Nigeria’s tax authorities are increasing scrutiny of transactions between related companies as part of efforts to boost revenue and reduce tax leakages.

The increased focus is backed by the Nigeria Tax Act 2025 (NTA 2025), which gives regulators more power to examine how companies price deals within their group.

Under Section 20 (1) of the Act, companies can only deduct expenses that are wholly and exclusively incurred for business purposes, allowing tax authorities to question and, in some cases, reject payments that do not meet this test.

“In today’s globalised economy, many companies operate across multiple jurisdictions through subsidiaries and affiliated entities,” Olayinka Adedeji, a tax and transfer pricing professional, wrote in a LinkedIn post.

“While this supports business expansion, it also creates opportunities for profits to be shifted from one country to another through related-party transactions.”

Adedeji explained that although these transactions are common in business, they are often open to abuse. She noted that companies regularly carry out activities such as management services, intercompany loans, and the use of intellectual property within their group.

However, problems arise when the pricing does not reflect what independent companies would agree under similar conditions, leading to profit being moved away from where it should be taxed.

This practice is not limited to multinational firms. Nigerian companies can also structure their operations in ways that shift profits to entities enjoying tax incentives, such as free zones or special reliefs.

According to Adedeji, this is why tax authorities are now paying closer attention to whether such transactions are fairly priced and supported by real business activity.

There is also a focus on ensuring that related-party transactions follow what is known as the arm’s length principle, meaning they should be priced as if the parties involved were independent of each other.

Where this is not the case, companies may be seen as understating profits and reducing their tax obligations.

Recent actions by tax authorities show that enforcement is becoming stricter. Companies are now required to provide detailed documentation to support their related-party transactions, including how prices are determined and whether the services provided offer real value.

In many cases, businesses are expected to go beyond basic reporting and clearly explain the purpose and benefit of each transaction.

Authorities are also paying closer attention to intercompany loans, management fees, and royalty payments, areas where profits can easily be shifted if not properly monitored.

This marks a move away from simply checking documents to actually assessing whether the transactions make business sense.

The tougher stance is reflected in the penalties. Companies that fail to submit the required transfer pricing documentation within the specified time face fines of up to 1 percent of the transaction value, along with additional daily penalties if the failure continues.

“The implementation of the new tax law will increase tax risks for companies, especially in the transfer pricing space,” Andersen said in a 2026 outlook article, adding that businesses should expect more detailed reviews of their intercompany transactions.

The stricter enforcement comes as Nigeria pushes to improve its tax revenue. The country’s tax-to-GDP ratio has risen to about 13.5 percent, although it still trails the African average.

Tax collections have also grown significantly, reaching about N21.7 trillion in 2024, above the N19.4 trillion target. Collections between January and August 2025 stood at N20.62 trillion, reflecting strong growth compared with the previous year.

With improved data systems and information sharing, tax authorities are now better able to track transactions and identify cases where profits may be understated or shifted.

For companies, this means higher compliance demands. Businesses are expected to keep proper records, justify their pricing, and ensure that transactions with related parties reflect real economic activity. It is no longer enough to simply record a transaction; companies must be able to explain and defend it during reviews.

Failure to do so could lead to penalties, higher tax bills, and in some cases disputes with tax authorities. As scrutiny increases, companies may also face higher compliance costs as they invest in proper documentation and advisory support.

Beyond Nigeria, countries across Africa are also tightening rules around related-party transactions as part of efforts to curb profit shifting and improve transparency. As business operations become more complex, this level of scrutiny is expected to continue.

For companies operating in Nigeria, the message is clear: transactions with related parties must be fair, properly priced, and aligned with market value, as tax authorities take a closer look at how profits are reported. (BusinessDay)

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