US
On June 21, 2018, the United States Supreme Court fundamentally changed the rules for collection of sales tax by Internet-based retailers. According to www.nolo.com, in its decision in South Dakota v. Wayfair Inc., the court stated that individual states can require online sellers to collect state sales tax on their sales. This ruling overturns the court’s 1992 decision in Quill Corporation v. North Dakota. The Quill case prohibited states from requiring a business to collect sales tax unless the business had a physical presence in the state.
For many years, states argued that they were losing a lot of money by not being able to collect sales tax on Internet sales to customers in their states. Formerly the burden was on the customer rather than the seller to pay the relevant tax. In that case, the tax generally is called use tax rather than sales tax – and customers often simply did not pay use tax to the state.
In order for a given state to require you to collect internet sales tax, that state must pass a law allowing it to do so. Many states already have enacted new laws. Often, these laws refer to online sellers as remote sellers. In most cases, if a remote seller has either: a minimum number of separate sales to customers in the state; or a minimum dollar amount of sales to customers in the state, the law requires the seller to collect and pay sales tax. In addition, the seller must register with the state’s taxing authority.
Online sales tax in UK
Her Majesty’s Revenue and Customs (HMRC), the tax authority in the United Kingdom, as of 2017, approached sellers (on internet platforms) directly and via the marketplaces such as Amazon and eBay, searching for non-VAT compliant non-UK sellers. According to SimplyVAT.com, quoted by blog.taxJar.com, if you are a non-resident UK business and hold stock in the UK, either in a 3PL centre such as Amazon, you have created a taxable supply and have an obligation to VAT register in the UK. If a seller has been trading in the UK for many years without a UK VAT number, HMRC does want the seller to pay the back taxes. Once a seller registers for VAT and has to catch up on a lot of historical returns , which means they will have a lot of back-dated taxes to pay, HMRC will give the seller time to pay as long as the seller offers a reasonable payment plan.
Likely scenario in Nigeria
In an interview with Daily Sun even before Fowler announced the plan, Oyedele painted a likely scenario in Nigeria this way
“Take Amazon for example: if you want to order something from Amazon, you can open your computer now or your phone, just log on to the internet. And you can order. Now let’s say you order handset. The handset in Nigeria is liable to VAT. But Amazon is not a Nigerian company. It is supposed to charge VAT. They don’t even know whether there is VAT in Nigeria and they are not even interested. The phone is $50. They have not put VAT on it.
Now let’s look at the Origination and Destination principle, which is fantastic. So the destination of that mobile phone is Nigeria, so VAT should be collected in Nigeria. But who should collect it? The Nigerian tax authority says Amazon should have charged it. So the tax official should go and collect from Amazon. So if you are lucky, you can get a Visa to where Amazon is. When you get there, you will be lucky to come back to Nigeria because you have crossed your jurisdiction. What power and authority does Nigeria have over an American company in America to go and be charging Nigerian VAT? You can never enforce that law.
So the other option is, well let’s go to my friend who ordered the phone.
You say bros, you ordered a phone and there is no VAT on it. So can we collect the VAT? Imagine the millions of Nigerians in that situation.
The cost of trying to collect that tax will be more than the tax they want to collect. That means that one tax officer must be aware of that your phone, he must know where you live, how much you paid. Maybe get the cost from MasterCard. That is another ball game because MasterCard would say I have Confidentiality agreement with my customer. I can’t just release their information. Let’s say they manage to get it. They then now fine you: can you pay VAT? You say sorry, I don’t even know there is VAT. So it is almost impossible to deal with it. But that is not the only issue with e-commerce. There is a bit of them that can still be handled in a way that is pragmatic.
So if you look at the likes of MultiChoice, what they are doing essentially is digital economy or e-commerce. We have some of those card companies. Look at Interswitch, for example. It is a Nigerian entity. Even MasterCard and Visa have some form of presence in Nigeria. But how can we do it? I think ultimately, we will get to the point where the world will cooperate. We need the world to cooperate to solve digital economy problems such that, Amazon, for example, the US would ask them, when you are selling, find out the country you are selling to, charge the VAT. We would transfer the money to Nigeria because we know it belongs to Nigeria. But that is a long way off.