Firms face stricter scrutiny as new tax law targets artificial transactions

Companies operating in Nigeria are set to face closer review under a new tax law that empowers authorities to disregard transactions designed to reduce tax liabilities.

According to the Nigeria Tax Act (NTA), tax authorities are allowed to “disregard any disposition or transaction” considered artificial and make adjustments to counteract any reduction in tax liability, marking a significant expansion of enforcement powers.

The provision signals a shift in how tax compliance will be assessed, moving beyond the legal form of transactions to focus on their underlying economic reality.

“For countries like Nigeria, where tax revenue plays an important role in national development, protecting the tax base has become a priority,” said Olayinka Adedeji, a transfer pricing expert.

Read also: LIRS extends income tax filing deadline to April 14

Under the new framework, transactions between connected parties may be treated as artificial where they are not conducted at arm’s length or are structured primarily to obtain a tax advantage. This includes arrangements involving trusts, covenants, or other agreements that lack genuine commercial substance.

Multinational companies that use artificial deductions or complex structures to reduce their tax burden below the minimum effective tax rate of 15 percent are also expected to come under increased scrutiny.

In practical terms, the measure places a wide range of corporate structures in focus, particularly those involving subsidiaries, family-owned businesses, and affiliated entities where profits may be shifted or liabilities reduced through internal arrangements.

“Though tax avoidance is legal, aggressive tax avoidance schemes are problematic,” said Samson Olubode, a chief finance officer, highlighting growing concerns around the use of complex structures to minimise tax obligations.

Read also: NiMet seeks tax breaks, PPP framework to scale meteorological infrastructure

An article by PwC titled ‘Changes to expect for businesses in the Nigerian Tax Reform Act’ shows that the reform strengthens transfer pricing rules and introduces tighter disclosure requirements around aggressive tax planning strategies.

Structures involving family trusts, offshore entities, and closely held companies are expected to face closer examination, with provisions that could see undistributed profits taxed as though they had been distributed.

The changes reflect a broader move towards a substance-over-form approach, a principle widely applied in global tax systems, where authorities assess the real economic activity behind transactions rather than how they are legally structured.

Analysts say the provision could help reduce revenue leakages linked to profit shifting and artificial arrangements, particularly among large corporations and high-net-worth individuals.

The reform also comes at a time when Nigeria is looking to boost domestic revenue mobilisation. The government has set an ambitious revenue target of N40.71 trillion in 2026, up from N28.3 trillion collected in 2025, making improved compliance a central priority.

However, the expanded powers granted to tax authorities are raising concerns about potential uncertainty for businesses.

Experts warn that the broad interpretation of what qualifies as an “artificial” transaction could lead to disputes, especially if applied inconsistently or without clear administrative guidance.

For companies, the implication is a shift in how transactions are structured and documented.

“For corporations, success now depends not just on strategic fit but on how well tax risks are identified, priced, and managed,” said Oluwatobi Adedapo, an associate chartered accountant.

Advisers say businesses will need to take a more cautious approach to structuring transactions, particularly those involving related parties.

Olatilewa Oni, an expert on the subject, explained in a LinkedIn post that companies should reassess their existing arrangements and ensure they can withstand regulatory scrutiny.

This includes reviewing holding structures, related-party transactions, and group financing arrangements, as well as clearly documenting the commercial purpose behind each transaction.

He also advised firms to apply a “substance test” to their operations and seek advance tax rulings where necessary, particularly for structures that may raise compliance concerns.

While the provision is designed to close loopholes and improve fairness in the tax system, its effectiveness will depend on how transparently and consistently it is enforced.

As Nigeria strengthens enforcement through a more data-driven tax system, the balance between closing loopholes and sustaining investor confidence will be key.