ABSTRACT
This study examined the effect of tax incentives on foreign direct investment in the petroleum upstream sector in Nigeria with respect shell petroleum Development Company. The study used time series data from 2008-2017 and used the Ordinary Least Square based Simple Regression Method. The findings indicated that; the study also revealed that there is a very high relationship between by tax incentives proxied by (investment tax allowance, non productivity rent, and capital allowance) and the dependent variable that is foreign direct investment. Secondly the study revealed that Investment tax allowance has a significant effect on foreign direct investment, the study further revealed that Non productive rent has a significant effect on foreign direct investment and finally revealed that Capital allowance has a significant effect on foreign direct investment. The study concluded that firms’ enjoying tax incentives will generate more employment opportunities than firms in highly taxed regions. Conducive investment climate is a strong requirement for the flow of sustainable physical investment in an economy. Tax incentives positively influences the living standards and per capital income, and expand variety of goods available to consumers. The study recommends that; i) Tax policies should be designed to eliminate double taxation. ii) Tax incentives should be effectively implemented and efforts should be made by relevant tax authorities to ensure that firms to benefit from these incentives are adequately granted these incentives. iii) Investment climate in the country and state should be made conducive through effective policy formulation, implementation and the provision of equate functional physical infrastructure.
TABLE OF CONTENTS
TITLE
PAGE i
DECLARATION ii
CERTIFICATION iii
DEDICATION iv
ACKNOWLEDGEMENT v
TABLE
OF CONTENTS vi
LIST
OF TABLE vii
ABSTRACT viii
CHAPTER ONE:
INTRODUCION
1.1 Background to the Study 1
1.2 Statement of Problem 2
1.3 Objectives of the Study 3
1.4
Research Questions 4
1.5
Research Hypotheses 4
1.6 Significance of the Study 4
1.7 Scope / Limitation of the Study 5
1.8
Definition of terms 6
1.9 Historical background of Shell
Petroleum Development Company 7
CHAPTER TWO:
REVIEW OF RELATED
LITERATURES
2.1 Conceptual Framework 9
2.1.1 Incentives put in place
10
2.1.2
Reduced Petroleum Profit Tax for Marginal Field Operators 11
2.1.3 Reduced Royalty Rate. 11
2.1.4 Gas Utilization Incentive 11
2.1.5
Need for Tax incentives 12
2.1.6 Investment Opportunities in the Oil
and Gas Sector 14
2.1.7 Tax incentives available to oil and
Gas sector in Nigeria 16
2.1.8 Incentives
and Allowances Accruable to the IOCs
2.1.9 Investment
Tax Allowance/Tax Credit 24
2.2 Theoretical Framework 24
2.2.1 Benefit Theory:
24
2.2.2 The Cost of Service
Theory: 25
2.2.3 Ability to Pay
Theory:
26
2.2.4 Proportionate
Principle: 28
2.3 Empirical
Framework 28
CHAPTER THREE:
METHODOLOGY
3.1 Research Design 35
3.2 Area
of the Study 35
3.3 Sources of data Collection 37
3.4
Model Specification
37
3.5
Method of Data Analysis 40
CHAPTER FOUR:
DATA PRESENTATION,
ANALYSIS AND DISCUSSION OF FINDINGS
4.1
Data presentation 42
4.2
Data analysis 46
4.3
Test of hypotheses 49
4.4
Discussion of findings 50
CHAPTER FIVE:
DATA PRESENTATION,
ANALYSIS AND DISCUSSION OF FINDINGS
5.1
Summary of findings 51
5.2
Conclusion 52
5.3 Recommendations 52
REFERENCES 53
TABLE OF LIST
DATA
PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS 42
4.1
Tax Incentives proxies and data for the year 2008 to 2017 42
4.2 Regression
results between Investment Tax Allowance and FDI 43
4.3 Regression
results between Investment Tax Allowance and FDI 43
4.4 Regression
results between Non Productive Rent and FDI 44
4.5 Regression
results between Capital allowance and FDI 45
CHAPTER ONE
INTRODUCION
1.1 Background to the Study
As part of the effort to provide an
environment that is conducive for the growth and development of industries,
inflow of foreign direct investment, shield existing investment from unfair
competition and stimulate the expansion of domestic production capacity, the
federal government has developed package of incentives for various sectors is
encouraging tax incentives in the petroleum industry for overall development in
Nigeria.
Tax studies have become increasingly
sophisticated especially during the past decade and have yielded conflicting
results as regards the tax matter. Some studies focus on the cost and benefit
of tax incentives while a few look at whether public funds could have been
better spent or if tax incentives were economically justified. Tax studies
offer little guidance to policy makers who are concerned about tax rates and
the effectiveness of employing tax incentives as an economic and developmental
tool (Aroh&Nwadioalor, 2009).
Tax
incentive itself, is the use of government spending and tax policies to
influence the level of national income. This measure encourages the springing
up and gradual growth of new enterprises by the reduction of profit tax, which
in turn encourages production, influences the production level and curbs
unemployment. So, the government should provide such tax incentives in order to
boost development which will bring about an increase in employment
opportunities and also cause an improvement in the economy (Okafor, 2009).
Amadiegwu (2008), a tax expert wrote that
the objective of tax incentive is that by borrowing rather than taxing, the
government has a better chance of expanding investment spending which is
essential in enlarging production possibilities and attaining a sustainable
improvement in the standard of living of the people.
Dotun and Sanni (2009), stated that tax
incentives can be targeted on the low income earners, local and developing
industries, farmers, which will increase their savings and is necessary for
higher investment. Tax incentives create employment opportunities for the
people, helps to fight economic depression and inflation thereby increasing the
equitable distribution of income and wealth.
Petroleum represents a very important
mineral in Nigeria economy. The economic well-being of the citizenry is now
completely dependent on petroleum. This means that petroleum touches every
facet of human life in Nigeria. Petroleum resources have become more important
than any other means of generating income to the government in Nigeria.
1.2
Statement of Problem
The Nigeria Government have over the year
adopted one form of incentives or the other for the companies operating in the
country. This is aimed at encouraging business growth and development in the
private sector organization. In the petroleum industry the issue of tax
incentive has not really received a positive attention because the people think
that the sector is rich enough to pay all taxes.
Though there is little level of tax
incentives in the oil sector, but this cannot be compared what we have in the
private sector organization. The problems faced are in the area of negative
relationship between taxes and the petroleum industry’ is the ability to
sustain itself and to expand, petroleum industries are faced with the problem
of high tax rates, multiple taxation, complex tax regulations and lack of
proper enlightenment or education about tax related issues. Not minding other
challenges that other industries are facing in other developing countries like
Nigeria; inadequate capital, poor technical and managerial skills,
environmental effects and the government regulations which is most affecting
the operation of industries in Nigeria especially this issue of multiple
taxation which is a worm eating deeply and the large chunk of revenues
generated by these small scale industries for their growth and survival. These
have led to an increase in record of dearth of industries in Nigeria.
1.3
Objectives of the Study
The broad objective of the study is to
examine the effect of tax incentives on foreign direct investment in the
petroleum upstream sector in Nigeria.
The specific objectives of the study
include:
i.
To determine the effect
of investment tax allowance on FDI
ii.
To examine the effect of
non-productive rent on FDI
iii.
To ascertain the effect of
capital allowance on FDI
1.4 Research
Questions
The
following are the research questions of the study:
1) What
is the effect of investment tax allowance on FDI?
2) What
is the effect of non-productive rent on FDI?
3) What
is the effect of capital allowance on FDI?
1.5 Research Hypotheses
For the purpose of the study, the
following hypotheses was tested in null form
1) There
is no significant effect of investment tax allowance on FDI.
2) There
is no significant effect of non-productive rent on FDI.
3) There
is no significant effect of capital allowance on FDI.
1.6 Significance of the Study
The study will be quite significant to the
following group of people;
Petroleum
Industry: the study will enable industries to know
the importance of tax incentives in their industry. The study will help them to
know the tax relieves and holidays they are expected to receive. The study will
also help the management of every industry to know the importance of employing
and training their staff on tax matters in order not to pay higher tax than
expected.
Government:
the study will help government to understand the contribution of industries in
economic growth and as such know the amount of tax charged to them to avoid
much tax burden that could affect their performance. This is because any
negative performance of industries will affect the economic growth of the
country.
Researchers
and Scholars: the study will serve as a reference
material to students and researchers for their future research and studies
respectively.
1.7 Scope / Limitation of the Study
The focus of this study is rested on tax
incentive in the attraction of investment in the upstream petroleum sector. It
evaluates the effect of tax incentives on investment in the upstream petroleum
sector with particular reference to Shell Petroleum Development Company.
The study area of this research work is
Shell Petroleum Development Company. This is because this study tends to
evaluate the effect of tax incentive on investment in FDI were investment tax
allowance, non-productivity rent, royalties, and capital allowance remains the
proxies of evaluation.
Thus, this work is limited to only foreign
direct investment in the petroleum upstream sector in Nigeria whose data will
extract in findings and drawing conclusions.
1.8 Definition
of terms
Tax:
a compulsory levy imposed by the
government on the citizens of a country to enable the government provide basic
amenities for them.
Investment
tax allowance: A tax
incentive offered to businesses to encourage capital
investment in which they can deduct
a specified percentage of capital costs,
including depreciation,
from taxable
income. Different from investment
credits which allows businesses to deduct investment costs directly from their tax
liability.
Non-productive
rent: This
is any payment to an owner or factor of production
in excess of the costs needed to bring that factor into production. In
classical economics, economic rent is any payment made (including imputed
value) or benefit received for non-produced inputs such as location (land)
and for assets formed by creating official privilege
over natural opportunities (e.g., patents
). In the moral
economy of neoclassical economics,
economic rent includes income gained by labor or state beneficiaries of other
"contrived" (assuming the market is natural, and does not come about
by state and social contrivance) exclusivity, such as labor guilds and
unofficial corruption.
Royalties:
A royalty is a payment to an owner
for the use of property, especially patents, copyrighted works, franchises or
natural resources
Capital
allowance: Capital allowances is the practice of allowing a company to get tax
relief on tangible capital expenditure by allowing it to be expensed against its
annual pre-tax income.
Incentive: Something that
encourages you to do something or perform an action
Upstream
sector: Involving exploration and pre – production
rather than selling and refining.
Investment:
this is the commitment and accumulation of fund with the hope of future returns
for commeasuring to the level of risk assumed.
1.9
Historical background of Shell Petroleum Development Company
Shell Nigeria is the common name for Royal
Dutch Shell's Nigerian operations carried out through four subsidiaries primarily Shell Petroleum Development Company of
Nigeria Limited (SPDC). Royal Dutch Shell's joint ventures account for
more than 21% of Nigeria's total petroleum production (629,000
barrels per day (100,000 m3/d) (bpd) in 2009) from more than
eighty fields.
Thus,
Shell started business in Nigeria in 1937 as Shell D’Arcy and was granted an
exploration license. In 1956, Shell Nigeria discovered the first commercial oil
field at Oloibiri in the Niger Delta and started oil exports in 1958.
Furthermore,
Shell Petroleum Development Company (SPDC) is the largest fossil fuel company in Nigeria, which operates over 6,000 kilometres
(3,700 mi) of pipelines and flowlines, 87 flowstations,
8 natural gas plants and more than 1,000 producing wells. SPDC's role
in the Shell Nigeria family is typically confined to the physical production
and extraction
of petroleum. It is an operator of the joint venture, which composed of Nigerian National Petroleum Corporation (55%), Shell (30%), Total S.A. (10%) and Eni (5%). Until relatively recently. It operated largely onshore on dry
land or in the mangrove swamp.
In July
2013, Shell Nigeria awarded Kaztec engineering Limited a $84.5 million
exploration and production contract for the Trans-Niger oil pipeline.
On March
25, 2014, Shell Nigeria declared a force majeure on crude oil exports from its Forcados crude
oil depot which stopped operations due to a leak in its underwater pipeline, a
clause freeing the company from contractual obligations as a circumstance
beyond its control happened.[5] While it struggled repairing the pipeline,
Royal Dutch Shell announced a force majeure on Nigerian crude oil exports.
Uzere was the second place where oil was discovered. Olomoro was the third
place, before oil discovery spread across most places in the Niger Delta
region.
Shell
petroleum Development Company has its head office at Rumuobiakani Port Harcourt
Rivers State.
Click “DOWNLOAD NOW” below to get the complete Projects
FOR QUICK HELP CHAT WITH US NOW!
+(234) 0814 780 1594
Login To Comment