ABSTRACT
The study analyzed the effect of corporate income tax policies on foreign direct investment in Nigeria. The study made use of secondary data which were collected from publications of CBN, National Bureau of Statistics and World Bank database. The study covered the period 1981-2015. Data were analyzed using descriptive statistics and ordinary least square multiple regression analyses. The finding of the study revealed that statutory tax rate negatively and significantly influenced foreign direct investment in Nigeria within the study period Effective tax rate positively and significantly influenced foreign direct investment in Nigeria in the long-run and short-run within the study period. The study further revealed that adoption of tax free zone policy in Nigeria positively and significantly influenced foreign direct investment in Nigeria. More so, the adoption of tax haven policy in Nigeria positively and significantly influenced foreign direct investment in Nigeria. This implies that an increase in double taxation avoidance policy, effective tax rate and tax free zone increase foreign direct investment. The study also showed that adoption of double taxation avoidance policy in Nigeria positively and significantly influenced foreign direct investment in Nigeria. The study concluded that corporate income tax policies influenced foreign direct investment in Nigeria between 1981- 2015. The study recommended that there is need for the government to reassess its corporate income tax policies which discourages foreign investors from investing in the country. This can be done by offering 10 years’ tax free investment incentives to foreign investors so as to spur FDI into the country. There is need for Nigerian government to come up with a friendlier economic policies and macroeconomic adjustments that will lead to continuous increase in nation’s GDP through improved infrastructure, economic diversification, political stability and security of life and properties thereby paving way for a friendly business environment that will boost foreign investment in Nigeria.
TABLE
OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
List of Tables vi
Abstract vii
CHAPTER 1:
INTRODUCTION
1.1 Background
to the Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the Study 6
1.4 Research Questions 7
1.5 Research Hypotheses 8
1.6 Significance of the Study 8
1.7 Scope
of the Study 9
1.8 Limitation of the Study
9
CHAPTER 2: REVIEW OF RELATED LITERATURE
2.1 Conceptual
Framework
11
2.1.1 Corporate
Tax Policies in Nigeria
11
2.1.2 Evaluation
of Nigerian Tax System 12
2.1.3 Improving
Infrastructure or Lowering Taxes to Attract Direct Investment 13
2.1.4 Impact of Taxation on International Business 15
2.1.5 Tax
Incentives as Attraction for FDI in Nigeria Manufacturing and
Processing Companies 16
2.1.6 Foreign
Direct Investment 22
2.1.7 Foreign
Direct Investment Determinants 23
2.1.8 Foreign
Direct Investment in Nigeria trend, Policies and Issues 23
2.1.9 The effect of FDI in
Developing Economies 26
2.1.10
Measurement of Economic Growth 27
2.2 Theoretical
Framework 30
2.3 Empirical
Review 33
2.4 Identified Gap in Literature 38
CHAPTER 3: METHODOLOGY
3.1 Research
Design 40
3.2 Area
of Study 40
3.3 Sources
of Data 41
3.4 Model
Specification 41
3.5 Descriptions
of Variables 45
3.5.1 Dependent Variable 46
3.5 Technique
for Data Estimation 48
CHAPTER 4: DATA PRESENTATION, ANALYSIS AND
INTERPRETATION
4.1 Data Presentation 50
4.3 Descriptive Statistics 53
4.4 Stationary Properties of the Variable used in the Analysis 54
4.5 Effect
of Statutory Tax Rate on Foreign direct Investment in Nigeria 57
4.5.1 Test of Multi Collinearity for the Model Used
to Estimate the Effect of Statutory
Tax rate on Foreign Direct
Investment in Nigeria 57
4.6 Effect of Effective Tax Rate on Foreign
Direct Investment in Nigeria (1981-2015) 62
4.6.1 Test of Multicollinearity for the Model used
to Estimate the Effect of Effective
Tax Rate on Foreign Direct
Investment in Nigeria 62
4.7 Effect of Tax-Free Zone Policy on Foreign
Direct Investment in Nigeria 66
4.8.1
Effect of Tax Haven Policy on Foreign
Direct Investment in Nigeria 67
4.9 Effect of Double Tax Avoidance Policy on
Foreign Direct Investment in
Nigeria (1981 – 2015) 68
4.10 Hypotheses
Testing 70
Hypothesis 1: 70
Hypothesis 2: 71
Hypothesis 3: 72
Hypothesis 4: 73
Hypothesis 5: 74
4.11 Discussion of Finding 75
CHAPTER 5:
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
of Findings 78
5.2 Conclusion 78
5.3 Recommendations 79
5.4 Contributions to Knowledge 80
References 82
Appendix 96
LIST OF
TABLES
2.1 Impact
of FDI in developing economics (the case Nigeria) 27
4.1
Data presentation(remove pop because it is not used in the analysis) 50
4.2:
Descriptive statistic of the variables used in the analysis 53
4.3:
Result of the group unit root test for logged explained and
explanatory
variables used in analysis at Order I(0) 54
4.4: Result of group unit
root test for logged explained and explanatory variables
used in analysis at order I(1) 56
4.6: Variance inflation Test
(VIF) 58
4.7: Regression result of the effect of
statutory tax rate on foreign direct
investment in Nigeria (1981 –
2015) 59
4.8:
Variance Inflation Test (VIF). 62
4.9: Johansen cointegration test of the
variables used to estimate the effect
of effective tax rate on
foreign direct investment in Nigeria 63
4.10: Effect of tax free zone policy on foreign
direct investment in
Nigeria (1981 – 2015) 66
4.11: Effect of tax haven policy on foreign direct
investment in
Nigeria (1981 – 2015)
4.12: Effect of double tax avoidance policy on
foreign direct investment in
Nigeria (1981 – 2015) 68
4.13: Ordinary least square
(OLS) multiple regression model of the effect
of
statutory tax rate on foreign direct investment in Nigeria (1981-2015) 70
4.14: Parsimonious static error correction model regression result of the
effect of
effective tax rate on
foreign direct investment in Nigeria (1981-2015) 72
4.15: Effect of tax free zone policy on foreign
direct investment in
Nigeria (1981 – 2015) 73
4.16: Effect of double tax avoidance policy on
foreign direct investment in
Nigeria (1981 – 2015) 74
4.17: Effect of tax haven policy on foreign
direct investment in
Nigeria (1981 – 2015) 75
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The
peaceful handover of power in 1999 to the democratically elected government
marked the demise of the military system. Nevertheless, overcoming post
military’s socioeconomic legacy of wide spread poverty and income inequality
still poses a daunting challenge for the teeming Nigeria economy. The disparity
between rich and poor in Nigeria ranks amongst the largest in the world. World
Bank Official Report(2014) estimates that 55.9 million Nigerians (about 33.1
percent of the country’s population put at 169 million) are living below the
acceptable poverty level, a significant improvement from the figure released in
February, 2014, by the National Bureau of
Statistic (NBS) which put the poverty level at 112.519 million (62.6
percent). A further examination of these figures revealed that the richest 20
percent of household’s received 62.2 percent of total national income almost
eighteen times that of the poorest 20 percent. Despite the efforts to diversify
the economy and attract investors by the present administration, Nigeria is
still ranked among the strugglers in the global competitive index (GCI)
2013-2014 released 2013 by the world economic forum. Nigeria falls within the
GINI index ratio of 0.50 to 0.70 (Euro Monitor International, 2011). There has
been a concentration of wealth and economic power in a few hands to the detriment
of the under privilege and the common people in Nigeria. The gap between haves
and have not has widened over time in the country. Some Nigerians are swimming
in avalanche, spending their wealth on gold, expensive lace, gigantic
buildings, exotic cars etc when some rejected poor's are wallowing in extreme
poverty as a result of unfavourable distribution of income (Albaladejo,
2013).
The
above stated problems in the oil rich Nigeria has been hobbled by political
instability, inadequate infrastructure and poor macroeconomic management which
have hindered economic growth and development. Government is interested for
improvement in all these areas therefore, in recent years Nigeria began
pursuing economic reforms in order to meet its target of becoming the world’s
top 20 economies by 2020 (Asiedu ,2011).
Foreign Direct Investments (FDI), in
their classical form, are defined as a physical investment that a foreign
entrepreneur does in a country other than his country of origin, by engaging
his financial funds with the purpose of having returns over his investment.
Foreign Direct Investment (FDI) has been defined as the investment of resources
in business activities outside of firm’s home country (Hill,2013). OECD
(2010),IMF(2013), and Ballak, Leibrecht and Damijan (2014),defined FDI as the
long-term investment that reflects the objective of a lasting interest and
control by a resident entity of one economy(the direct investor) in an
enterprise. An expanded
explanation of the operational meaning of FDI has been offered by Ayanwale
(2015), as ownership of at least 10% of the ordinary shares or voting stock in
a foreign enterprise. Thus, ownership of 10% ordinary shares is the criterion
for the existence of a direct investment relationship while ownership of less
than 10% is recorded as portfolio investment. This definition has been used in
most studies on this subject. According to Nicodeme
(2008), FDI creates employment and acts as a vehicle of technology transfer,
provides superior skills and management techniques, facilitates local firms
access to international markets and increases product diversity. Ayanwale
(2007), stated that most countries strive to attract FDI because of its
acknowledge advantages as a tool of economic development. This view is
supported by Nicodeme (2008) study on Nigeria which stated that FDI is an
engine of economic growth and development in Africa as evidenced by the
formation of new partnership for Africa’s Development (NEPAD).
In view of the NEPAD initiative, the government is
working toward developing stronger public private partnership for roads,
agriculture, and power through the attraction of FDI among measures. A national
council on privatization was established, in addition, the Nigeria Investment
Promotion Council (NIPC), has been strengthened to serve as a one stop office
for clearing all the requirements for Investments Promotion Commission Act
(1995), LFN. Also attracting FDI through taxation policy in form of some of tax
incentives is an avenue being adopted which include Nigeria free tax zone,
incentive scheme, tax holidays to multinational companies and other tax
allowances as stipulated by CITA section 23 of 2007 as amended.
However, the scope of discussions is broader than the
descriptive models of relations between inflow of foreign direct investment and
tax policies and thus the aspect of location decisions influenced by tax base
differences and tax incentives of the host country will be discussed. Smith and
Florida(1994), Coughlin, Terza Arromdee (2011), Benassey-Quesry, FontagneLareche-Revil
(2005)have examined the role of credit
exception schemes applicable for profit taxation in investor’s location
decisions. Business surveys carried out by Devereux and Pearson (2014) and for
Ruding Committee (Ruding , 2012) support the view that tax systems play a role
in the firm’s investment decisions. However, a more recent survey of
multinationals conducted by Deloitte and Touch (2013) found that although taxes
are influential in investment decision making, a large number of investors are
unfamiliar with many of the available beneficial tax incentives, including
those in countries where they have already invested.
In this study, the researcher tries to establish an
empirical link between Foreign Direct Investments and corporate income tax
policies. And to evaluate the impact of taxation as the macro-economic policy
used by government, so as to ascertain its effectiveness in encouraging the
inflow of foreign investment into the country and to determine how investors
react to tax policies in Nigeria
1.2 STATEMENT OF THE PROBLEM
Nigeria is a mixed economy with expanding and wide
financial service, communication, technology, production, mining and
entertainment sectors. Irrespective of the fact that Nigeria is a country with
many business opportunities, Adepeju (2012) observed that Nigeria is in dilemma
as it is in dire need of foreign capital for the ongoing internal adjustment, yet
it fears that commanding height of some sectors of the economy may attract
complete control of the national economy and the need for foreign capital has
become indispensable if the economy must come out of the depression. However,
the important of foreign direct investment cannot be overemphasized in
dynamically synergizing fallen apart in the economy of Nigeria. The Nigeria
Government in recognition of the importance of FDI as an important vehicle for
industrial progress must at times express readiness to enter into bilateral
agreement with foreign governments or private organization that wish to invest
into bilateral agreement with foreign additional incentives (Morisset, 2003).
A critical look at the inflow of foreign direct
investment into Nigeria from World Bank report displays a very disturbing
development. while the net inflows into the less developed countries have been
growing steadily since late 80's, foreign direct investment (FDI) flows to
Nigeria declined by 21.4 percent to $5.5 billion in 2013 (UNCTAD, 2013). The
country's FDI flows have been on a free fall since 2011, when it dropped from $8.9 billion to $7 billion in
2012 to $5.5 billion in 2013, $6.7 billion in 2014 and $7.8 billion in 2015
(World Bank, 2016). On the contrary, the report stated that China attracted
$347.85 billion worth of foreign direct investment (FDI) in 2013 representing
20% percent of the total flow in the entire less developed countries (UNCTAD, 2014)
in spite of her long restrictive policies and her recent liberalization
policies. Recently Nigeria government has been proposing new tax incentives
such as free tax zone; tax holiday and other tax concession in order to attract
foreign direct investment, but different tax analysts have mixed reactions
about using tax incentives to attract foreign direct investment.
However Excessive Corporate Income tax rate will
discourage investment which is the pivotal channel of growth in every economy
of the world. High statutory tax rates have been inhibiting tax growth of the
economy and in turn inhibiting the complementary role of Foreign Direct Investment
in growing Nigeria economy.
Therefore, by awarding an incentive in terms of lower
tax rate or exemption on one foreign firm may be countered by increased levies
on other tax bases on other local firms resulting to multiple taxation.
Edmiston, Mudd and Talev (2013),
contended that government may attempt to shift tax liabilities from firms that
receive incentives to the ones that do not. Edmiston, Mudd and Valev (2013), stated that there is evidence
that much of the foreign investment in the transition economies have been
driven by location-specific factors such as attractive privatization deals, new
market and geographical location. They argued that tax incentives leave a
country worse off in terms of reduced tax revenue. Furthermore, the continuing
implementation of tax incentives pose management difficulties for tax
administration and require well developed accountability system. This view is
supported by OECD (2007); Morisset and Pimia (2012); UNCTAD (2011). In their
studies, they argued that tax incentives have many costs such as in the
difficulty of administering them effectively, which can distort allocation of
resources. Morisset (2013), opined that using tax instruments to attract FDI,
favors tax incentives, but tax incentive is a reduction in the corporate income
tax rate, through tax holidays or temporary rebates.
The researcher intends to establish whether corporate
tax system favours Nigeria in terms of attracting foreign direct investment.
The recent relocation of multinational companies like Dunlop, Michelin and
unilever to Ghana, where the felt the business climate is more conducive and
constant dwindle in the inflow of foreign investment call for immediate action
on corporate tax policies.
Another issue raised against taxation in Nigeria
related to other taxes apart from statutory corporate taxes from 2001,
companies apart from payment of corporate tax pay education tax of 2 percent of
their assessable profit. This adds to capital gain taxes paid by the company.
Put together companies pay between 35 percent to 40 percent of their profit as
tax.
1.3 OBJECTIVES OF THE STUDY
The broader
objective of this study was to determine the effect of corporate income tax
policies on foreign direct investments in Nigeria from 1981 to 2015. The
following specific objectives guided the study:
i.
To determine the effect of statutory tax rate
on Foreign Direct Investment within the stated period.
ii.
To ascertain the
effect of effective tax rate in attracting foreign direct investment in Nigeria
within the study period.
iii.
To examine whether Tax
free zone policy has any impact on Foreign direct investment in Nigeria within
the study period..
iv.
To investigate whether Double
taxation avoidance treaties has any impact on Foreign Direct Investment in
Nigeria within the study period.
v.
To determine the impact of
tax haven on Foreign Direct investment in Nigeria within the study period
1.4 RESEARCH QUESTIONS
This research work provided answers to the following
research questions:
1. To what
extent does statutory tax rate impact on Foreign Direct Investment within
the study period?
2. To what
extent does effective tax rate affect Foreign direct investment in Nigeria within
the study period?
3.
What is the effect of tax
free zone of on Foreign Direct Investment in Nigeria within the study
period? tax
4.
What is the effect of
double taxation avoidance scheme on Foreign Direct Investment?
5.
To what extent does tax
haven affect Foreign Direct Investment in Nigeria within the study period?
1.5 RESEARCH HYPOTHESES
Following the above stated objectives, the under
listed five hypotheses were tested:
H01: Statutory tax rate does
not significantly affect FDI in Nigeria.
H02: Effective Tax rate have no
significant effect on Foreign Direct Investment in Nigeria within the study
period
H03: There is no significant effect of Tax free Zone on Foreign Direct
Investment in Nigeria within the study period.
H04: Double taxation avoidance scheme has no significant effect on FDI in
Nigeria within the study period.
H05: There is no significant of Tax havens on
Foreign Direct Investment
1.6 SIGNIFICANCE OF THE STUDY
The study of the effect of corporate Tax policies on
foreign direct investment in Nigeria will be of great significance to various
aspects of the economy. Specifically, it will be beneficial to the following:
Multinational
Companies: This research work also expects to
provide multinational companies a new perspective towards taxation influence on
FDI in developing countries. This contributes to decision making of
multinational enterprises toward FDI allocation.
Policies Makers: It
will assist the policy makers have an empirical way of determining the economic
allocation of public fund and avoid the intuition in making expenditure
decisions which mostly lead to disastrous economic consequences.
Education Analyst:
The result of the study will be of benefit
to education analysis and institutions in examining the effectiveness of
government expenditure and economic growth. It will also be useful in
stimulating public discourse given the dearth empirical researchers in the
these areas from emerging economies like Nigeria.
Researchers: Finally,
it will also add to the available literature on the area of study while
providing a platform for other researchers who may want to further this study.
Government:
This presents the government of developing countries some ideas in planning
their taxation policy by first consider the effects on FDI and provide frame
work for government to develop a successful long run taxation policy.
1.7 SCOPE OF THE STUDY
Nigeria tax policies are too numerous and varies
according to the analyst. No study of this nature can afford to examine all the
tax policies. For this reason therefore, only the Company Income Tax Act (CITA)
will be analyzed. However, mentioned will be made to other tax policies where
necessary. Also, since the field of the investment is too vast, one can safely
say that it runs through all aspect of human Endeavour. This study will focus
on inflow of foreign direct investment in Nigeria. This study covers the period
of thirty five years (35) that is 1981-2015. This is due to data availability
and other sources of information relevant to this study.
1.8 LIMITATIONS OF
THE STUDY
The process of this work was interesting following the
exploration of various sources of related information and materials.
Notwithstanding efforts made as a single student researcher, this work
encountered some limitations which eventually made the researcher to more
efficient in information utilization. Such limitations include:
Data availability: sources of data for this study
really posed a challenge to the researcher due to the attitude of those in
possession of the information.
Finance: all aspect of this work required some amount
of funding which the student researcher could not sufficiently handle. This led
to exploration of available alternative.
Time
frame: the period of this study was another limitation experienced by the
researcher because it exceeded the required time frame.
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