ABSTRACT
Foreign Direct Investment plays a very important role in the development of the economy. However, it is usually affected by corporate income tax. The objective of the study was to ascertain the effect of corporate income tax on foreign direct investment in Nigeria. Ex-post facto design was chosen for the research because the researcher made use of data which were already in existence, while secondary data used in the research was derived from Central Bank of Nigeria Statistical Annual Report and Federal Inland Revenue Service Annual Report. Furthermore, Foreign Direct Investment inflow was used as Dependent variable while Petroleum profit tax, Corporate income tax and Education tax were dependent variables. In addition, Augmented Dickey-Fuller unit root test used in testing time series data showed that it was stationery and integrated at first difference. The study also made use of ordinary least square simple regression in analyzing the effect of corporate income tax on foreign direct investment. The result of the study showed that Education tax, company income tax and petroleum profit tax had a significant effect on foreign direct investment. The study therefore recommended that government should ensure that there is effective monitoring on petroleum sector to enhance its revenue. Also policy makers on corporate tax laws should articulate ways to provide incentives to attract foreign direct investment.
TABLE OF CONTENTS
Title
Page i
Certification ii
Declaration iii
Dedication
iv
Acknowledgements
v
Table of Contents vi
List of
Tables
x
List of Figures xi
Abstract
xii
List of appendix xiii
CHAPTER
1: INTRODUCTION
1.1
Background to the Study 1
1.2
Statement of the Problem 4
1.3
Objectives of the Study 5
1.4
Research Questions 5
1.5
Research Hypotheses 6
1.6
Significance of the
Study 6
1.7
Scope of the Study 7
1.8
Limitation of the Study 7
CHAPTER 2:
REVIEW OF LITERATURE
2.1 Conceptual
Overview 8
2.1.1 Meaning
of taxation 8
2.1.2 Structure
of the Nigeria tax system 9
2.1.3 Problems
associated with tax generation 9
2.1.4 Implication
of multiple taxation 11
2.1.5 Burden
of multiple taxation 12
2.1.6 Tax
administration leakage 12
2.1.7 Tax
evasion 13
2.1.8 Reason
for tax evasion 14
2.1.9 Tax
avoidance 14
2.1.10 Methods
of tax avoidance 14
2.1.11 Principles
of taxation 15
2.1.12
Objectives of taxation 16
2.1.13
Taxes collected in Nigeria 17
2.1.14 Types
of tax 18
2.1.15 Effect
of taxation 18
2.1.16 Tax
transparency 19
2.1.17 Tax
competition 19
2.1.18 Ways
to tackle international competition 20
2.1.19 Tax
harmonization 21
2.1.20 Reasons
for tax harmonization 22
2.1.21 Tax
incentives 23
2.1.22 Parameters
for accessing pioneer status by companies 25
2.1.23 Transfer
pricing 26
2.1.24 Benefits
of transfer pricing 26
2.1.25 Tax
haven 27
2.1.26 Foreign
direct investment 27
2.1.27 Importance
of foreign direct investment 30
2.1.28 Negative
effect of foreign direct investment 33
2.1.29 Response
of countries to pressure to lower tax on foreign direct investment 34
2.1.30 Types
of foreign direct investment 35
2.1.31 Kinds
of foreign direct investment 36
2.1.32 Determinants
of foreign direct investment 37
2.1.33 Problems
associated with foreign direct investment 43
2.2 Theoretical
Framework 44
2.2.1 The
internalization theory 44
2.2.2 Theory
of monopolistic advantage 44
2.2.3 Location-specific
theory 44
2.3 Empirical
Review 44
2.4 Gap
in Literatures 59
CHAPTER 3:
METHODOLOGY
3.1 Research design
65
3.2 Area
of Study 65
3.3 Sources
of Data 65
3.4 Model
Specification 65
3.4.1 Description
of research variables 67
3.4.1.1 Dependent
variables 67
3.4.1.2 Independent
variables 67
3.5 Methods
of data Analysis 67
3.6 Estimation
procedure 67
3.6.1 Unit
root test analysis 67
3.6.2 Co-integration
68
3.7 Test
of Significance. 68
CHAPTER 4: DATA PRESENTATION AND RESULTS
4.1 Data Presentation 69
4.2 Discussion on Unit Root Test 72
4.3 Discussion of Results 73
4.3.1 Effect of petroleum profit tax revenue on
foreign direct investment 73
4.3.2 Effect of company income tax revenue on
foreign direct investment 75
4.3.3 Effect of education tax revenue on foreign
direct investment 77
4.4 Hypothesis Testing 78
4.5 Discussion of Findings 80
CHAPTER
5: SUMMARY,
CONCLUSION AND RECOMMENDATION
5.1
Summary of Findings
82
5.2
Conclusion
83
5.3
Recommendations 84
References 86
Appendices
LIST OF TABLES
4.1: Augmented Dickey-Fuller Unit root test 75
4.2: Regression of petroleum profit tax revenue
and foreign direct investment 75
4.3: Regression of company income tax revenue
and foreign direct investment 75
4.4: Regression of education tax revenue and
foreign direct investment 77
4.5: Extracts from regression results 81
LIST OF FIGURES
4.1: Graph of petroleum profit tax revenue from
1985-2016 69
4.2: Graph of company income tax revenue from
1985-2016 70
4.3: Graph of education tax revenue from
1985-2016 71
4.4: Graph of foreign direct investment from
1985-2016 71
LIST OF APPENDICES
Appendix
A: 95
Appendix
B: 96
Appendix
C: 100
Appendix
D: 101
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
It is now widely believed that
foreign direct investment is an important source of private external finance
for developing countries. Foreign direct investment is highly needed in
developing countries especially in Nigeria now that revenue from crude oil is
dwindling because of the fall in prices and the reduction in the quantity of
crude oil produced daily in Nigeria due to the problem of militants in the
Niger Delta. All over the world, foreign direct investment remains a major
source of finance in bridging the gap created by shortage of funds for domestic
investments (Hanson, 2003). Mallampally and Sauvant (1999) defined foreign
direct investment as investments by multinational corporations in foreign
countries with the aim of controlling asset and managing production activities
in those countries.
The importance of foreign direct
investments come in the form of adoption
of foreign technology by home countries, development of human capital resources
and creation of employments .It is the benefits derivable from foreign direct
investment that make some countries adopt low tax rates.
There are many factors which could
make a country to be attractive for foreign direct investment. It includes:
cheap labour, investment incentives, economic, political, social stability and
low tax rate. Among the factors mentioned, taxation has proved to be a very
important determinant of the inflow of foreign direct investment. Taxation is a
major source of revenue in Nigeria. Taxation revenue is very importance for
sustainable development because it provides an independent source of revenue
for investing in development and delivering public service. According to OEDC
(2014),Organisation for Co-operation and Development countries collect on
average 34 % of their gross domestic product as tax, while developing countries
only achieve half this rate. Taxation is a solution to the problem of over-dependence
on external concessional finance by developing
countries.
In Nigeria, tax revenue constitutes the most
significant source of domestic resource for the implementation of development .Despite
the importance of taxation to the economy, it has tremendous effect on foreign
direct investment and the economy. Ekpung and Okoi (2014), observed that high
corporate tax is bad for economic growth and discourages foreign direct
investment, while Adegbile (2011), observed that low corporate tax is used by
developing countries to attract foreign
direct investment. According to (Reint and
Kristina, 2001), countries often choose to forfeit some revenue which would
have accrued to them when they cut corporate tax rate in an attempt to attract
foreign direct investment from other location. This process of reducing tax
rates by countries in order to attract foreign direct investment is called tax
competition. Investors routinely compare tax burdens in different countries in
order to determine the location where
they are to invest. Foreign investors compare conditions prevalent in any
location before deciding where to invest.
1.1
STATEMENT
OF THE PROBLEM
The dependency on crude oil as a
major source of revenue instead of diversifying the economy has greatly
affected the economy. According to World Bank report (2016),mono-product
economies, especially those dependent on
crude oil would remain vulnerable due to volatility of crude oil prices. It is
in this regard that there is need to diversify the sources of revenue
especially through increased foreign direct investment and taxation.
In addition, companies depend heavily
on constant power supply for the production of goods and services, however companies in Nigeria have continued to groan
due to power outage.
The rising cost of production caused
by constant power outages in Nigeria and the poor state of our infrastructure has continued to be a source of concern. For
example a number of companies in Nigeria
relocated to Ghana due to the
rising cost of production . It is therefore important for government to improve
the state of our infrastructure in order to improve the inflow of foreign
direct investment.
Taxation is a major source of revenue
in Nigeria. Taxation revenue is very important for sustainable development of the country.
However, the rising incidence of tax evasion by companies who invest in Tax
Havens where little or nothing is paid as tax is becoming worrisome. Also the
abuse of transfer pricing by multinational companies by manipulating financial
transactions with the aim of reducing the amount of corporate income tax to be
paid is on the rise. Therefore, there is a need to examine the nexus between
corporate income tax and foreign direct investment in Nigeria.
1.3 OBJECTIVES
OF THE STUDY
Generally, this study seeks to
examine the effect of taxation on foreign direct investment in Nigeria. This
study is therefore set to achieve the following specific objectives which are
to:
i.
ascertain the effect of education tax on
foreign direct investment in Nigeria;
ii.
establish the effect of corporate income tax on
foreign direct investment in Nigeria; and
iii.
to determine the effect of petroleum profit tax
on foreign direct investment in Nigeria.
1.4
RESEARCH
QUESTIONS
Based
on the objectives of the study stated, the researcher intends to receive answer
to the following questions
i.
To what extent does
Education Tax affect foreign direct investment in Nigeria?
ii.
What is the effect of Company income
tax on foreign direct investment in Nigeria?
iii.
What is the effect of Petroleum profit tax
on foreign direct investment in Nigeria?
1.5
RESEARCH HYPOTHESES
In
line with the objectives of the study and in search of answer to the research
question, the following research hypotheses have been formulated.
i.
Education
tax has no significant effect on foreign direct investment in Nigeria
ii. Company income tax has no
significant effect on foreign direct investment in Nigeria.
iii.
Petroleum
profit tax has no significant effect on foreign direct investment in Nigeria.
1.6
SIGNIFICANCE
OF THE STUDY
Foreign direct investment is a very
important tool for the development of the economy. Therefore the result of this
study which is centered on the effect of taxation on foreign direct investment
will be beneficial to many stakeholders. They include:
Government
It will
help government to know the best policies to adopt as it concerns tax in order
to increase the inflow of foreign direct investment in Nigeria.
Investor
Investors will benefit from this
study because it will help them identify the effect of taxation on foreign direct
investment and the best location to invest their money in order to make the
highest return on investment.
Federal
Inland Revenue Service
The study will help Federal Inland
Revenue Service to articulate ways to provide incentives to attract foreign direct
investment.
1.7
SCOPE
OF THE STUDY
The scope of this study is on effect
of taxation on foreign direct investment in Nigeria. The study concentrated on the total values of corporate
income tax, Petroleum profit tax and Education tax and its effect on foreign
direct investment in Nigeria between the year 1985 to 2016 when the economy was
liberalized due to the introduction of Structural Adjustment Programme.
1.8
LIMITATIONS OF THE STUDY
The study scope of the study was
limited to Nigeria in order to determined the actual effect of corporate income
tax on foreign direct investment. Also time constraint was a serious obstacle
to this research work because the researcher had to combine it with other
schedules.
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