Nigeria’s tax authorities are ramping up enforcement across corporate structures as the government intensifies efforts to block revenue leakages and improve compliance in an increasingly complex business environment.
The renewed focus is particularly targeted at transactions between related entities, an area long identified by regulators as vulnerable to profit shifting and tax base erosion.
Tax authorities tighten scrutiny on related-party transactions
Recent policy shifts confirm that tax authorities tighten scrutiny on related-party transactions, backed by expanded powers under the Nigeria Tax Act 2025, which strengthens regulatory oversight on how companies structure intra-group dealings.
Under the revised framework, regulators are now empowered to closely examine whether expenses claimed by companies are “wholly and exclusively” incurred for legitimate business purposes—a key threshold that determines tax deductibility.
Experts say this provision gives authorities broader discretion to question or disallow transactions that appear artificial, inflated, or lacking economic substance.
Rising concerns over profit shifting
The move comes amid growing concerns about profit shifting, a practice where companies allocate income to jurisdictions with lower tax obligations.
According to tax professionals, multinational corporations and even local firms often engage in intercompany transactions such as management fees, intellectual property licensing, and intra-group loans.
While these arrangements are legitimate business tools, regulators warn that they can be manipulated to reduce taxable income in higher-tax jurisdictions.
As a result, tax authorities tighten scrutiny on related-party transactions, ensuring that such dealings reflect market realities rather than artificial pricing strategies.
Enforcement of the arm’s length principle
A central pillar of the new enforcement regime is the application of the arm’s length principle, a globally recognised standard in transfer pricing.
This principle requires that transactions between related entities be priced as if they were conducted between independent parties under similar conditions.
Tax authorities are now placing greater emphasis on whether companies adhere to this rule, with increased audits and documentation requirements.
Failure to comply could lead to adjustments in declared profits, resulting in higher tax liabilities for affected companies.
Increased documentation and compliance burden
One of the most immediate impacts of the policy shift is the heightened compliance burden on businesses.
Companies are now required to maintain detailed transfer pricing documentation, including evidence of how transaction prices were determined and whether they reflect economic value.
As tax authorities tighten scrutiny on related-party transactions, businesses must go beyond basic reporting to provide clear justifications for each transaction.
This includes demonstrating the commercial rationale behind intercompany arrangements and proving that services rendered or payments made deliver tangible benefits.
Focus on high-risk transaction categories
Regulators are paying particular attention to transaction types commonly associated with profit shifting.
These include intercompany loans, management service fees, and royalty payments for intellectual property—areas where pricing can be easily manipulated.
By intensifying oversight in these categories, authorities aim to close loopholes that have historically enabled tax avoidance.
Analysts note that the shift reflects a move from procedural compliance checks to substantive economic assessments, where the focus is on the real value and purpose of transactions.
Stricter penalties for non-compliance
The tougher stance is reinforced by stricter penalties under the new tax framework.
Companies that fail to submit required documentation within specified timelines face fines of up to one per cent of the transaction value, alongside additional daily penalties for continued non-compliance.
This enforcement approach signals that as tax authorities tighten scrutiny on related-party transactions, regulators are prepared to impose significant financial consequences on defaulting entities.
Tax advisory firms warn that businesses must proactively review their structures to mitigate risks and avoid costly disputes.
Impact on Nigeria’s revenue drive
The crackdown is part of a broader strategy to enhance Nigeria’s tax revenue performance.
Recent data shows that the country’s tax-to-GDP ratio has improved to approximately 13.5 per cent, although it still lags behind the African average.
Tax collections have also recorded strong growth, reaching about N21.7 trillion in 2024 and maintaining momentum into 2025.
Authorities believe that tightening oversight on related-party transactions will further boost revenue by ensuring that profits are taxed where economic activities actually occur.
Technology and data-driven enforcement
Another critical factor driving the new approach is the adoption of advanced data systems and information-sharing mechanisms.
With improved access to financial data, tax authorities are better equipped to identify inconsistencies, track cross-border transactions, and detect potential cases of profit shifting.
This technological shift enhances the ability of regulators to enforce compliance and reduces reliance on manual audits.
As tax authorities tighten scrutiny on related-party transactions, data analytics is expected to play an increasingly central role in enforcement strategies.
Implications for businesses and investors
For companies operating in Nigeria, the evolving regulatory landscape presents both challenges and opportunities.
While increased scrutiny raises compliance costs and administrative complexity, it also promotes transparency and levels the playing field for businesses that adhere to best practices.
Investors, on the other hand, may view the reforms as a positive signal of Nigeria’s commitment to strengthening fiscal governance and improving revenue mobilisation.
However, businesses will need to invest in robust tax planning, documentation, and advisory support to navigate the new requirements effectively.
Outlook for tax enforcement in Nigeria
Looking ahead, the trend that tax authorities tighten scrutiny on related-party transactions is expected to intensify as regulators continue to refine enforcement mechanisms.
Experts predict that audits will become more detailed, with greater emphasis on economic substance and real value creation.
In the long term, these measures could help Nigeria build a more resilient tax system, reduce reliance on volatile revenue sources, and enhance fiscal sustainability.
Ultimately, the message from regulators is clear: companies must ensure that their related-party transactions are transparent, properly priced, and fully compliant with the law in an era of heightened tax accountability.
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