The Effect of Thin Capitalisation Rules on Debt Financing and Tax Revenue in Nigeria

This study empirically examines the effect of Nigeria's thin capitalisation rules on the debt financing behaviour of foreign-controlled companies and the implications for corporate tax revenue collection. Thin capitalisation rules, which restrict the tax deductibility of interest on related-party loans above a specified debt-to-equity threshold, are designed to prevent profit shifting through excessive intragroup debt loading. Nigeria's thin capitalisation provisions were substantially strengthened by the Finance Act 2021, providing a natural policy experiment for empirical analysis. Using a panel dataset of 40 foreign-controlled companies with Nigerian operations drawn from the FIRS Large Taxpayer Office, the study employs difference-in-differences estimation around the Finance Act 2021 effective date to test for changes in leverage ratios, interest expense claims, and effective tax rates attributable to the rule change. Robustness checks compare treated firms to domestically owned companies not subject to thin capitalisation constraints. The study expects to find a statistically significant reduction in intragroup leverage among treated firms post-reform, accompanied by a modest increase in their effective tax rates, consistent with the rules achieving their intended fiscal objective. It also anticipates evidence of partial circumvention through reclassification of intragroup loans as equity or intercompany services fees. Contributions include the first causal evaluation of Nigeria's thin capitalisation reform. Keywords: thin capitalisation, debt financing, related-party loans, profit shifting, Finance Act 2021.