Nigeria's business sector may face increased costs for foreign borrowing due to impending tax reforms. According to a report by tax advisory firm Kreston Pedabo, the new tax regime will remove longstanding exemptions on interest paid on foreign loans and tighten scrutiny of financing arrangements between related companies. This change may reduce returns for overseas lenders and raise borrowing costs for Nigerian businesses. The report, titled Impact of the Nigeria Tax Act 2025 on Related Party Financing, highlights significant shifts in Nigeria's corporate tax framework.
The new tax regime in Nigeria expands transfer pricing obligations, restricts interest deductions, and subjects interest on foreign loans to a 10 per cent withholding tax. This move is expected to increase the cost of foreign borrowing for Nigerian businesses and reduce net yields for overseas lenders. As a result, foreign investment decisions may be influenced, and businesses may need to reassess their financing arrangements. Kreston Pedabo has urged multinational and domestic corporate groups to review their intercompany loan terms, debt-to-equity ratios, and transfer pricing policies.
The report, authored by Adewale Kayode, Ayodeji Adenugba, and Esther Nofiu, notes that the reforms bring Nigeria closer to Organisation for Economic Co-operation and Development (OECD) standards. These standards aim to curb profit shifting and ensure taxes are paid where economic value is created. The new law places greater scrutiny on transactions between connected companies, including shareholder loans, parent-subsidiary financing, affiliate lending, guarantees, and other intra-group funding arrangements.
The changes may have significant implications for businesses in Nigeria. With increased scrutiny on financing arrangements, companies may need to demonstrate commercial substance and adequate documentation for their transactions. Those lacking sufficient documentation may face heightened tax scrutiny under the new regime. As a result, businesses may need to adapt their strategies to comply with the new regulations.
Kreston Pedabo's report emphasizes the need for businesses to review their financing arrangements in light of the new tax regime. The firm recommends that companies assess their intercompany loan terms, debt-to-equity ratios, and transfer pricing policies to ensure compliance. This may involve revising existing agreements or renegotiating terms with related parties.
The new tax regime is part of a broader effort to align Nigeria's corporate tax framework with international standards. By adopting OECD standards, Nigeria aims to prevent profit shifting and ensure that taxes are paid where economic value is created. This move may have far-reaching implications for businesses operating in Nigeria and may influence foreign investment decisions.
The implementation of the new tax regime is expected to have a significant impact on Nigeria's business sector. As companies adapt to the changes, they may need to reassess their financing strategies and ensure compliance with the new regulations. The outcome may be an increase in the cost of foreign borrowing for Nigerian businesses, potentially influencing investment decisions and economic growth.
Key points
- The new tax regime in Nigeria may increase the cost of foreign borrowing for businesses.
- The reforms aim to curb profit shifting and ensure taxes are paid where economic value is created.
- Businesses may need to review their intercompany loan terms, debt-to-equity ratios, and transfer pricing policies to ensure compliance.
