Lagos Tax Authority Issues Stern Warning on Artificial Transactions
The Lagos State Internal Revenue Service (LIRS) has issued a firm warning to all taxpayers within the state against engaging in artificial or fictitious transactions designed to reduce tax obligations. This directive comes as part of the agency's efforts to enforce compliance with the Nigeria Tax Administration Act (NTAA) 2025, which provides the legal framework for addressing tax avoidance schemes.
Scope of the Warning and Legal Basis
The warning applies comprehensively to companies, individuals, partnerships, trusts, and other taxpayers operating in Lagos State. According to a public notice dated January 21, 2026, and signed by Executive Chairman Ayodele Subair, the LIRS will disregard any transaction deemed artificial or fictitious under Section 46 of the NTAA 2025, particularly those resulting in reduced tax liability.
The agency emphasized that transactions between connected persons—such as related companies or individuals—will be treated as artificial if not conducted at arm's length. This means transactions must occur on terms that independent parties would normally agree to, ensuring fair market value and transparency.
Consequences of Non-Compliance
Taxpayers found using artificial transactions to reduce their tax burden face several serious consequences:
- Revised tax assessments with additional tax payments
- Administrative penalties and interest charges
- Audits and investigations triggered by suspicious transactions
- Legal actions under relevant tax legislation
The LIRS retains the authority to recast or disregard any arrangement primarily structured to avoid tax obligations. Taxpayers affected by such adjustments will be liable for revised assessments and any additional taxes arising, though they maintain the right to appeal these decisions.
Compliance Requirements for Taxpayers
To avoid penalties, the LIRS advises taxpayers to ensure all transactions are:
- Genuine and commercially driven with proper business justification
- Properly documented with complete records maintained
- Transparent regarding relationships with connected persons
- Responsive to clarification requests during audits or reviews
The agency specifically referenced the Income Tax (Transfer Pricing) Regulations, 2018, which require disclosure of related-party transactions. This applies particularly when at least one party is not a corporate entity, covering various dealings including loans, write-offs, leases, and advances between companies and individual shareholders.
Implementation Timeline and Enforcement
The public notice takes effect from January 1, 2026, aligning with the commencement of newly gazetted tax laws. This gives taxpayers time to review their transactions and ensure compliance before enforcement begins.
The LIRS has demonstrated its enforcement capability through recent actions, including shutting down a Shoprite outlet at Ikeja City Mall for tax non-compliance. This action was taken under Section 94 of the Personal Income Tax Act, 2011 (as amended), indicating the agency's willingness to use available legal mechanisms to ensure tax compliance.
Transparent and accurate disclosures form part of taxpayers' legal obligations, and failure to comply or providing misleading information will attract administrative penalties. The LIRS emphasizes that maintaining proper documentation and responding promptly to information requests are essential components of tax compliance in Lagos State.
