THE IMPACT OF COMPANY INCOME TAX ON FOREIGN DIRECT INVESTMENT

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Globalization is a tendency towards interaction and integration of world-wide economies bringing to the varying of the multinational enterprises (MNEs) ' strategies and the technique countries compete for foreign direct investments (FDI). In this globalize world economy with liberalisation investments; attracting FDI gradually more depends on the ability to provide a favourable government regime such as lower taxation rate, especially to the developing countries who lack of well-establish markets if compared to the developed countries. Countries have recognized the importance of attracting investment as a means of revitalizing their economies and stimulating growth. This has prompted many countries to work on developing favorable conditions to promote investment. The level of development of any nation depends on the level of the investment irrespective of private and foreign direct investment. Many countries impose tax on the income or capital of some types of legal entities in order to establish or invest for creating employment opportunity for their citizen. One of the taxes imposed by government is corporate income taxes. Corporate tax is a levy imposed on taxable profit of firms with a stipulated statutory rate. The burden of corporate taxation obviously influences the volume and location of foreign direct investment (FDI) for the simple reason that it determines after tax returns from investment (Okoi & Edame, 2013). This corporate income tax generally only applies to corporations and treated as taxable entities separate from their shareholders. That is, corporate income is taxed once at the corporate level according to the corporate income tax system. When corporate dividend payments are made or capital gains are realized income is taxed again at the individual-shareholder level according to the individual tax system. The corporate tax system serves to ensure a comprehensive income tax system. Investment has been confirmed as the engine of economic growth in many economies, especially in developing economies like Nigeria. Corporate Taxes are a crucial factor when deciding to invest. However, the inflow of investment is attracted not only by tax factors but also by a number of other factors such as macroeconomic stability, legal and regulatory framework to support well structured, skilled labor and a flexible labor market, the available natural resources, financing, degree of openness, the growth of the market size, purchase power of local markets; institutional factors, commerce and location. The inflow of Investment brings several benefits in particular by way of economic growth, infrastructure, human resources, technological development, and employment generation, economic and social well-being of the people in the country. The sensitivity of investment to tax varies depending on the conditions of the country, the tax policies of the companies and the period of time in analysis. it also depends mainly on the conditions of the country, the investment policies established there, types of industry, and commercial activity covered. A sizeable review of literature is well documented on the overwhelming importance of FDI inflows to the developing countries. This is not unconnected to the teaming benefits it accrues to a nation in terms of employment, knowledge and skills transfer in the area of management and technology (Morisset, 2000). It also provides avenue for products diversification which collectively promote growth and development of an economy (Desai, Fritz & James, 2004). In view of the above stated advantages, many nations today are striving to create a favourable and enabling climate to attract FDI as a policy priority. According to Adepeju (2012), Nigeria is in dilemma as it is in dare need of foreign capital for the on-going internal adjustment, yet it fears that commanding heights of some sectors of the economy may extract complete control of the national economy and the need for foreign capital has become indispensable if the economy must come out of the depression. The Nigerian Government in recognition of the importance of FDI as an important vehicle for industrial progress, most times expressed readiness to enter into bilateral agreement with foreign governments, or private organization that wish to invest in the country as well as discuss the additional incentives (Morisset, 2003). The corporate tax burden obviously affects the MNEs decision to locate FDI for the simple reason that it would reduces profits after tax from investment. MNEs have the capacity to shift their location and/or taxable income across borders. So what drives inward FDI and what is the role of taxation rates in this process? FDI is not determined by a single driver but many factors intervene, such as market size, market growth, trade openness, human capital, the quality of the physical infrastructure and others. Taxation is but one of many influences on inward FDI but how important is it in attracting FDI? However, the aim of this research is to determine the relationship between corporate taxation and FDI in Nigeria.

1.2     STATEMENT OF THE PROBLEM

Ogba (2013) noted that experience has shown that there are certain issue that commonly arise and questions that often come up when foreign investors seek to .invest in Nigeria. This article (while attempting to address some of those issues that investors often seek answer to) is not intended to be specific to investments in any given sector of the economy of the issues discussed.

The need to attract Foreign Direct Investment into the Nigerian economy is reflected by the following ills:

i.       Unwilliness of foreign investors to invest in the country.

ii.       Economic imbalance (unfavorable, balance of payment) .

iii.      Decline in external reserve of the country. .

iv.      Unfavorable tax structure in the country. The realization of the above challenges, the researcher observe that the effect on the economy if far reaching and in most cases detrimental to the economy. The improvement of the tax structure and tax rate in the country would. invariably turn the economy around with much impact on’ improvement in foreign direct investment stock, balance of payment position and technology transfer. This therefore form the focus of this research which intended to capture the impact of company income tax on foreign direct investment.

In reaction to the above challenges, Kareem et al (2012) pointed out that this immense fall of 60.4 percent shows the need for Nigerian government to begin to rigorously and courageously address the challenges to foreign investment and other business interests in the country. The UNCTAD report noted that investment inflow into Nigeria and the rest of Africa increased. Substantially, in 2008 but declined significantly in 2009. Inspire of economic reform by the government, no appreciable improvement was made. Insecurity in the land is a likely primary factor responsible for the sharp decline. This is a true reflection of Nigeria’s economic, Social legal, and cultural environment which raises several questions and anxiety from prospective foreign investors.

While the research holds constant insurgency and other determinant of investment, the study is therefore interested in assessing whether company income tax is a major determining factor of foreign direct Investment in Nigeria. This form the focus of the research.

1.3     OBJECTIVES OF THE STUDY

The following objectives have been outlined by the researcher for attainment at the end of the research work.

1. To examine the effect of corporate income tax on foreign direct investment in Nigeria.
2. To assess if there is a positive relationship between Foreign Direct Investment and Nigeria’s Balance of Payments.
3. To ascertain whether Foreign Direct Investment is directly linked to Nigeria’s External Reserve.
4. To establish the extent to which Foreign Direct Investment affect Nigeria’s Foreign Trade.
5. To assess the relationship between corporate income tax and foreign direct investment in Nigeria 

1.4     RESEARCH QUESTION

1. Does foreign direct investment, measure the effect of company income tax in Nigeria?
2. Is there a positive relationship between foreign direct investment and Nigeria’s balance of payments?
3. To what extent is foreign direct investment linked to Nigeria’s external reserves?
4. Does foreign direct investment affect Nigeria’s foreign trade?
5. What is the relationship between corporate income tax and foreign direct investment in Nigeria?

1.5     STATEMENT OF HYPOTHESES

HYPOTHESIS 1

Ho: Corporate income tax has no significant effect on foreign direct investment in Nigeria.

 H1: Corporate income tax has a significant effect on foreign direct investment in Nigeria.

HYPOTHESIS 2

Ho:  Corporate income tax has no significant relationship on foreign direct investment in Nigeria.

 H1: Corporate income tax has no significant relationship on foreign direct investment in Nigeria.

1.6    SIGNIFICANCE OF THE STUDY

This study attempts to shed light on how important of taxation do affect the inward FDI to developing countries instead of developed countries. This paper would suggest corporate tax-lowering strategies of governments seem to have an important impact on FDI location decisions. Thus presents the government of developing countries some ideas in planning their taxation policy by now consider the effects on FDI and provide framework for government to develop a successful long run taxation policy. This paper also expects to provide enterprises a new perspective towards taxation influence on FDI in developing countries. Thus contribute to the decision making of companies toward FDI location.

1.7    SCOPE OF THE STUDY 

The study is based on assessing the impact of company income tax on foreign direct investment in Nigeria, a case study of Federal Inland Revenue Service, Abuja.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Tax: Refers to a compulsory payment of money or occasionally of goods and services from private individuals, institutions or groups to the government, it may be levied upon wealth or income or a surcharge on price.

Income Tax: An income is a levy on the financial income of personnel or corporation or other legal entities.

Company: Is a form of organizing a business with a legal personality distinct from the individual taking part in it.

Corporate Tax: Refers to a direct tax levied by various jurisdictions on the profit made by companies or associations which often includes the capital gain of a company.

Generation: This is the process of sourcing revenue for the local government in carryout their aim and objectives.