Introduction

In the shipping industry, vessels are sold and purchased either new built, second-hand or as scraps. Transactions in the second-hand market shift ownership of existing vessels between different shipowners or shipping companies. Thus, in the second-hand market, a typical ship sale and purchase transaction involves the transfer of the ownership of a not-so-new vessel between ship-owning entities and across different countries, as the case may be.

In structuring a multi-jurisdictional ship sale and purchase transaction, it is typical for parties to consider the tax implications of such transactions and, where possible, seek ways to limit their tax liabilities, thereby limiting their expenditure and maximizing their expected profit from the transaction. A major tax consideration for shipowners and/or financiers in ship acquisition transactions is the liability to pay the Nigerian value added tax (“VAT”).

The Nigerian VAT Regime

The Value Added Tax Act (the “VAT Act”) imposes a tax on the supply of all goods and services in Nigeria, except the goods and services listed in the First Schedule to the VAT Act. The VAT Act (as amended)¹ also states that, for the purpose of the Act, goods and services consumed or otherwise utilized in Nigeria are supplied in Nigeria.

To characterize a transaction as a supply of goods or services in Nigeria, the transaction must fall within the scope of VAT Act and the goods and services supplied must be deemed to be in Nigeria at the time of supply. Section 2(3) of the VAT Act provides that a taxable supply shall be deemed to take place in Nigeria if:

(a) the goods are physically located in Nigeria at the time of supply, imported into Nigeria, assembled in Nigeria or installed in Nigeria; or the beneficial owner of the goods is a taxable person in Nigeria and the goods or the right in the goods is situated, registered or exercisable in Nigeria;

(b) the service is rendered in Nigeria by a person physically present in Nigeria at the time of providing the service, or the service is provided to and consumed by a person in Nigeria, regardless of the place where the service is rendered or the physical location of the person who has the legal or contractual obligation to render such service; or the service is connected with existing immovable property located in Nigeria; and

(c) the supply is related to an incorporeal exploited by a person in Nigeria or the right is registered in Nigeria, assigned to, or acquired by a person in Nigeria, irrespective of the place of payment for the exploitation, or the incorporeal is connected with a tangible or immovable asset located in Nigeria.

The VAT Act (as amended)² further provides that the time of supply is either when an invoice or receipt is issued, or when the payment of consideration is due or received by the supplier, whichever occurs first. However, where invoices are not issued for the supply, the time of supply is the time of removal of the object from the supplier’s premises or otherwise, when the object becomes available to the recipient.

According to the Federal Inland Revenue Service (“FIRS”), the boundaries of “Nigeria” for VAT purposes, means “the Federal Republic of Nigeria including any area outside the territorial waters of the Federal Republic of Nigeria which, in accordance, with international law has been or may hereafter be designated under the laws of the Federal Republic of Nigeria concerning the continental shelf, as an area within which the rights of the Federal Republic of Nigeria with respect to the sea-bed and their natural resources may be exercised”.³

Vessel sale and purchase Transaction between Nigerian and foreign shipowners

From the above, when a Nigerian shipowner purchases a vessel from a foreign shipowner, the transaction will be subject to VAT in Nigeria if:

(a) the vessel is physically located in Nigeria at the time of sale - this may be the case where the vessel was trading in Nigeria under a charter or other arrangements before the sale, and it is immaterial that the vessel sails out of Nigeria immediately after the sale;

(b) the vessel is imported into Nigeria after the sale, irrespective of the vessel’s flag at the time of concluding the transaction; or

(c) the vessel is registered under the Nigerian flag irrespective of its physical location.

On the other hand, when a foreign shipowner purchases a vessel from a Nigerian shipowner, the transaction will be subject to VAT in Nigeria if the ship is physically located in Nigeria at the time of the sale. However, when the vessel is exported for physical delivery to a foreign buyer either prior to or upon completion of the sale, the transaction will not be subject to VAT,⁴ thereby said to be exempt from VAT for exported goods.

In a vessel sale and lease-back transaction, the factors described above will guide parties and the tax authority in determining whether VAT will be payable in Nigeria. However, the post-sale lease of the vessel for trading or other operations in Nigeria will be subject to relevant taxes and/or duties based on the transaction structure and mode of importation.

Liability to charge, withhold and remit Nigerian VAT

The VAT Act (as amended) authorises a non-resident person that makes a taxable supply to Nigeria to register with the FIRS, obtain a Tax Identification Number (TIN) and include the VAT payable for the supply in its invoice. Therefore, it may not be realistic for a foreign ship owner, who intends to sell a vessel to a Nigerian entity as a one-off transaction, to register with the FIRS, obtain a TIN, charge VAT on the purchase price and state same in its invoice.

Section 10(3) of the VAT Act (as amended) requires the receiver of a taxable supply in Nigeria, or any person appointed by FIRS, to withhold or collect the tax payable on the transaction and remit same to FIRS. As such, unless the foreign seller of a vessel has assumed the responsibility of collecting and remitting the VAT payable on the transaction,⁵ the Nigerian purchaser has the obligation to withhold the VAT sum stated in the invoice and remit same to the FIRS. When the invoice does not contain the VAT element of the transaction, the Nigerian receiver of a taxable supply is required to self-account for the VAT payable on the transaction by computing the applicable VAT and remitting the sum to the FIRS accordingly.⁶ The person who has the duty to withhold VAT is required to submit returns, including a schedule showing the details of the supplier, the purchase price, the VAT payable and the month of return.⁷ Failure to charge or remit the applicable VAT on a transaction attracts a penalty under the VAT Act.

Conclusion

With the increase in international vessel sale and purchase transactions involving Nigerian parties, it would not be surprising for tax authorities to demand unpaid VAT from companies. Consequently, parties involved in such transactions are advised to consider the applicable taxes at the negotiation stage of the transactions and to seek professional clarification or advice on the tax implications of a proposed transaction structure before adopting same.

1. The VAT Act was initially enacted as Decree 102 of 1993, and amended in 1996, 1999 and 2007, as well as the Finance Acts enacted in 2019, 2020, 2021 and 2023.
2. Section 2A of the VAT Act (as amended by Section 41 of the Finance Act 2020).
3. See Section 69 of the Federal Inland Revenue Service (Establishment) Act (as amended by Section 56 of the Finance Act 2020) and the FIRS Information Circular on “Clarification on the Taxation of Seafarers and Onshore or Offshore Platform Workers” published on 3 June 2021.
4. Item 6 of the First Schedule to the VAT Act exempts “all exports” from the supply of goods and services for which VAT will be charged in Nigeria.
5. At the rate of 7.5% of the purchase price.
6. Section 14(4) of the VAT Act. See also the FIRS Information Circular on VAT Withholding and Self-Accounting Guidelines dated 3 March 2023.
7. See Section 13(3) of the VAT Act (as amended) and the FIRS Information Circular of 3 March 2023 which provides a guideline on the withholding and self-account of VAT.