In line with Section 46 of the Nigeria Tax Administration Act (NTAA) 2025, the Lagos State Internal Revenue Service (LIRS) has established a strict framework to prevent tax avoidance through “artificial” or fictitious transactions.

Substance Over Form.

The LIRS now has the legal power to look past the legal “labels” of a transaction to its true economic purpose. If a deal is made primarily to reduce tax rather than for a real business reason, it will be disregarded for tax purposes.

What makes a transaction Artificial?

• The transaction doesn’t make commercial sense without the tax break.
• Deals between connected persons (like a business and its owner, or sister companies) that aren’t at fair market prices.
• Transactions that exist only on paper to shift profits or create artificial losses.

If the LIRS determines a transaction is artificial, it can:

• Act as if the transaction never happened.
• Recalculate the tax based on what a normal market transaction would have looked like.
• Issue a new tax bill reflecting the higher (corrected) tax amount.

Penalties for Artificial Schemes

Engaging in these transactions doesn’t just result in a higher tax bill; it also triggers fines for providing inaccurate information, additional costs for the unpaid tax portion and a higher risk of being flagged for a comprehensive tax investigation.

Key Takeaway: The LIRS will now ignore or “recast” any business deal that lacks a genuine commercial purpose, especially between related parties, and will tax you based on the real market value of the transaction. You must maintain detailed records that prove the commercial (not just tax) motivation behind your business deals.