FIRM ATTRIBUTE AND EFFECTIVE TAX RATE OF LISTED OIL AND GAS COMPANIES IN NIGERIA (A CASE STUDY OF LISTED OIL AND GAS FIRMS IN RIVERS STATE)

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

The statutory tax rate (STR) has been severely criticized for its inability to reflect the actual tax burden borne by firms. Because of this, Nicodeme (2008) opines that economists have come up with the concept of effective tax rate as a measure of actual tax burden inherent in investment decisions. Two types of effective tax rate are generally encountered in literature; the King and Fullerton (2012) marginal effective tax rate which measures the implicit tax rate inherent in an investment projects, and the average effective tax rate which is considered to be better suited for showing the overall tax burden of a firm (Callihan, 2015). Spooner (2012) posits that marginal effective tax rate can be used to determine the tax incentive to invest in new assets and AETR to measure the distribution of tax burden of previous investments. The concept, effective tax rate, has also been involved in backing pension policies (Francis and Recter, 2013), determining management compensation (Ronen and Aharoni, 2008), reaching investment decisions and determining investment behaviour (Shevlin, 2013; Devereux and Griffiths, 2015), examining tax planning effectiveness (Shevlin, 2013), back up agitation for tax equity (Citizen for Tax Justice, 2012) and to support changes in public policies (Gupta and Newberry, 2011) amongst others. Effective tax rate has been calculated for many countries (Buijink et al., 2013, Kraft, 2014; Mourikis, 2015, Ribeiro, 2016), many sectors (Derashid and Zhang, 2015) and single investment projects (Devereux and Griffiths, 2015). Moreover, researches in effective tax rate have found it to be different from the statutory tax rate during the periods of the studies (Rohaya et al., 2008, Nicodeme, 2008), from one sector to another (Derashid and Zhang, 2015) and from one economy to another economy (Buijink et al., 2013). Researches on the causes of this variability in the effective tax rate have also enjoyed quite a significant amount of studies. Most of these researches, however, have been conducted in the USA and the developed western countries, to a less extent in the Asian Countries (Kim and Limpaphayom, 2015), very little in Africa and there seems to be no study published on determinants of effective tax rate in Nigeria, even though the issue of tax is an important issue in Nigeria just as it is in other parts of the world. Knowing the actual corporate tax burden companies bear in Nigeria and the factors that affect them is important because of the current efforts of government to attract foreign investments into the country and the dwindling revenue from oil, which makes tax the new focus for revenue generation. This study, therefore, has several objectives. One, it investigates the tax burden, as measured by effective tax rates, being experienced by non-financial firms in Nigeria. Two, it examines whether there is equity in the corporate tax system in Nigeria. This is measured by the neutrality/dispersion in effective tax rate across various sectors of the economy. It also determines the firm specific characteristics that cause variability in the effective tax rates. The importance of this study lies in the provision of new insight on effective tax rate in the Nigerian corporate tax system and serves as a guide to policy makers and firms on tax matters and tax planning.

1.2 STATEMENT OF THE PROBLEM

The peculiarity of oil and gas firms in terms of huge capital outlay, variability and volatility in earnings, government regulation, ownership structure, fluctuation in international prices of products, taxation, non-correlation between the amount of investment made and returns obtained and high sensitivity to market risk, operational risk and foreign exchange risk have attracted diverse interest in the activities, choice of accounting methods and reported numbers presented by these companies. It is a widely held belief that Choice of accounting methods affects reported earnings. Corporate tax rate is an instrument of fiscal policies. Ever more the choice and establishment of the statutory tax rate is on the main agenda of governments. It is well known that taxes are an important source of revenue in order to states develops their public policies. However, the willingness to increase statutory taxes in order to satisfy that purpose has been somewhat constrained by other important aspects such as the relevance of corporate taxation to the attractiveness of foreign investment. Therefore, investigations concerning the analysis of which factors may influence the taxes paid by firms are useful for regulators and policy makers and contribute to the definition of domestic tax systems.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine        firm attribute and effective tax rate of listed oil and gas companies in Nigeria. Other general objectives of the study are:

1. To examine the determinants of effective tax rate at the firm level.
2. To examine the neutrality and the determinants of these rates to the companies.
3. To examine the impact of effective tax rate on firm attributes of listed firms in Nigeria.
4. To examine the actual corporate tax burden companies bear in Nigeria.
5. To examine the relationship between effective tax rate and labour intensity.
6. To examine the causes of variability in the Effective Tax Rate of listed oil and gas companies in Nigeria.

1.4 RESEARCH QUESTIONS

1. What are the determinants of effective tax rate at the firm level?
2. What are the neutrality and the determinants of these rates to the companies?
3. What is the impact of effective tax rate on firm attributes of listed firms in Nigeria?
4. What is the actual corporate tax burden company’s bear in Nigeria?
5. What is the relationship between effective tax rate and labour intensity?
6. What are the causes of variability in the Effective Tax Rate of listed oil and gas companies in Nigeria?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no significant impact of effective tax rate on firm attributes of listed firms in Nigeria.

H1: There is a significant impact of effective tax rate on firm attributes of listed firms in Nigeria.

Hypothesis 2

H0: There is no significant relationship between effective tax rate and labour intensity

H1: There is a significant relationship between effective tax rate and labour intensity

1.6 SIGNIFICANCE OF THE STUDY

The outcome of this study is expected to immensely contribute to the existing body of knowledge. This is because there are a lot of studies on firm attributes and effective tax rate around the globe. There is dearth of evidence that investigated the relationship between firm characteristics and effective tax rate of listed oil and gas firms in Nigeria. The outcome of this study will therefore serve as a reference for further research in this area. Also, the outcome of this study will be of immense benefit to a number of users of accounting information. Investors will know the relationship between firm characteristics and effective tax rate of the sub-sector as they invest their funds in anticipation of expected value. The study will also make some significant contribution to the field of accounting and finance in Nigeria. Literature-wise, because there is a mixed of opinion in the existing literature between firm characteristics and stock market stock value of quoted firms, there is always the need for further empirical evidence. For that, the study will be among those that may provide additional evidences for future debates in the field of accounting and finance by students and researchers. For policy, the findings of this study provides better understanding of regulators and corporate managers on the firm attributes that play significant role in the tax burden of the oil and gas sector. This is relevant as policy efforts could be geared towards achieving the desired level of the variables studied in order to enhance the effective tax rate of the sector.

1.7    SCOPE OF THE STUDY 

The study is based on firm attribute and effective tax rate of listed oil and gas companies in Nigeria, case study of listed oil and gas firms in Rivers state.

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: is a percentage of persons’ income or of the price of goods takes by the government to help pay the benefit received.

Firm: A firm is an organization which sells or produces something or which provides a service which people pay for.

Firm Attributes: Are essential determinants of a firm’s performance as well as its success in business. Firm attributes variables used in this study include, firm size, firm age, Leverage, liquidity and operating expenses