Anti-avoidance rules: documenting client tax positions
How a Nigerian firm should document a client's tax position under the Nigeria Tax Act's anti-avoidance and substance-over-form rules, with a file note.
By Achekam · · 5 min read · For Accountants & audit firms in Nigeria
Every firm has a client who is pleased with an arrangement a previous adviser suggested. Perhaps it is a consultancy fee paid to a company owned by the director's spouse, or a lease between two companies in the same group at a rent nobody would pay a stranger. The deduction has been claimed for years without challenge, and the client sees no reason to change.
Under the Nigeria Tax Act, 2025, that comfort is thinner than it used to be. The question for the firm is not only whether the position is defensible, but whether the file would show, to a reviewer or to the Nigeria Revenue Service, how the firm reached its view.
A power to look through arrangements
The NRS describes the Nigeria Tax Act as including general anti-avoidance and substance-over-form rules, with powers to disregard artificial or fictitious arrangements. Its summary page on the Nigeria Tax Act, 2025 explains the Act's role as the main law on who and what is taxed and how it works alongside the Tax Administration Act.
For a practitioner the practical meaning is straightforward. The legal form of a transaction no longer settles its tax treatment on its own. If the NRS concludes that an arrangement is artificial or fictitious, it can set it aside and tax what it considers the real position. A tax position that rests entirely on documents being in order, with nothing behind them, is exposed.
Read the Act's own provisions before advising, because the NRS page summarises the rules rather than reproducing their tests. What follows is how to build a file that would stand up to that kind of scrutiny.
Exemptions must be found in the law
The NRS also says the Nigeria Tax Act requires tax exemptions to be expressly provided by law. That cuts off a familiar line of argument: "this income has never been taxed", "the authority has always accepted it", or "a similar business does not pay". None of those is an exemption.
When a client claims that an item of income is exempt, the file should cite the provision that exempts it. If the firm cannot find one, the item is taxable, however long the client has treated it otherwise.
Commercial purpose and the deduction test
Deductions are the other half of most avoidance disputes. The NRS says business expenses are allowable for relief when they are wholly, reasonably, exclusively and necessarily incurred in the course of business operations, subject to limits in the law.
Those four words give the firm a ready-made structure for testing a doubtful expense:
| Test | Question to ask the client | Evidence that answers it |
|---|---|---|
| Wholly | Was the whole amount for the business, or was part of it private or for another party? | Invoices, contracts, allocation workings |
| Reasonably | Is the amount what an unrelated party would have charged? | Quotes, market comparisons, the basis of the price |
| Exclusively | Did the expense serve only the business, with no other purpose? | Description of the service, who benefited |
| Necessarily | Did the business need it to operate? | What was delivered, how it was used |
An arrangement that fails these tests may not need an anti-avoidance rule to defeat it: the deduction simply was never allowable. An arrangement that passes them, with evidence, is much harder to characterise as artificial.
Recording the judgement and who was consulted
The weakness in most files is not the conclusion but the absence of reasoning. A working paper that says "management fee allowed" tells a reviewer nothing about whether anyone considered the anti-avoidance rules.
Achekam gives the firm two places to hold that reasoning:
- Technical consultations. Staff can take a consultation on an engagement from question to conclusion and closure. Where partners disagree about a position, the difference of opinion is recorded with each party's view, the escalation and how it was resolved. That is exactly the record a firm wants when its judgement on a borderline arrangement is later questioned.
- Quality registers. The firm's registers, including its register of professional judgements, are kept on the server with every version and the person who changed it. A significant judgement on a client's tax position belongs there. One limit: sign-off roles on professional judgements are checked by the screen, not the server, so the reviewing partner should confirm the sign-off is theirs.
The evidence itself, such as the contracts, board minutes, correspondence and comparisons, goes into the client's folder in the Document Centre, where it is versioned and searchable. Link the consultation to those documents by name so the trail can be followed.
When to ask the NRS first
Documentation protects a position after the event. For a significant transaction not yet carried out, the firm can also ask the authority directly. The NRS describes an advance ruling as a binding decision on how tax law applies to a specific transaction, applied for in the prescribed form, with a response due within 21 days. Where an arrangement could plausibly be seen as artificial and the amount at stake is large, recommending a ruling is often the more prudent advice. The process is set out in asking the NRS for an advance ruling.
A file note template
For each position where the anti-avoidance or substance-over-form rules could be relevant, a short note on the file should cover:
- The arrangement. What happened, between whom, and on what terms.
- The tax effect. What the client gains compared with a simpler alternative.
- The commercial reason. Why the client did it, in the client's own words, with evidence.
- The deduction tests. Wholly, reasonably, exclusively, necessarily, each answered.
- Any exemption relied on. The provision that expressly grants it.
- The firm's conclusion. Whether the position is supportable, and the risk if challenged.
- Consultation. Who was consulted, and any difference of opinion and its resolution.
- Advice given. What the firm told the client, and the client's decision.
Where a question turns on which Act governs, the substantive rule or the procedure, see reading the Nigeria Tax Act and the Administration Act together.
Ask each tax manager to name the three client positions they would least like to defend. Write a file note for each using the template above, open a technical consultation where the conclusion is not clear, and discuss the results with the clients before their next returns are prepared.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
