Nigerian government tightens deductions, raises foreign firms' taxes

Nigeria has introduced stricter tax rules targeting multinational companies operating in the country as part of its efforts to curb profit shifting and boost government revenue.

Under the new Nigeria Tax Act 2025, royalty payments made by foreign companies to their parent firms abroad will no longer automatically qualify as deductible business expenses when calculating taxable income.

Authorities say the change addresses a long-standing practice in which multinational firms reduce their taxable profits through payments related to intellectual property, brand licensing, or technical services.

According to tax policy consultant Akintunde Ogunsola, the previous system allowed companies to deduct royalties worth about 5 percent of their earnings.

“Most of these multinational firms usually shift the royalties to their related companies abroad,” Ogunsola said. “This new tax law clearly states that these royalties are no longer allowable deductions.”

Previously, companies could claim such deductions under transfer pricing regulations, which govern transactions between related companies across borders. However, tax authorities say the framework created loopholes that enabled firms to move profits generated locally to overseas affiliates while reducing their tax obligations in Nigeria.

Tax policy expert Solomon Arasah said the reform aims to ensure deductions are granted only for legitimate business transactions.

“It was discovered over time that some companies were using this as a way to reduce the amount of tax they would pay in Nigeria,” Arasah said. “The government is trying to curb that and ensure that even if deductions are claimed, it must be clearly shown that they were actually incurred in the regular course of business.”

The new rules are part of Nigeria's broader efforts to strengthen domestic revenue collection and align with global initiatives to combat corporate tax avoidance.

These changes are expected to particularly affect multinational firms in sectors such as oil and gas, telecommunications, mining, and technology.