ABSTRACT
The study examined the effect of corporate tax planning on the performance of listed manufacturing companies in Nigeria. The specific objectives of the study are; to examine the extent to which effective tax rate reconciliation affect return on asset of listed manufacturing firms in Nigeria, to determine the effect of tax incentives and exemptions on return on asset of listed manufacturing firms in Nigeria and to determine the effect of debt tax shield on return on asset of listed manufacturing firms in Nigeria. Ex-post facto research design was adopted. Secondary data was used through the use of annual reports and accounts of the selected manufacturing firms. The population of the study is made up of all the manufacturing firms listed in Nigeria stock exchange, while the sample size is made up of 10 listed manufacturing firms after adopting Taro Yamane formula. Data was analyzed using panel data regression analysis. The finding revealed that corporate tax planning components (effective tax rate, tax incentives, debt tax shields) have a positive but insignificant effect on financial performance of listed manufacturing firms in Nigeria. The study concludes that though tax planning affects the financial performance but to a minima extent. Hence, there are other factors that can really determine the performance of firms outside corporate tax planning. The study recommends that manufacturing firms should engage in tax planning and at the same time pay attention to other factors that can affect their performance. The study also recommends that manufacturing firms should run an analysis on the effect of debt tax shield on performance before making decision of increasing their debt in the name of increasing performance
TABLE OF CONTENTS
Title page i
Declaration page ii
Certification iii
Dedication iv
Acknowledgement v
Table of content vi
Abstract ix
CHAPTER 1: INTRODUCTION
1.1. Background to the
Study 1
1.2. Statement of the
Problem 4
1.3. Objectives of the
Problem 6
1.4. Research Questions 6
1.5. Research Hypotheses 6
1.6. Significance of the
Study 7
1.7.
Scope of the Study 8
1.8.
Definition of Terms 8
1.9.
Limitation of the Study 9
CHAPTER 2: REVIEW OF RELATED
LITERATURE
2.1. Conceptual Framework 10
2.1.1. Taxation 10
2.1.2. Corporate Tax 11
2.1.2.1.
Companies Income Tax Act 15
2.1.2.2.
Incidence of Corporation Tax 15
2.1.2.3. Incidence of Tax on Profits 16
2.1.3.
Corporate Tax Planning and its Measures 17
2.1.3.1. Measurement of Tax Planning 19
2.1.4. Tax Planning and
Risk 22
2.1.5. Tax planning and
financial risk 25
2.1.6. Tax planning and
policy risk 26
2.1.7.
Constraints of Tax Planning 29
2.1.8. Level of Tax Planning Activities 30
2.1.9.
Performance 31
2.1.10. Tax Planning and Corporate Performance 32
2.1.11.
Tax Shifting 35
2.2. Theoretical Framework 36
2.2.1.
Ability to Pay Theory 36
2.2.2. Political Power Theory
37
2.2.3.
Benefit Theory. 38
2.3.
Empirical Review 39
2.4. Summary of
Literature Review 54
2.5.
Gap in Literature 61
CHAPTER 3: METHODOLOGY
3.1. Research Design 62
3.2. Area of the Study 62
3.3.
Source of Data 62
3.4.
Population of the Study 62
3.5. Sample size of the
Study 62
3.6.
Techniques of Analysis 63
3.7.
Model Specification 63
3.8.
Measurement of Variables 64
CHAPTER 4:
DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS
4.1. Data
Presentation 65
4.2. Pre-estimation Tests 65
4.2.1. Stationarity/ Unit Root Tests 65
4.2.2.
Cointegration Test Results 66
4.2.3. Descriptive Statistics 67
4.3. Data
Analysis 68
4.3.1. Hausman
Test 68
4.3.2. Panel
Data Test 69
4.4. Test of Hypotheses 70
4.5. Discussion
on Results 71
CHAPTER 5: SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
5.1.
Summary of Findings 73
5.2.
Conclusion 73
5.3.
Recommendations 74
5.4. Contribution to Knowledge 74
5.5. Areas of Further Research 75
REFERENCES
76
APPENDICES
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Tax is one of the major
instruments of fiscal policy for regulating the economy of any nation. At
various times, successive governments in Nigeria have employed the instrument
of tax policy to encourage industrial and corporate growth in the private sector
(Nwaobia, 2013). On the opposing side, taxation and tax policies in Nigeria do
equally act as disincentive to manufacturing firms to create value for
stakeholders and enhance the value of the firms. As noted by (Gatsi, Gadzo and
Kportorgbi, 2013), taxation, observably, plays a role in the misfortunes of the
manufacturing sector because tax policies, apart from generating revenue for
the state, serve several other purposes. It can be used as an avenue to protect
infant industries, create incentive for investors to invest in certain areas of
the economy or to create disincentive for other activities (Gatsi, Gadzo and
Kportorgbi, 2013). For example, Nwaobia (2013)
noted that adoption of unfriendly tax policies is one of the many
reasons for the slow growth of the underground economy, where law-abiding
individuals and corporate citizens seek refuge from wrongs inflicted on them by
government.
One of the most important
responsibilities for corporate tax manager is to strategize on minimizing a
company's overall tax liability. Theoretically, firm’s tax liability is
proportionally related to its profitability; attaining firm’s wealth
maximization objective through diverse means of increasing profitability poses
more challenge on firm’s ability to reduce its tax liability. Effective tax
planning is defined by Scholes and Abdul (2012) as strategies that maximize the
firm’s expected discounted after-tax cash flows. Apart from being vast in the
tax laws, the tax consultants of any organisation should have extensive knowledge
of the company, its history and how the organisation operates. It extends to
the coordination of parties with diverse interests and information, involving
domestic and foreign operations across multiple segments of the business
including finance and financial reporting, management and technology
(Maydew& Shackelford, 2005).
According
to Morien (2008), in well-organized economies, paying taxes by business is
almost unavoidable. Effective tax planning strategies should produce benefits
in terms of wealth creation for the company. Hence, tax planning is actually a
subset of the overall financial planning of a company which needs to take into
account investment, financing and wealth building strategies of the company.
Majority of Nigerian firms are highly financed through equity, thus unable to
enjoy the benefits of debt tax shield as related to thin capitalization.
Corporate tax planning
refers to the legal utilization of the tax laws to one’s own advantage, to
minimize the amount of tax payable by means that is within the law
(Pastersen& Rico, 2008). According to Tiley (2005), corporate tax planning
is what sensible people do in order to reduce their tax liabilities. Corporate tax planning does not imply any conscious
wrong doing, but rather finding loopholes in the tax laws which could result in
paying less tax than required. Thus, effective tax planning strategies should
produce benefit in terms of wealth maximisation for manufacturing firms. Hoffman (1961) opines that, firms need to
understand the prevailing tax laws and apply the laws in a manner that will
reduce their tax burden. Scholes, Wolfson, Erickson, Maydew and Shelvin (2005)
support the need for manufacturing firms to engage in dynamic tax planning by
responding to subsequent changes in the tax laws. Traditionally, tax planning
is seen as activities that transfer resources which would have gone to
government to corporate entities (Wang, 2010).
Tax planning is an
integral part of financial planning and the area of financial structure decisions
offers a tax manager and the company an opportunity to mitigate the company’s
tax liability and improve on the financial performance of the firm.
Corporate
tax planning can be measured using effective tax rate, capital allowance and
tax shields (Rego, 2003). Effective tax rate (ETR) has been used extensively by
prior researchers to measure the extent to which firms take advantage of tax
incentives and different rules between financial reporting and tax reporting
(Zimmerman, 1983; Rego, 2003; Rohaya et al., 2008). In measuring the outcome of
tax planning, ETR could be the appropriate measure because it exhibits the gap
of tax burden between "book- reporting-based" and "taxable
income-based" (Abdul-Wahab, 2010). Another measure of tax planning is tax shield. A Tax
Shield is an allowable deduction from taxable income that
results in a reduction of taxes owed. The tax shield is divided into two, debt tax shield and non-debt tax
shield. The debt tax shields in debt financing mentioned in the trade-off model
is associated with exploiting the tax deductibility of interest expenses, so that
firms will increase debt to benefit from tax shields.
Although
tax planning is perceived to increase after-tax profit and enhance shareholders
wealth, Hundal (2011) argues that, tax planning represents a serious loss of
revenue to governments. According to Slemrod (2004), tax planning activities
could have negative effect on government revenue needed for the provision of
infrastructure and public utilities. In addition, Slemrod points out that, tax
planning can also increase compliance cost of collecting taxes. Consequently,
the tax planning strategy tends to give a positive impact on a firm's cash flow
and its after tax rate of returns; however, tax planning strategies have a
negative impact on the government's revenue and further, increase the
compliance cost of collecting taxes. This concept is therefore significant for
firms listed on the Nigeria stock exchange who may seek to improve on all their
tax savings. Given the importance of this concept of tax planning for corporate
organizations in Nigeria, there is a gap that the present study seeks to bridge
by exploring different tax planning mechanisms available to firms listed on
Nigeria stock exchange and the influence of corporate tax management on the
financial performance of manufacturing firms quoted on Nigerian Stock Exchange.
However,
it is believed that tax reliefs and rebates will influence investment
decisions, growth and ultimately the performance of the companies. Thus, many
studies on taxation and financial performance reveal that taxes have
significant effect on the performance of companies (negative) and few others
reveal mixed results that are inconclusive (Teraoui & Kaddour, 2012; Gatsi,
Gadzo & Kportorgbi, 2013; Onuorah & Chigbu, 2013; Mucai, Kinya, Noor
& James, 2014). It is on this ground that this study intends to examine the
effect of corporate tax planning on the performance of listed manufacturing
firms in Nigeria.
1.2 STATEMENT OF THE PROBLEM
The major challenge of
corporate entities, and in particular manufacturing firms, come in a midst of
high corporate tax rates and other taxes that lead to high effective tax rates
far above the statutory company income tax rate. With the introduction of the
Information Technology tax, there are about forty different taxes levied on
companies and individuals (Bammeke, 2012). Many of these taxes from the different
levels of government overlap and are forcefully extracted from corporate
organizations. The effect of these exactions of course is high cost structure
for firms (Nwaobia, 2013). One will not fail to agree with Nnadi&Akpomi
(2008) that a tax policy defines the cost structure of firms as it is factored
into pricing. In addition, tax costs and eventual payout deplete the disposable
income of individuals as well as the distributable profits of corporate
organizations. These taxes in fact, do translate to a substantial cost to
organizations and if not properly planned and managed can have adverse impact
on the bottom line, cash flow and capacity to invest.
The
payment of taxes is actually supposed to be according to income earned which
ordinarily should not have been a burden, since those that earn higher pay more
taxes and the low income earner pay less taxes (Bon, Remotin & Edgar,
2007). However, the high rate of company
income tax has created the problem of tax evasion of firms in Nigeria. Tax avoidance is the willful and different
lawful ways a taxpayer tries to reduce or eliminate his/her tax liabilities
while tax evasion is the unlawful act to prevent payment of tax (Mughal &
Akram, 2012). The struggle leaves the
government with less revenue and at the same time has brought companies so many
unresolved tax issues with the government.
Due to the frustration, firms now employ the services of financial
experts who could manipulate tax laws so as to reduce the burden of corporate
taxation on them. This has led to a high
profile of tax avoidance for companies who could afford to hire tax consultants
to lessen their tax liability by all means.
To mitigate the effect of
taxes on liquidity and profitability of corporate bodies and by extension firm
value, tax planning becomes imperative. But unfortunately, many companies are
ignorant of the strategies they can adopt to legally mitigate their tax
burdens.
Most of studies on
corporate tax planning are majorly international works. Few studies that were
carried out in Nigeria focused only on effective tax rate without considering
other tax planning measures. This study intends to fill in the gap by examining
the effect of corporate tax planning on financial performance of listed manufacturing
firms in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The main objective of the
study is to examine the effect of corporate tax planning on the performance of
listed manufacturing companies in Nigeria.
The specific objectives of
the study include:
(i)
To examine the extent to which effective tax rate affect
return on asset of listed manufacturing firms in Nigeria.
(ii)
To determine the effect of tax incentives and exemptions on
return on asset of listed manufacturing firms in Nigeria.
(iii)
To determine the effect of debt tax shield on return on asset
of listed manufacturing firms in Nigeria.
1.4 RESEARCH QUESTIONS
The following questions guided
the study
(i)
To what extent does effective tax rate affect return on asset
of listed manufacturing firms in Nigeria?
(ii)
What is the effect of tax incentives and exemptions on return
on asset of listed manufacturing firms in Nigeria?
(iii)
What is the effect of debt tax shield on return on asset of
listed manufacturing firms in Nigeria?
1.5 RESEARCH HYPOTHESES
For the purpose of this
study, the following hypotheses were stated in null form
H01: Effective tax rate has no significant effect on return on asset
of listed manufacturing firms in Nigeria.
H02: Tax incentives and exemptions have no significant
effect on return on asset of listed manufacturing firms in Nigeria.
H03: Debt tax shield has no significant effect on return on
asset of listed manufacturing firms in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The study on the effect of
corporate tax planning on the performance of manufacturing firms will be of a
benefit to different groups of people which includes; government, companies,
academic community.
Government: The government would greatly benefit from these
research work since taxation is the major source of revenue. The findings of
this study will enable them know how to charge and collect tax from
manufacturing firms. The findings and recommendations of this study will
educate government on policies that will help them collect taxes from companies
without any form of tax evasion from the companies. The findings of this study
will also help government to know when companies are going outside those tax
holidays and tax relief granted to them in order to reduce tax payment
illegally.
Companies: companies stands to benefit a great deal from this research
work. As pointed earlier the financial manager needs a thorough knowledge of
taxation in taking financing investment and decision making. The business
manager needs to take advantage of the knowledge of the taxation to avoid
excessive taxes and benefit from the initial and capital allowances. However,
the findings of this study will help companies to take advantage all the tax
relieves and allowances that will make them pay lesser tax while still acting
by law. The findings from this study will also educate companies and tax
managers on ways to plan their tax to avoid engaging or involving in tax
evasion.
Academic community: This study would help the academic
community update their knowledge of the corporate tax planning. In other words,
the study will educate students of this noble institution and other
institutions on the effect of corporate tax planning on the performance of
listed manufacturing firms in Nigeria.
Finally other researchers
and scholars in the area of taxation would find this work as a useful tool for
further research work in this area.
1.7 SCOPE OF THE STUDY
The
study examined the effect of corporate tax planning on the performance of
listed manufacturing firms in Nigeria (2014-2018). The period is used because
of the recent tax reforms that took place during the period of the study. This
study is in the field of taxation which is a branch of accounting.
1.8 DEFINITION OF TERMS
Corporate tax planning: this refers to the legal
utilization of the tax laws to one’s own advantage, to minimize the amount of
tax payable by means that is within the law
Effective tax rate: effective tax rate for a corporation is the
average rate at which its pre-tax profits are taxed.
Tax incentives: Deduction,
exclusion, or exemption from a tax liability, offered as an enticement to
engage in a specified activity (such as investment in capital goods) for a
certain period.
Tax shield: A tax shield is a reduction in taxable
income for an individual or corporation achieved through claiming allowable
deductions such as interest on debt, mortgage interest, medical expenses,
charitable donations, amortization, and depreciation.
1.9 LIMITATION OF THE STUDY
The
limitation of this study is the unavoidable constraints and problems
encountered in the process.
Non-availability of records: This is one of the most important
limiting factors in the course of the study. This includes the problems of
easily getting the appropriate data due to bureaucracy which hinders the
information flow in the country. In spite of this, the researcher is poised to
making the best use of the available record to get the job properly done.
Click “DOWNLOAD NOW” below to get the complete Projects
FOR QUICK HELP CHAT WITH US NOW!
+(234) 0814 780 1594
Login To Comment