Nigeria: an update on recent tax developments

Wednesday 6 October 2021

Lolade Ososami
Udo Udoma & Belo-Osagie, Lagos

There are two significant developments that may alter the face of taxation in Nigeria at a domestic and international level.

The first is the possibility of a decentralised VAT system, whereby each of the 36 states of the federation would have the right to impose and administer VAT on all taxable supplies.

The second is Nigeria’s refusal to endorse the Organisation for Economic Cooperation and Development (OECD) Inclusive Framework’s Pillar One proposal on tackling the tax challenges of digitalisation.

The contention over VAT collection

Nigeria operates a federal system of government whereby power is shared by three tiers of government: the federal government, state governments and local governments. Under Section 4 of the 1999 Constitution of the Federal Republic of Nigeria (the Constitution) the scope of the legislative powers of each tier of government is set out in Schedule II to the Constitution and divided into an Exclusive Legislative List and a Concurrent Legislative List.

The Exclusive Legislative List expressly sets out the matters in respect of which only the federal government can legislate upon, while the Concurrent Legislative List sets out matters in respect of which both the federal and the state governments can legislate upon. A third list, which was repealed prior to the amendment of the Constitution, is the Residual List. In its place is a provision in Section 4(7) of the Constitution, which gives states the power to legislate over any matter that is not expressly stated in the Exclusive Legislative List.

The federal government has the power under the Exclusive Legislative List to legislate over stamp duties, taxation of incomes, profits and capital gains. It also has the power under the Concurrent Legislative List to delegate the collection of those taxes to the state government or other authority of a state.

Nigeria introduced value-added tax (VAT) into its tax system in 1993, when the country was still under a military regime. The intention was that VAT would replace sales tax (which was charged and collected at the state level on intra-state sales of a specific list of goods and services, and by the federal government on inter-state sales and cross-border sales) and would be a sub-national tax which would be shared among the state and local governments, whereas the federal government will administer the tax on their behalf and would be allocated a percentage of the VAT collected as an administration fee. Section 40 of the Value Added Tax Act[1] provides a sharing ratio of 15 per cent for federal, 50 per cent for states and 35 per cent for local governments. Twenty per cent of the amount to be shared among the states would be based on derivation; 30 per cent would be based on population and 50 per cent would be based on equality.

In September 2020, the Attorney-General of Rivers State – Nigeria’s largest oil-producing state, filed a suit[2] at the Federal High Court (FHC) against the Federal Inland Revenue Service (FIRS) and the Attorney-General of the Federation, challenging the constitutional basis for the imposition and collection of VAT by the federal government, which was not included in the Exclusive or Concurrent Legislative Lists. The judge ruled in favour of the Attorney-General of Rivers State and declared that the federal government does not have the legislative authority to impose or charge VAT because consumption tax does not fall within the scope of taxes stated in the Exclusive Legislative List.

On the strength of the FHC’s decision, the Rivers State Government:

  • passed the Value Added Tax Law of Rivers State No 4 of 2021;
  • ordered consumers within the state to charge VAT on all supplies of goods and services within the state; and
  • to remit the VAT collected to the Rivers State Government with immediate effect.

Within weeks of the Rivers State judgment, Lagos State ­– the commercial nerve centre and most populated state in Nigeria – passed its own VAT Law which provided that VAT will be charged at 6 per cent on all supplies of goods and services within the state. Subsequently, several states have also indicated an intention to pass their own VAT laws.

The FIRS has appealed the FHC decision to the Court of Appeal (COA) sitting in Abuja. The COA has ordered that parties maintain status quo ante bellum and has directed that enforcement of the VAT Law of Rivers State be suspended pending the determination of the suit. The decision of the COA has further been appealed to the Supreme Court. While the matter is yet to be decided by the courts, there has been an ongoing debate about:

  • the implementation of fiscal federalism in Nigeria;
  • the validity of the VAT Act; and
  • whether or not states should be allowed to pass their own VAT Laws and collect VAT.

This is not the first time that the scope of the legislative powers of the federal and state governments has been the subject of a dispute in relation to taxation. However, this case has come at a time when VAT has become the largest source of tax revenue for the federal government. In 2020, VAT revenue increased by 29.3 per cent from 2019,[3] surpassing that of Petroleum Profit Tax, which had consistently been the largest tax revenue source for the country for years. VAT has also been one of the ways by which the federal government has sought to track the supply of goods and services into Nigeria by non-resident companies that do not have a taxable base in Nigeria through a mandatory VAT registration requirement.

As we await the judgment of the Supreme Court, some possible outcomes include:

  • a decision in favour of the FIRS, in which case, the status quo is maintained; or
  • a judgment in favour of the states, which raises concerns about incidences of multiple taxation and increased compliance costs for taxpayers, as was the case under the sales tax regime.

The federal government and the states may reach a political compromise where VAT is administered at a state level on domestic supplies, while VAT on imports and cross-border supplies is administered by the federal government. Finally, the National Assembly may decide to revise the current sharing formula to what is perceived as more equitable; or attempt to amend the Constitution to include VAT on the Exclusive or Concurrent Legislative Lists. This would require the consent of two-thirds of the states which does not seem feasible and could be a prolonged process. Considering the potential loss that both the federal government and the states could suffer in the face of the uncertainty this has created for taxpayers, an expedited line of action can be expected. The outcome of this conundrum could affect years of progress made in building the VAT collection and compliance system in Nigeria; for instance, the electronic filing and remittance processes that have been introduced by the FIRS to make VAT compliance in Nigeria seamless for both resident and non-resident suppliers. Some states in Nigeria lack the capacity to manage the digital infrastructure that would aid VAT compliance, which may invariably increase the cost of doing business in Nigeria for non-resident suppliers involved in cross-border trade.

Nigeria’s response to the OECD Pillar One and Pillar Two proposals

In July 2021 the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the OECD IF) announced that it reached an agreement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy, with a detailed implementation plan to follow by October 2021. Nigeria is one of the African countries that refused to endorse the Pillar One and Two Proposals.

Under the Pillar One proposal, there will be a special purpose nexus rule that will be determined on the profits that a multinational enterprise (MNE) derives from a market jurisdiction, based on the GDP of the market jurisdiction. The special purpose nexus rule will be used to determine whether a jurisdiction qualifies for the Amount A allocation.

The concerns of African countries on the Pillar One proposal are contained in a statement[4] issued by the African Tax Administration Forum (ATAF) on 1 July 2021. First, ATAF considers that the proposals would result in insufficient profits being reallocated to market jurisdictions; secondly, that the allocation of profits to a market jurisdiction should not be based on an MNE’s residual profits but on total profits; and that a binding dispute resolution mechanism should not be mandatory but should be an option for African countries with limited capacity and a low level of mutual agreement procedure (MAP) disputes.

Regarding the Pillar Two proposals, ATAF recommends a minimum corporate tax of 20 per cent and is of the view that the undertaxed payment rule (UTPR) or subject to tax rule (STTR) should be given priority over the income inclusive rule (IIR), which tends to favour developed countries more.

Nigeria’s reservation, as expressed by the Federal Minister of Finance, Budget, and National Planning, is that the threshold set out under Pillar One would significantly reduce any benefit that may accrue to market jurisdictions, and that the mandatory binding dispute resolution mechanism embedded in the proposal is not acceptable.

In 2020, Nigeria introduced a ‘digital PE rule’ based on the existence of a significant economic presence (SEP). The introduction of the SEP rule into its domestic laws[5] was a unilateral approach to tackling the tax challenges of digitalisation. The scope of its application was limited to countries that did not have a double tax treaty with Nigeria. This meant that non-resident countries resident in a non-treaty jurisdiction, which carry on only digital activities in Nigeria, would not have a taxable presence in Nigeria. Considering Nigeria’s narrow treaty network, the SEP rule was considered to cover a relatively broad base. Nigeria’s reluctance is that when compared with the Pillar One proposal, Nigeria stands to gain more from the unilateral approach.


The struggle for a larger share of taxing rights is one that Nigeria is currently facing at a domestic and at an international level. At the international level, Nigeria may not have a choice but to consent to the Pillar One and Two proposals. The OECD is determined to proceed with the implementation of the proposals and has expressed its commitment to ensuring that the few members of the Inclusive Framework that have not signed the agreement, will be persuaded to do so.[6] At the domestic level, depending on how the Supreme Court rules, VAT could become a sub-national tax that only state governments can impose and collect, or a tax administered by both tiers of government.


[1] Chapter VI, Laws of the Federation of Nigeria 2004 (as amended).

[2] AG Rivers State v FIRS & AG Federation (FHC/PH/CS/1492020).

[3] ‘Sectoral Distribution of Value Added Tax in Nigeria’ (National Bureau of Statistics), see https:/nigerianstat.gov.ng/elibrary/read/1241053, accessed 6 October 2021.

[4] ‘130 Inclusive Framework countries and jurisdictions join a new two-pillar plan to reform international taxation rules – What does this mean for Africa?’ (ATAF, 1 July 2021), see www.ataftax.org/130-inclusive-framework-countries-and-jurisdictions-join-a-new-two-pillar-plan-to-reform-international-taxation-rules-what-does-this-mean-for-africa accessed 4 October 2021.

[5] The SEP rule was introduced by the Finance Act 2019 as an amendment to the Companies Income Tax Act Cap C21 Laws of the Federation of Nigeria 2004 (as amended). It took effect after the passing of the Companies Income Tax (Significant Economic Presence) Order 2020.

[6] ‘Addressing the Tax Challenges arising from the Digitalisation of the Economy’, (OECD, July 2021), see www.oecd.org/tax/beps/brochure-addressing-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.pdf, accessed 6 October 2021.