RESOLVING THE CONTROVERSY ON THE APPLICABILITY OF VALUE ADDED TAX TO REAL PROPERTY LEASES IN NIGERIA

RESOLVING THE CONTROVERSY ON THE APPLICABILITY OF VALUE ADDED TAX TO REAL PROPERTY LEASES IN NIGERIA.

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BEING A WELL RESEARCHED PAPER PREPARED AND SUBMITTED IN RESPONSE TO THE OBAFEMI AWOLOWO UNIVERSITY LAW JOURNAL (OAULJ) CALL FOR PAPERS FOR PUBLICATION IN VOLUME 4 NO. 1 AND 2 (2020) OF THE JOURNAL.

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Prepared by:

Ebube Godwin Onyejekwulum Esq.

LLB(Nigeria), BL, ACIArb(UK),Grad ICSAN, LLM Taxation Candidate Lagos State University, Associate at Synergy Attornies, Lagos.

Email address: [email protected]

Phone number: +2347036152997

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RESOLVING THE CONTROVERSY ON THE APPLICABILITY OF VALUE ADDED TAXTO REAL PROPERTY LEASES IN NIGERIA

ABSTRACT

This paper seeks to examine the dispute over the applicability of Value Added Tax (VAT) to Lease transactions especially commercial leases of real property in Nigeria. This complicated issue has attracted variety of opinions and conflicting decisions of Nigerian courts on the subject matter. On one hand the Federal Inland Revenue Service (FIRS) argues that rental income over residential leases are administratively exempted from VAT while that of commercial leases are subject to VAT having not been listed among the exempt items under the first schedule to the VAT Act 2007. On the other hand, tax payers argue that leases do not qualify as “taxable goods or services” and consequently should not be subject to VAT. The paper finds that the conflict was far from settled under the old regime of the VAT Act considering the recent conflicting decisions delivered by the Tax Appeal Tribunal of South- South and Lagos zones respectively. Perhaps, the recent amendment of the VAT Act by the Finance Act 2020[1] which includes new definition of “goods” and “services” should have eliminated the logjam. The paper concludes that the controversy relating to the applicability of VAT to lease transactions appears not to have been effectively resolved and recommends a further amendment of the law and/or a definite judicial pronouncement on the matter which will leave no room for ambiguity. This unequivocality can be found in some other jurisdictions whose legal provisions although not in unanimity with each other actually provide a sufficient level of certainty and clarity on the issue.

INTRODUCTION

The major focus of this paper is on the controversial issue which raises the question on whether lease of real property falls within the scope of VAT Act in Nigeria to the extent that rent paid as consideration by the tenant to the landlord should be subject to VAT. It is common to see tax payers and the FIRS taking divergent positions on the subject matter. The conflict on the issue can be traced to the language employed by the drafters of the law.[2] While the VAT Act[3], had provided for a definition of “supply of goods and services”, it omitted the meaning of “goods” and “services” for the purposes of VAT. The omission was the major contributing factor to the ambiguities in interpreting the Act. These ambiguities were demonstrated in two recent decisions of the Tax Appeal Tribunal. In 2019, the National Assembly passed the Finance Act 2020 which amended the Value Added Tax Act and included new definition of goods and services, amongst other alterations. While the definition makes it clear that intangible rights qualify as taxable services under the Act, it leaves other ambiguities. For instance, a lease could be interpreted as a transfer of interest in land which makes it exempt from VAT or it could be treated as a taxable service; that is, provision of a real property for a defined tenure. The paper contains a review of the conflicting judgments, highlights the amendment to the VAT Act relating to the subject and recommends ways of settling the controversy and thereby creating certainty in the business environment.

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REVIEW OF RECENT CONFLICTING DECISIONS ON THE SUBJECT

1.?????Chief J.W. Ellah, Sons & Company Ltd v. Federal Inland Revenue Service (Ellah Case)[4]

Brief Facts

The Ellah case was a judgment delivered by the Tax Appeal Tribunal (The Tribunal) South-South zone sitting in Benin on 9th September, 2020.?The Appellant is in the business of leasing and maintenance of houses and properties while the Respondent is the Tax authority. After series of assessments, objections and reconciliatory meetings, the Respondent reviewed the Appellant’s tax liability downwards to?26,162,275 (Twenty-Six Million, One hundred and Sixty-Two Thousand, Two Hundred and Seventy Five Naira only) for 2010-2015 accounting years. The Appellant cleared the reviewed tax assessment?and was issued a tax clearance certificate by the Respondent. Seven months later, the Respondent issued and served another tax assessment notice in the sum of ?152,849,773.00 (One Hundred and Fifty Two Million, Eight hundred and Forty Thousand, Seven Hundred and Seventy Three Naira only) and for the same period of assessment already cleared by the Appellant. The Appellant objected to the said revised assessment; however, the Respondent failed to respond to the objection thus necessitating the appeal.

Issues for Determination

After trial and evaluating the evidence and arguments canvassed by counsel, the Tribunal distilled two issues for determination:

1.?????“Whether the Respondent has power to audit the Appellant and issue an additional assessment where Appellant has paid the original assessment and a Tax Clearance Certification issued to the Appellant? and;

2.?????Whether the Appellant is liable to the revised assessment of ?152,849,773.00 (One Hundred and Fifty-Two Million,Eight Hundred And Forty Thousand, Seven Hundred And Seventy Three Naira only) dated 18th December 2018?”

The Decision

In its ruling, the Tribunal addressed the question which relates to whether rent on residential or commercial buildings or premises are VATable or not. The Tribunal referred to Section 2 of the Value Added Tax Act[5] which defined VAT as:

“The tax that shall be charged and payable on the supply of goods and services (in this Act referred to as taxable goods and services) other than those goods listed in the First Schedule to this Act.”

The Tribunal held that the above definition means that all goods or services that are not expressly exempted as listed in the first schedule were VATable. The Tribunal also referred to the definitions of the operational words in section 2 contained in section 46 of the Act as follows:

“Supplies” means “any transaction, whether it is the sale of goods or performances of a service for a consideration that is, for money or money’s worth;

“Supply of goods” means any transaction where the whole property in the goods is transferred or where the agreement expressly contemplates that this will happen and in particular includes the sale and delivery of taxable goods on hire or leasing and any disposal of taxable goods”

?“Supply of Services” means any service provided for a consideration”

The Tribunal relying on the said definitions held thus:

We view these definitions very apt in resolving the contentious issue raised by parties on whether rent on residential or commercial buildings are subject to VAT. From the above definitions, supply of goods includes the letting out of goods on hire or leasing. The Longman Dictionary of contemporary English defines let out as ‘charge someone an amount of money for the use of a room or building’. The same dictionary gave the meaning of Hire as ‘to pay money to borrow something for a short period of time’. In this case it means to pay money for a periodic or temporary use of building and similarly the Cambridge Dictionary defines Leasing as a financial arrangement in which a person, company etc. pays to use a land, a vehicle etc. for a particular period of time. From the above, it is obvious that commercial buildings where a charge, fee, rent or any other consideration is payable is subject to VAT whereas domestic or residential building, in our opinion are not VATable.[6]

Further, the Tribunal relied on the Respondent’s Information Circular 9701 dated 1st January, 1997and the decision in the case of Federal Board of Inland Revenue v. Ibile Holdings[7]?to find that the Respondent was right to demand VAT on the lease of commercial buildings of the Appellant since the circular exempted rental income from residential leases from VAT but did not exempt leases from commercial buildings. The Tribunal while allowing and disallowing some of the deductions/tax assessments consequently reviewed the Appellant’s tax liability downwards to?34,552,911.53 (Thirty-Four Million, Five Hundred and Fifty-Two Thousand, Nine Hundred and Eleven Naira, Fifty-Three Kobo only).

It is noteworthy that the Tribunal discountenanced the Appellant’s argument that Commercial leases are not VATable because it is a transfer of “choses in action” and so do not fall under supply of goods and services. The Tribunal acknowledged that circulars and guidelines cannot take the place of law but stated that it was ironic and a misnomer for one to use a document to support his/her claim and in the same vein, jettison that same document on areas that do not favour him/her.

2.?????ESS-AY HOLDINGS LIMITED V. FEDERAL INLAND REVENUE SERVICE (Ess-ay case)[8]

Brief facts

The Essay case was a judgment of the Tax Appeal Tribunal (The Tribunal) of the Lagos zone. The Appellant invests and engages in the development of real properties which are rented or leased to tenants and put to both commercial and residential purposes. The Respondent is the tax agency of the federal government responsible for the assessment, collection and administration of Federal taxes on behalf of the government including the Value Added Tax. On July 9, 2018, the Respondent served the Appellant a VAT assessment notice in relation to VAT on incomes derived from its commercial tenants. The Appellant objected to the said VAT assessment Notice through its objection letter dated 15th July, 2019. The Respondent served the Appellant with a Notice of Refusal to Amend (NORA) dated 22nd July,2019. Being dissatisfied with the NORA, the Appellant filed an appeal before the Tax Appeal Tribunal on 22nd August 2019.

Issues for Determination

The Tribunal with regards to the grounds of appeal and arguments of counsel adopted the two issues for determination formulated by the Appellant counsel as follows:

“1. Whether rental incomes are subject to Value Added Tax (VAT) under the Value Added Tax Act CAP V1 LFN 2004 (as amended - VAT Act)?; and

2. Whether the provisions of the Federal Inland Revenue Service Information Circular No. 9701 dated 1st January, 1997 seeking to exempt only rents from residential properties is not ultra vires the Respondent?”

The Decision

In resolving issue one, the Tribunal acknowledged that the challenge with the determination of the issue was founded on the language employed by the law makers in drafting the Act. The Tribunal clearly stated that for a transaction to be chargeable to VAT, it must amount to a taxable supply of goods or service and that while VAT Act defines supply of goods and supply of service,[9]it was silent on the definition of goods or services; therefore, the silence was part of the reasons there are ambiguities in the construction of the Act.

Since the VAT Act did not define the terms “goods” and “services”, the Tribunal relied on other sources for guidance as follows:

1.?????The Blacks' Law Dictionary defines goods as; "tangible or moveable property other than money, especially articles of trade or items of merchandise.”

2.?????Section 62 of the Sale of Goods Act 1893 (a Statute of General Application enforced in England as at 1st January 1900 adopted into Nigeria) defines goods to include all chattels personal other than things and money; and including emblements, industrial growing crops, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of Sale.

3.?????The Sale of Goods Law of Lagos defines “goods” as: all chattels personal, other than things in action and money… and includes emblements, industrial growing crops and things attached to and forming part of the land which are agreed to be severed before sale or under the contract of sale.

4.?????Section 61 (1) of the United Kingdom’s Sale of Goods Act of 1979, defined “goods” as: “all personal chattels other than things in action and money … all corporeal movables except money; and in particular “goods” includes emblements, industrial growing crops and things attached to and forming part of the land which are agreed to be severed before sale or under the contract of sale.”

5.?????Black’s Law Dictionary defined “Service” as “an intangible commodity in the form of human effort, such as labour, skill or advice.”

Based on the above definitions, the Tribunal found that it was impossible to regard real properties as an intangible commodity. Also,from the argument of both counsel, the Tribunal found that parties agreed that the Appellant was in the business of developing real properties amongst others, some of which are leased or let out to tenants for commercial or residential purposes. Their point of divergence was as to the nature of the transaction. The Respondent was convinced that the letting of the taxable development on the land to tenants for commercial or residential use is VATable and by inference, considered the Appellant’s real properties as taxable goods.

On one hand, the Tribunal referred to the decision of Federal Board of Inland Revenue v?Ibile Holdings[10], where The VAT Tribunal relying on section 42 of the VAT Act (s. 46?under the VAT Act Cap V1 LFN 2004)held that Ibile Holdings' Commercial Lease transactions were taxable on the ground that they constituted supply of goods under the Act. On the other hand, the Tribunal referred to the case of Momotato Nigeria Limited v UACN Property Development Company Plc[11], where the Federal High Court held that sale of land, in itself, does not constitute a supply of goods, and therefore, is not liable to VAT. After considering the two Judgments, the Tribunal held that the decision in Federal Board of Inland Revenue v Ibile Holdings proceeded on the footing that real properties could be classified as goods.

The Tribunal further referred to the decision in the case of CNOOC Exploration and Production Nigeria Limited and South Atlantic Petroleum Limited v Attorney General of the Federation &Ors[12](The CNOOC Case)where the Federal High Court agreed with the Plaintiff that the item assigned was a right which was neither ‘goods’ nor ‘services’, but a ‘chose in action’ and, accordingly, the transaction was not liable to VAT. The court noted that in the United Kingdom, statutory intervention accounted for the reason assignment of a right constituted ‘services’, the supply of which is VATable.

Consequently, the Tribunal held as follows:

The expression “the letting out of taxable goods on hire or leasing, and any disposal of taxable goods” used in the Act must be construed by reference to goods properly so-called, that is, goods that are moveable or capable of being severed. We find it difficult to agree with the Respondent that the lease in this appeal amounts to a supply of goods. Our disagreement stems from the fact that the lease in this appeal is a lease in respect of real properties. Real property is best characterized as property that does not move, or that is attached to the land. See Federal Republic of Nigeria v Yakubu&Ors.[13] Because of their nature, real properties cannot be regarded as goods. They are not severable or moveable. Thus, if real properties do not qualify as goods, it follows that any transaction relating to real properties cannot qualify as a supply of goods.[14]

Ultimately, the Tribunal decided that the lease of real properties does not amount to supply of goods or services and therefore VAT is not chargeable or payable on the transaction.

In resolving issue two, the Tribunal relied on the case of Halliburton (WA) Limited v FBIR[15] where it was held emphatically that the FIRS Information Circular is neither law nor regulation but merely information to the general public and, in particular, all taxpayers’ representatives or advisers and the staff of Revenue Services with no legally binding effect.

The Tribunal also relied on Warm Spring Waters &Ors v FIRS[16]where the Federal High court held that FIRS Information Circulars cannot modify the provisions of VAT Act nor can it alter or vary the list of exempted items under the First Schedule to VAT Act and The Registered Trustees of Hotel Owners and Managers Association of Lagos v. Attorney-General of Fed.&Anor[17]where the Federal High Court held delegated legislation to be an exercise of powers given by the Legislature to another body to give effect to the enabling legislation and not to override it. The court went further to state that the Schedule to an enactment cannot be amended by delegated legislation since it is actually part of the enabling legislation having the same legal force as the Act itself.

Relying on the above decisions, the Tribunal held that the FIRS Information Circular is a subjective opinion which does not command the force of law and cannot be the basis for charging a particular transaction to VAT.Consequently, the Tribunal upheld the appeal and set aside the assessed VAT liability of the Appellant together with the interest and penalties.

Comments on the Decisions

One striking feature of the above judgments is that they are conflicting decisions of the Tax Appeal Tribunal delivered one day apart[18]on practically similar issues. A cursory reading of both decisions reveals that the Ess-ay case was more detailed and well- articulated on the issue under consideration.?It is important to note that both rulings were delivered by TAT of two different zones, which are courts of coordinate jurisdiction. It is obvious that tax payers will prefer the decision in the Ess-ay case while the FIRS will prefer the decision in the Ellah case. This will create a blurry position whereby parties will adopt the interpretation which appears most favorable to them. It follows that a decision of the Federal High Court in its appellate capacity will be necessary to determine the valid position.[19]In my opinion, the VAT Tribunal in Ibile Holdings case and the Tax Appeal Tribunal in Ellah case erred in law for implying that when an item is not listed under the exemption list in the First Schedule to the Act, it means that VAT will be applicable on such items. Ordinarily, the issue of exemption should only arise where an item is determined to be goods or service. There are items which do not fall under the classification of goods or services and exemption of those items will be pointless. Certainly, a situation where an item is subjected to VAT because it was not exempted under the First Schedule to the Act would amount to creation of another category of taxable items besides “goods” and “services”.[20] The decision in Ess-ay case is preferred on this point.

It is important to note that the decisions were based on the provisions of the VAT Act prior to the amendment of the relevant sections by the Finance Act, 2020. The question that necessarily arises is whether the amendment of the VAT Act has resolved the controversy on the applicability of VAT to lease transactions?

Amendment to the VAT Act

The Finance Act 2020 made sweeping amendments on various tax laws in Nigeria and the Valued Added Tax Act was not left out. It is possible that the conflicting decisions in the Ellah and Ess-ay case may have been decided differently if the tax appeals were based on the Finance Act 2020.

Prior to the amendment of the VAT Act by the Finance Act[21]?there was no clear definition of taxable “goods” and “services” under the VAT Act and this was the major contributing factor to the controversy regarding the applicability of VAT to lease transactions, especially commercial leases. Section 44of the Finance Act 2020 amended Section 46 of the VAT Act (the interpretation section) to include new definitions of “goods” and “services”.

It provides that:

???????????“goods”, for the purposes of this Act, means all forms of tangible properties,

???????????movable or immovable, but does not include, land and building, money orsecurities”;[22]

???????????“services” means -

(a) anything, other than goods, or services provided under a contract of employment; and

(b) includes any intangible or incorporeal (product, asset or property)over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another, excluding interest in land and building, money or security.[23]

The above definitions imply that incorporeal rights may now be subject to VAT except interests in land and building.[24]Incorporeal property is a legal right in property that has no physical existence such as mortgages, intellectual property rights e.g. patents, trademarks etc.[25]While it may have been correct to argue under the old VAT Act?that incorporeal rights do not amount to taxable goods or services,[26] the position has changed with the definition of “goods and services” included in the amended VAT Act. The law now recognizes assets or property that are tangible and moveable as well as intangible assets or property over which a person has ownership right. It will be noted that in the case of CNOOC Exploration Production Nigeria Limited V AG Fed &Ors[27] the court had enjoined the country to borrow a leaf from the UK VAT Act if she desired to charge VAT on incorporeal properties like the grant, assignment or surrender of any right. This may have accounted for the amendment of the VAT Act via the Finance Act 2020.

The new codification of a definition for “goods” and “services” in the VAT Act seems to have settled the controversies surrounding the applicability of VAT to property transactions involving intangible rights and securely captured all forms of transactions involving taxable goods and services in FIRS’ Tax net excluding those exempted under the Finance Act.[28]However, a new question arises as to whether a residential and commercial Lease can be classified as an “interest in Land and building” for the purpose of VAT.

Under a typical lease/tenancy transaction, the tenant/lessee is considered to be entitled to exclusive possession of the let or leased property for a defined period in exchange for the payment of rent. A lease grants the holder possessory interest over the property while the lessor/landlord has the right to the reversionary interest in the property. The landlord conveys a bundle of rights including a right to exclusive possession to the property for the period of lease or tenancy in exchange for the rent paid.[29]

In Nigeria, ownership of all land is vested in the state and the maximum interest that a person can acquire over real estate is a right of occupancy.[30]This can be classified as being equivalent to a lease. On the expiration of the right of occupancy, the real estate potentially reverts to the state except there is a renewal of same. Basically, land or real estate cannot actually be “sold” in Nigeria since the vendor conveys in actual terms an interest not higher than a leasehold interest. What a party can assign or transfer to another is the unexpired residue of its leasehold or create a sub-lease in favor of another, with the state holding the reversionary interest on the expiration of the head lease.[31]

Furthermore, under Nigerian jurisprudence, “Land” includes any building and any other thing attached to the earth or permanently fastened to anything so attached excluding minerals.[32]This is in line with the popular legal maxim: Quic quid plantatur solo, solo cedit, which means that “whatever is affixed to land becomes a part of the land”. On this basis it will be impossible to separate an interest in a property or building from the land. It follows that, lease of building amounts to lease of the land also. Therefore, in my view, a lease qualifies as an “interest in Land and building” which should not be subject to VAT by virtue of same having been excluded from the definition of services. The same argument will apply to sale of real estate because they also involve interest in land/buildings which have been exempted from VAT. ?Bearing in mind that under the amended VAT Act, definition of services includes intangible or incorporeal asset, product or property over which a person has ownership rights. An argument that leases constitute ownership rights in residential or commercial properties and are thus subject to VAT may not succeed because interest in land is inseparable from ownership rights in real properties and any sale or lease of interest in such properties should be exempt from VAT as provided in the Finance Act. VAT will however be applicable to supply of services e.g sand filling, electricity supply, road tarring, legal and professional services rendered in the course of developing the land and or its transfer/lease.

In the context of the new definition of ‘service’ introduced by the Finance Act 2020, a tricky question which necessarily arises is whether lease can be treated as a service. In attempting to answer this question, leases have to be distinguished from short term lodging provided by hotels, motels, guest houses and other similar places. Usually, these places provide accommodation together with additional facilities such as well furnished lodging facility, bed, cleaning & laundry services, cable network, internet service, meals, shared television or rest rooms and phone services for its guests and visitors. The provision of such facilities jointly with the lodging space will qualify as a supply of ‘service’?which will be subject to VAT.[33] To illustrate the point, it is a well known fact that foodstuffs are exempt from VAT. However, food purchased from restaurants are usually charged to VAT[34]. This is because eateries usually provide additional facilities to the consumer which may include entertainment facility like cable TV, internet access, good ambience with air conditioning system, delivery services etc. However, the lessor or a landlord in a lease or tenancy does not render any service to the lessee/tenant in the form of additional facilities such as the ones listed above. He only transfers his right in the property to the lessee/tenant and for the tenure of the lease and nothing more. In my opinion, the transfer of interest in real properties in the form of lease does not amount to supply of ‘service’ with respect to Nigeria’s VAT Act. This position will be different if lease of real property was expressly classified as a service under the Act.

There were controversies under the old VAT regime as demonstrated by the conflicting decisions of the TAT yet the amendment of the Act seems not to have removed the uncertainty in the VAT Act. At this juncture, a consideration of the position in some other jurisdictions will be valuable.

The Position in some Selected jurisdictions

1.?????Australia

Goods and Services Tax (GST) in Australia is the equivalent of Nigeria’s VAT.GST is payable on taxable goods and supplies. Section 9-5 of A New Tax System (Goods and Services Tax) Act 1999?(GST Act)sets out the criteria that must be satisfied for a supply to qualify as a taxable supply.[35]Under Section 40-35 of the GST Act, A supply is not a taxable supply to the extent that it is GST-free or input taxed and a supply of residential premises by way of lease, hire or licence is an input taxed supply unless the supply is: a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that controls the commercial residential premises; or the supply is of commercial accommodation.

The effect of the provision is that GST doesn't apply to residential rent in Australia while the lease of commercial residential premises is subject to GST. A landlord is liable to charge and remit GST for rents on accommodation in commercial residential premises which includes a hotel room or serviced apartment, commercial spaces like a function room or office space, caravan parks, camping grounds, school hostels or boarding houses.[36]

2.?????England and Wales

In England and Wales, supplies which includes grant, assignment or surrender of an interest in, right over or licence to occupy land for payment or consideration such as freehold sales, leasing or renting, are normally exempt from VAT.[37] But landlords can opt to tax land. However, even when the property owner opts to charge VAT, certain supplies remain exempted such as buildings designed or adapted and intended for use as dwellings or for relevant residential or charitable purpose etc.[38]For the purposes of VAT, the term land includes any buildings, civil engineering works, walls, trees, plants and any other structure or natural object in, under or over it as long as they remain attached to it.[39]

3.?????Canada

Canada has a federal VAT called the Goods and Services Tax (GST). Within Canada, some provinces harmonized their provincial sales tax regime with the federal GST regime, and in those provinces the landlord will be required to charge the combined rate of GST together with the rate of provincial sales tax which is referred to as the Harmonized Sales Tax (HST).[40]For the purposes of the GST/HST, ‘real property’ includes all types of land and buildings and every estate or interest in real property, whether legal or equitable, in addition; mobile homes, floating homes and any leasehold or proprietary interest are also considered to be real property.[41]Generally, all real property transactions in Canada involving the transfer, exchange, or sale of interests are prima facie subject to GST/HST; that is, GST/HST applies unless the transaction is specifically exempted from tax.[42]Leases of commercial-use real property are regarded as taxable supplies while leases of residential-use real property are exempted. Also, supplies of real property (including both sales and leases of real property) by public service bodies such as non-profit organizations, charities, municipalities, school authorities, hospital authorities, and public colleges or universities, are exempt supplies.[43]

4.?????India

Under India’s Good and Services Tax (GST) law, GST will be applicable when the rental income from commercial leasing is beyond Rs.20 Lakhs while lease of residential property for residential purpose is exempt from GST.[44] Also, other types of lease or renting out of immovable property for business would attract GST as it would be treated as a supply of service, this includes leasing out commercial or residential property for commercial purposes, either fully or partially.[45]

Gleaning from other jurisdictions, it can be seen that there is actually no uniformity on the method of applicability of VAT on lease transactions. However, there is certainty in the provisions of the law such that tax payers can easily deduce whether VAT will apply to each relevant transaction without much difficulty. The same cannot be said of Nigeria despite the recent amendment of the VAT Act.

Conclusion/Recommendations

The paper has examined the divergent positions on the VAT status of lease transactions in Nigeria under the old VAT regime and the ambiguity contained in the amended VAT Act. The controversy regarding the applicability of VAT to rental income was at its peak prior to the enactment of the Finance Act 2020 as demonstrated by the Ell-ah and Essay case. Regrettably, the introduction of the definition of “goods” and “services” into the VAT Act by the Finance Act?appears not to have resolved the issues surrounding the application of VAT on lease/tenancy transactions involving real property in Nigeria. It is therefore proposed that, in order to promote certainty, there should be clarity through a more detailed amendment of the VAT Act and/or a definite judicial pronouncement on the subject matter.[46]Clarity is required to determine whether residential and commercial leases of real property qualify as taxable service within the scope of the Amended VAT Act. This can be achieved through clearly worded statutory provisions and/or a well reasoned superior court’s interpretation of the law. It is recommended that the National Assembly should define the meaning of “interest in land” for the purpose of VAT as clearly provided in some other jurisdictions. For instance in the England and Wales, “property” means land (including buildings and civil engineering works) while “interest in property” means any interest in, right over or license to occupy property.[47] Also, in some other jurisdictions the circumstances that will make a lease of property to be either deemed as a taxable supply or exempted are contained under the enabling law. In India, the GST Act stipulated a threshold thereby avoiding equivocality on the applicability of VAT on any commercial lease transaction in question.

Indeed, a VAT Modification Order may not be the suitable mode to resolve the issue as the Courts have held that the Minister of Finance cannot validly exercise any power to issue subsidiary legislation, even when such powers have been donated under the statute.[48]The rationale being that such donation of power runs contrary to the principle of separation of power embedded in Nigeria’s Constitution. It goes without saying, that any information Circular released by the FIRS does not have force of law.[49] However a FIRS circular or public notice will be useful to clarify that by virtue of the new provisions in the Finance Act 2020, VAT will be inapplicable to both lease of residential and commercial property of individuals and corporate entities in Nigeria. The need for this clarity is of utmost importance considering that Paragraph 4 of the Value Added Tax (Modification Order) 2020 lists “Lease and Rental of residential accommodation by persons other than corporate entities” as an exempted service. This creates the impression that VAT is applicable to commercial lease of real properties as opposed to lease of residential property by individuals.

To wrap this up, it is suggested that Nigeria should borrow a leaf from the legal provisions of other jurisdictions such as UK, Australia, India or Canada if the ambiguity in our VAT law will be clarified and ultimately lay to rest the knotty issue of VAT’s applicability to lease transactions or rental income on real properties.

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[1]Section 81 of the Act(Citation section) provides that the Act may be cited as the Finance Act 2020

[2]Ess-ay Holdings Limited v. Federal Inland Revenue Service (Ess-ay case),Unreported judgment in Appeal No: TAT/LZ/VAT/029/2019 P. 7

[3] CAP V1 Laws of the Federation (LFN) 2004

[4]Unreported,Judgment in Appeal No: TAT/SSZ/001/2019

[5] CAP V1 Laws of the Federation (LFN) 2004

[6]Ellah Case (n2) ?17

[7] All NTC vol. 6 Page 1

[8] Unreported judgment in Appeal No: TAT/LZ/VAT/029/2019

[9]VAT Act Cap V1, LFN 2004 s.46.

[10] (2010) 2 TLRN 151

[11] Unreported Judgment in Suit No: FHC/L/CS/1016/05

[12] [2013] 1 NRLR 88

[13](2018) LPELR-43930(CA)

[14]Ess-ay Case (n9) 10

[15] (2013)11 TLRN 84,The Court of Appeal affirmed the position in FBIR v Halliburton (WA) Ltd (2014) LPELR 24230 CA.

[16] Unreported Judgment in Suit No: FHC/L/CS/57/2015

[17] Unreported Judgment in Suit No: FHC/L/CS/1082/2019 delivered May 8, 2020

[18]September 9th and 10th 2020 respectively

[19] There is a chance that the decision may be appealed upwards to the Court of Appeal and the Supreme Court afterwards.

[20]‘Finance Act, 2019: What VAT?’(Bloomfield Law Practice 13 January,2020)<https://bloomfield-law.com/Publications/Finance_Act_2019_What_VAT.pdf>accessed 14 October 2020

[21] Note that there was a definition included in the earlier finance act passed in 2019 which was modified in the Finance Act 2020, the subject of review herein.

[22] S 44 (b) VAT Act

[23] Ibid. s 44 (b) (a) & (b)

[24]The decision in Ess-Ay case that VAT is?not applicable to incorporeal property will no longer apply under the dispensation after the amendment of the VAT Act

[25]‘Incorporeal Property Law and Legal Definition’ (USLegal) https://definitions.uslegal.com/i/incorporeal-property accessed 15 October, 2020.

[26]See CNOOC case and Essay case

[27](2013)9TLRN

[28]Bloomfield Law Practice, Finance Act, 2019: What VAT?(n16) 3

[29]See the case of Ekebelu&Ors v. Ejidike&Ors (2017)LCN/10546(CA)where the court adopted and relied on the definition of lease by Black's Law Dictionary 9th edition page 970 thus “contract by which a rightful possessor of real property conveys the right to use and occupy the property in exchange for consideration”. See also Star Finance & Property Ltd &Anor v NDIC(2012)10 NWLR (Pt.1309) pg.522

[30]Land Use Act 1978, ss. 1 and 5

[31] Kingsley Amaefule “Nigerian VAT: A Practitioner's Guide” (2017)?28(5)?Journal of International Taxation available at <https://www.ajumogobiaokeke.com/wp-content/uploads/2018/01/b367d3091af87f01728d287b52188dfe.pdf> accessed 14 October 2020.

[32] Interpretation Act LFN 2004 s. 18

[33]Ess-ay Case (n9)

[34] See Paragraph 3 of the Value Added Tax (Modification Order) 2020

[35]?Australian Government, Australian Taxation Office,Goods and Services TaxRuling(GSTR 2012 )7<https://www.ato.gov.au/law/view/document?DocID=GST/GSTR20127/NAT/ATO/00001&PiT=99991231235958#fp3> accessed 13October, 2020

[36]A New Tax System (Goods and Services Tax) Act 1999?ss 40-35

[37] HM Revenue and Customs, Opting to Tax Land and Buildings Notice 742A (16 April 2014) <https://www.gov.uk/guidance/opting-to-tax-land-and-buildings-notice-742a> accessed 13th October.

[38] Notice 742A (n 29) paragraphs 3.2 to 3.13

[39] UK Value Added Tax Act 1994

[40]‘Real World Law, Commercial Leases’ (DLA Piper, 1 March, 2019) <https://www.dlapiperrealworld.com/law/index.html?t=commercial-leases&s=rent&q=vat-on-rent&c=CA>

[41] Excise Tax Act(ETA) 1985, s 123.

[42]?Benjamin Alarie& Pierre-Pascal Gendron, “The VAT Treatment of Real and Immovable Property in Canada" in Robert van Brederode, ed, Immovable Property under VAT: A Comparative Global Analysis (Kluwer Law International, 2011)?also available at https://tspace.library.utoronto.ca/bitstream/1807/87988/3/The%20VAT%20Treatment_TSpace.pdf accessed 13 October,2020

[43]Excise Tax Act(ETA) 1985

[44]The Central Goods and Services Tax Act 2017

[45] ‘GST Policies on Income from Rent’ (Tax Guru, 30 November, 2019)<https://taxguru.in/goods-and-service-tax/gst-policies-income-rent.html> accessed ?13 October,2020

[46]‘Has the Finance Act 2019resolved the issues around VAT application on Leaseholds in Nigeria?’(Anderson Tax Digest, 29 September, 2020) <https://drive.google.com/file/d/1wvweyNinfUt_ttWhyDzHKi5A4fheuDwC/view> accessed 14 October, 2020

[47] See Option to Tax lands and Buildings Notice 742A

[48]The Registered Trustees of Hotel Owners and Managers Association of Lagos v. Attorney-General of Fed.&Anor?Unreported Judgment in Suit No: FHC/L/CS/1082/2019 delivered May 8, 2020.

[49] See Halliburton (WA) Limited v FBIR ?(2013)11 TLRN 84 at 110, Warm Spring Waters &Ors v.?FIRS Unreported, Suit No: FHC/L/CS/57/2015. See Ess-ay case, it was also acknowledged in the Ellah case that a circular lacks force of law.