Artificial Transactions: Anti-abuse Guidelines

Section 22 of the Companies Income Tax Act Cap C21 LFN 2004 (as amended) empowers the Federal Inland Revenue Service (FIRS) to disregard any fictitious or artificial disposition* or transactions that reduces or would reduce tax payable by any taxable entity, and direct adjustments as appropriate. In the words of the law:

Where the Service is of opinion that any disposition is not in fact given effect to or that any transaction which reduces or would reduce the amount of any tax payable is artificial or fictitious, it may disregard any such disposition or direct that such adjustments shall be made as respects liability to tax as it considers appropriate so as to counteract the reduction of liability to tax affected, or reduction which would otherwise be affected, by the transaction and any company concerned shall be assessable accordingly.

Consequently, the FIRS has issued an Information Circular to give an anti-abuse guidelines, towards checking artificial or fictitious transactions, especially with the introduction of the Finance Act, 2019 that has a couple of conditional tax benefits. The Circular reads:


i. transactions or business dealings being carried on by a company prior to the commencement of the Finance Act 2019 is subsequently split between one or more entities, for the purposes of enjoying the benefit provided for small companies under CITA, the Service shall discountenance such splitting, aggregate such transactions or business dealings and attribute all to the company originally doing the business, for the purpose of application or otherwise of this provision.

ii. A person, after the commencement of the Finance Act 2019, incorporates, or uses, two or more companies to carry on a contract or business that could have been otherwise carried out by one company and the Service is convinced that the arrangement by which the business or contract is split is targeted at obtaining the benefit available to small companies under CITA, the value of such contract or business shall be aggregated and taxed as appropriate in the hand of one of the companies.

iii. A company that conceals its turnover for the purposes of obtaining tax benefit available to small companies under CITA shall be prosecuted along with its directors and relevant principal officers in accordance with section 42 of the FIRS Act. In addition, taxes due shall be recovered with penalties and interest.

*The CITA defines disposition as:

a. any trust, grant, covenant, agreement or arrangement;

b. transactions between persons one of whom either has control over the other or, in the case of individuals, who are related to each other or between persons both of whom are controlled by some other person, shall be deemed to be artificial or fictitious if in the opinion of the Service those transactions have not been made on terms which might fairly have been expected to have been made by persons engaged in the same or similar activities dealing with one another at arm‘s length.

However, Section 22 (3) gives any a taxpayer that has been served a tax assessment based on the above direction, the right of appeal.

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