In Lagos, a mid-tier manufacturing company recently found itself overwhelmed with audit notices: one from the Federal Inland Revenue Service (FIRS) and another from the state tax authority, alongside separate demands for VAT reconciliation and a transfer pricing audit. All of these landed within a two-month period. Unfortunately, this scenario is no anomaly but increasingly reflective of Nigeria’s current tax environment: one marked by intensifying audits and revenue-driven scrutiny of the formal economy.
A misguided revenue strategy
Despite having one of the lowest tax-to-GDP ratios in Africa, 10.86 percent, according to FIRS data from 2023, Nigeria’s approach to improving revenue is raising red flags. While the low ratio suggests the need for enhanced revenue collection, the government’s emphasis has skewed dangerously toward enforcement over reform. Instead of widening the tax base, authorities are pushing harder on already tax-compliant businesses.
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Tax agencies are under pressure to deliver higher revenues without equivalent improvements in capacity, digitisation, or consistent policy direction. This creates a burdensome environment: erratic audits, unpredictable retroactive tax assessments, and a compliance regime that frustrates business operations.
Transfer Pricing turmoil
Transfer Pricing (TP) is designed to prevent profit shifting among multinational entities. However, Nigeria’s enforcement often lacks the commercial depth required to fairly evaluate intercompany transactions. Multinationals have faced hefty adjustments, sometimes in the billions, based on assumptions that ignore commercial realities. TP audits drag on, and the lack of specialist expertise, combined with unclear documentation standards, further undermines confidence.
Although Nigeria has aligned itself with the OECD’s Base Erosion and Profit Shifting (BEPS) principles, local application needs to be evidence-based, transparent, and guided by solid economic analysis, not a relentless pursuit of revenue.
VAT: Formal sector under siege
Nigeria’s VAT revenue jumped to ₦6.72 trillion in 2024, an 84.62 percent increase from ₦3.64 trillion the previous year. This spike was largely driven by sharp growth in both import VAT (₦1.59 trillion) and non-import VAT (₦5.13 trillion).
However, this expansion hides a systemic problem. The informal sector, which makes up over half of Nigeria’s GDP and includes roughly 40 million unregistered businesses, remains mostly outside the VAT framework. Despite the vast revenue potential, tax authorities continue to burden the formal sector through repeated audits and retroactive assessments rather than targeting inclusion strategies.
For VAT collection to be truly effective, Nigeria must digitise marketplaces, simplify tax structures for micro and small enterprises, and incentivise voluntary registration.
The squeeze on salaried workers
Personal Income Tax (PIT) growth in Nigeria is driven not by better collection or broader inclusion but by heavy dependence on middle-income earners. As inflation soars, 33.2 percent as of March 2025 (NBS), and infrastructure remains poor, salary earners are facing mounting tax pressures with little return.
Meanwhile, wealthy individuals and informal elites continue to evade taxation due to weak data integration across banking, property, and tax systems. To create a balanced system, the government must pursue digital tracking, asset-based assessments, and lifestyle audits.
Encouraging compliance over coercion
Rather than using taxation as a punitive tool, Nigeria should draw inspiration from progressive models like Rwanda’s. There, tax compliance is fostered through streamlined services, digitisation, and fair treatment, including quicker refunds and fewer audits.
Nigeria must transition toward a service-orientated tax administration that promotes transparency, predictability, and education. Compliance should be encouraged through trust, not fear.
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A smarter path forward
To realise a more balanced and sustainable tax system, Nigeria must:
Harmonise tax policies between federal and state agencies.
Empower the Joint Tax Board for better collaboration.
Prioritise full automation across all tax departments.
Reform tax dispute resolution processes to safeguard taxpayer rights.
Encourage informal sector participation through user-friendly, mobile-enabled tax platforms.
Conclusion: Fairness first
Taxation represents a social pact between citizens and the state. When this contract is one-sided, marked by high taxes, low public service, and aggressive enforcement, public confidence deteriorates.
Nigeria does not need more taxes; it needs a better system. One that is just, inclusive, and geared toward long-term prosperity.
Olawole Oluwabusayo Oladotun, ACCA, ACTI, is a Tax Manager at PKF Professional Services in Lagos, Nigeria. His areas of expertise include Transfer Pricing, Corporate Tax, VAT, and Personal Income Tax.
