DIFFERENTIAL IMPACT OF TAX POLICY IN A FOREIGN INVESTMENT IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background Of The Study

The political, economic and social development of any country depends on the amount of revenue generated for the provision of infrastructure in that given country. However one means of generating the amount of revenue for providing the needed infrastructure is through a well structure tax system. Azubike (2009) is of the view that tax is a major player in every society of the world. The tax system is an opportunity for government to collect additional revenue needed in discharging its pressing obligations. A tax system offers itself as one of the most effective means of mobilizing a nation’s internal resources and if lends itself to creating an environment conducive to the promotion of economic growth. Nzontta (2007) on the other hand, argues that taxes constitute key sources of revenue to the federation account shared by the federal, state and local governments.

Appah, et al (2004). Tax is a compulsory levy imposed on a subject or upon his property by the government to provide security, social amenities and create conditions for the economic well-being of the society also Anyanwu (1996) and Anyanfo (1997) stated that tax are imposed to regulate the production of certain goods and services, protection of infant industries, control business and curb inflation, reduce income inequalities etc.

On the other hand, Tosuu and Abizadeh (2005) acknowledge that taxes are used as proxy for fiscal policy. They outlined five possible mechanisms by which taxes can affect economic growth. First, taxes can inhibit investment rate through such taxes as corporate and personal income, capital gain taxes. Second, taxes can slow down growth in labour supply by disposing labour leisure choice in favour of leisure. Third, tax policy can affect on research and development expenditure. Fourth, taxes can lead to a flow of resources to other sectors that may have lower productivity. Finally, high taxes on labour supply can distort the efficient use of human capital high tax burdens even though they have high social productivity.

Tax is a major sources of government revenue all over the world. Government use tax proceeds to render their traditional functions, such as provisions of public goods, maintenance of law and order, defense against external aggression, regulation of trade and business to ensure social and economic maintenance.

Musgrave and Musgrave (2004) stated that economic effects of tax include micro effects on the distribution of income and efficiency of resources use as well as macro effect on the level of capacity output, employment, prices and growth.

In the last two decades, many governments have actively promoted their countries as investments locations, to attract private capital investment, technology and managerial skills associated with the idea of achieving the development targets. So, they have adopted measures to facilitate the attraction of foreign direct investment. Tax incentives were one of the important measures that were used. In some cases certain types of investment and fiscal incentives have proven to be a major factor in the decision related to the choice of investment location. In addition, for countries that offer to investors the same framework, tax incentives can make a difference, because governments can quite easy to change, modify or extend tax rate / tax base restriction, while other factors influencing change investments would not be achieved so easily and would consume more time, usually very important in making any decisions.

Since the attachment of independent in 1960 various policies of the Nigeria government have been geared essentially towards promoting the growth and development of the Nigeria economy by influencing the trends of gross fixed domestic investment or indirectly through policies aimed at stimulating the flow of foreign finance in any growing economy. This is so given that in the literature there are divergent views on the nature of effects of foreign direct investment and differential tax policy has been argued to be the most growth stimulation source of foreign finance in any growing economy. This is so given that in the literature there are divergent views on the nature of effects of foreign direct investment on host economics. Those that are of the view that foreign direct investment produce positive effects on host economics argue that some of the benefits are in the form of externalities and the adoption of foreign technology, employers training and the introduction of new process by the foreign   firms   according   to   Ayadi,   (2002)   foreign   direct   investment especially when it flows to a high risk area of new firms where domestic resource is limited.

The first national development plan was launched for industrial trade off and developments however as foreign industrial investors were. Rather apprehensive of the nascent independent administration efforts had to be made not only to alloy their fears of nationalization but also attract additional foreign investment through joint venture with individuals or the state. However Nigeria economy has been one of the important destination points of foreign direct investment in sub-Saharan Africa. The amount of foreign direct investment inflow into Nigeria according to ayadi (2002) has reached US $ 2.23billon in 2003 and it rose to US

$ 5.31billons in 2004 (9.13% increase) the figure rose again to US $9.92 billion (87%increasing) in 2005. The figure however declined slightly to US $ 9.44 billion in 2006.

Nigeria is argued to be buoyantly blessed with enormous mineral and human resource but believed to be highly risky market for investment. Also decade of bad governance have almost crippled. The national economy with corruption and misappropriation is of fund becoming the norm rather than expectation. What is the way out of this economic state? Many experts accepted that foreign direct investment. Is a verifiable boaster to kick start the economy. According to Odozi (1995) foreign investment appears to be the most. Crucial component of capital inflows and Nigeria should seek to attract in light of her current economic circumstance. Some scholars are of the view that Nigeria. Is in need of foreign direct investment as a verifiable boaster of the Nigeria economy while others are of the view that foreign direct investment is a form of neo- colonialism to what extent. Has foreign direct investment helped. The economic growth in Nigeria.

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). 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). However, the aim of this research is to determine the relationship between corporate taxation and FDI in Nigeria.

The remaining part of the project is structured as follows: The chapter two is review of the literature on previous related studies. The chapter three explains the method and data of the study. The chapter four of the paper deals with the results and discussion of the study and the chapter five of the paper is the conclusion and recommendations.

1.2 Statement Of Problem

A robust tax structure can impact on the movement of man, money and materials to invest in host country anywhere in the world. Again, several stakeholders believe that a flexible tax policy and incentives encourage investment from abroad thus helping the host nation to stem the tide of unemployment engender economic growth. Analysts however, have some reservations in this proposition as some host countries implement fiscal policy resulting in high tax rates coupled with poor infrastructure. The situation becomes unabated where insecurity and political upheaval becloud other considerations.

The highlights above become serious impediment to compete for FDI and a drawback to economic growth. This forms the gap which necessitates this research. The study deems it quite timely and apt to empirically substantiate the impact of tax policy and incentives on foreign direct investment and economic growth.

1.3Objective Of The Study

The objectives of the study are: to examine the extent to which tax rates encourage Foreign Direct Investment (FDI) to host countries and also to examine the relationship between FDI and economic growth.

The specific objectives of the study are as follow

To find out whether or not differential impact of tax policy in a FDI has a significant impact on the growth of the Nigeria economy. To determine the nature and magnitude of the differential impact of tax policy in a FDI on economic growth in Nigeri

1.4Statement Of The Hypothesis

Ho1:  The general proposition of this study is that there is a positive relationship between tax policy, foreign investment and economic growth in Nigeria

Ho2: “There is no relationship between tax policy, foreign investment and economic growth in Nigeria.

1.5Scope/ The Limitation Of The Study

The focus of the study is to verify if there has been any contribution made toward the economic growth and development of the Nigeria economics via gross domestic product (GDP) through foreign direct investment for the period (1986-2014). This study will however be limited to investigate the impact of differential impact of tax policy foreign direct investment on the growth of the Nigeria economy.

1.6 Significance Of The Study

Finding from the study will be of immense benefits in a number of ways and to different groups of persons.

For policy making, the expected result outcome shall serve as a riseful guide for future policies as it relates to stimulating growth within the economy. For further studies, it will serve as a reservoir of knowledge for such academic exercise