CORPORATE INCOME TAX AND PROFITABILITY OF THE LISTED CONSTRUCTION COMPANIES IN NIGERIA

ABSTRACT

This research examined corporate income tax and profitability of the listed construction companies in Nigeria. The survey research was used in this study to sample the opinion of respondents. This method involved random selection of respondents who were administered with questionnaires. Relevant conceptual, theoretical and empirical literature was reviewed. The target population of the study comprised selected employees from selected construction companies in Nigeria. The questionnaire administered was three hundred and ten (310) copies and three hundred copies (300) retrieved which constitute the sample size. The descriptive and analytical approach was adopted using Chi-square to test and analyze the hypotheses earlier stated. The result revealed that there is a significant impact of corporate income tax on the profitability of select firms in Nigeria. The finding of the study also reveals that firm size is one of the factors that affect the profitability of manufacturing firms in Nigeria. The findings of the study also revealed that the durability of investment is one of the factors that affect the profitability of manufacturing firms in Nigeria. The findings of the study further reveal that there is a significant relationship between corporate income tax and profitability of manufacturing firms in Nigeria. The finding of the study also reveals that high rated tax remission is one of the challenges reducing the profitability of manufacturing firms in Nigeria. The findings of the study reveal that effective tax rate has a positive impact on the profitability of manufacturing firms in Nigeria. It was therefore concluded that corporate income tax significantly has impact in the profitability of selected construction firms in Nigeria. It was recommended that Policies should ensure that companies pay their corporate income tax promptly and consequently better financial performance of construction companies in Nigeria.

CHAPTER ONE

INTRODUCTION

Background of the Study

Corporate profit taxes has been one of the most highly debated problems in Nigerian public finance. Currently, corporate revenues are subject to double taxes. Profits are taxed first at the corporate level and then again at the individual level when distributed as dividends or capital gains are realized (Citron, 2014). Corporations are legal entities with various owners and independent management. The capacity to attract various investors through the selling of shares or bonds provides businesses with increased financial access and development potential. Corporation shares can be readily transferred to other investors without interfering with the firms' activities. Corporation owners also benefit from restricted liability since, in the event of a default, their responsibility is limited to the amount invested.In Nigeria, business entities can avoid double taxation but lose some of the previously mentioned special privileges if they organize as pass-through entities (Junaidu & Hauwa, 2018).

Sebastian and Costel (2018) defined corporate tax mix as all public finance-related responsibilities incurred by a corporation, including not just profit taxes but also non-profit taxes like real-estate taxes and labor-related taxes like social security charges. Many business executives have erred in establishing adequate tax plans for the available corporate tax mix, which includes corporate income tax, deferred tax, and tax incentives, due to a lack of accurate classification and knowledge of the idea.These factors—how much tax is to be paid, how much tax is to be deferred, and what tax incentives are available to be taken advantage of—are neglected as a result of the uncertainty involved in finding the ideal corporate tax mix. There is no denying the significance of corporate tax mix when creating corporate tax plans, which have the goal of mitigating the perceived negative impact of corporate tax payment on net income of businesses (Citron, 2014).

The concept of corporate tax mix has a certain history, development and experience in Nigeria but it cannot be said that in its practical application it is a self-evident and seamless part of current financial practice. Literature on corporate tax in Nigeria and scholars often neglect to put forth arguments that pertain to corporate tax mix; they are more likely concerned with a singular view of each of these aspects of corporate tax mix. While corporate income tax is seen as a source of revenue to the government and a burden on the part of firms, deferred tax ameliorates the current tax burdens by legally shifting a current tax burden of a firm to a future specific period when it will be more convenient for the firm to pay, as well sustain their business operation. Also, in a bid to cushion the tax burden of firms and encourage business productivity that in-turn enhances economic growth, the government offers tax incentives to the firms to help achieve the aim of economic growth. Within this purview, corporate tax managers have used the various provision of tax laws to make financial plans ranging from investment plans to dividend policies which are hinged on the net income realized after tax deductions.

There are numerous literatures on the issue of corporate tax as a fundamental determinant of doing business and how it influences the sustainable performance of organizations. This is of great interest to policymakers and business executives, as many well-established researches look into corporate tax and its effects on firm performance. Gatsi et al.(2013) assert that the manufacturing sector of any economy is regarded as an essential sector to the growth of the economy as it contributes to the growth of the economy which is mirrored in job creation and increased tax contribution to the nation. The study carried out by Junaidu and Hauwa (2018) also, confirmed that Nigeria has turned to tax administration for revenue generation owing to the depletion of oil prices from 2014. The liberalization of the Nigerian economy thru a range of home grown policies, and World Bank policymanufacturing sector in Nigeria in a manner that is a challenge for current policymakers and business executives; specifically, how -these businesses are taxed (Junaidu & Hauwa, 2018).

The major issue facing corporate managers in the manufacturing sector is the inconsistency of corporate tax policies (Bauer et al., 2018). The question is, whether it is the high corporate tax rates that determine poor sustainable performance of firms in the manufacturing sector or poor corporate tax planning carried out by the management of the firms in the presence of various tax incentives. Whatever the case, taxation has been linked to the expansion of corporate organizations, according to researchers like Abiola et al. (2012), Adams (2012), and Abiahu and Amahalu (2017). This is due to effective tax policies, which in addition to helping the government raise money also help to attract investment.

Effective tax policies also serve as a means of protecting emerging firms in the manufacturing sector, as well as creates an incentive for investors to invest in certain areas of the economy (Aloys et al., 2015). A tax policy defines the cost structure of firms as it is factored into pricing (Beigi et al., 2013). Governments, over the years, have made pronouncements and policies that are supposed to create tax incentives for businesses. Fortunately, most of the provisions are to help manufacturing companies to withstand adverse external issues that will impede the growth of the firm (Junaidu & Hauwa, 2018).

Schwellnus and Arnold (2008) examined the effects of corporate income taxes on two of the main drivers of growth; profitability and investment of firms in European OECD-member countries. They found out that corporate income taxes reduce investment through an increase in the user's cost of capital while Junaidu and Hauwa (2018) carried out a study on corporate tax and performance of listed manufacturing firms in Nigeria and found out that corporate tax rate has no significant effect on the performance of the listed firms. This may be partly explained by the negative profitability effects of corporate income taxes if there is an increase in the corporate tax rate without commensurate tax incentives and benefits to the firm. That been the case, this study will examine the effect of corporate tax on profitability of construction companies in Nigeria to see if result now conforms with that of previous studies.

Statement of the Problem

Numerous studies have examined the consequences of corporation taxes. All models concur that corporate taxes influences a wide variety of decisions made by taxable firms in some way, despite the fact that the outcomes of empirical models show considerable variation. There is still disagreement over the scope of such consequences and how they will affect the economy as a whole. The discussion of corporate taxation is divided into three main topics by Gravelle (1995). "First, does the corporation tax play a part in a progressive tax system and who bears the weight of it—capital, labor, or consumers? How serious are the distortions brought forth by the excessive corporation tax, secondly? Thirdly, how can the corporation tax income be replaced?It based on this background that the present study aim is to investigate the effect of corporate tax on profitability of selected construction companies in Nigeria.

Objectives of the Study

The main objective of this study is to examine the impact of corporate income tax on the profitability of selected construction company in Nigeria. Other specific objectives of the study include;

1. To determine the impact of corporate income tax on profitability of the listed construction companies in Nigeria
2. To identify the factors that affect the profitability of manufacturing firms in Nigeria
3. To examine the importance of corporate income tax on the economic growth of Nigeria
4. To examine the relationship between corporate income tax and profitability of manufacturing firms in Nigeria

Research Questions

The following questions were derived from the objectives of the study to give it a direction;

1. To what extent does corporate income tax impact on the profitability of the listed construction companies in Nigeria?
2. What are the factors that affect the profitability of manufacturing firms in Nigeria?
3. What are the importance of corporate income tax on the economic growth of Nigeria?
4. Is there a relationship between corporate income tax and profitability of manufacturing firms in Nigeria?

Research Hypotheses

The following hypotheses were stated in the present study;

Hypothesis 1

H0: There is no significant impact of corporate income tax on the profitability of select firms in Nigeria.

H1: There is significant impact of corporate income tax on the profitability of select firms in Nigeria.

Hypothesis 2

H0: There is no significant relationship between corporate income tax and profitability of manufacturing firms in Nigeria.

H1: There is significant relationship between corporate income tax and profitability of manufacturing firms in Nigeria

Significance of the study

The significance of this study is to examine the impact of corporate income tax on the profitability of construction firms in Nigeria. Hence, the finding of this study will helps policy makers to know the importance of corporate tax on the economic development of Nigeria.

Additionally, this study would contribute to the growth of knowledge at the institution and aid advance research.

The results of this study would be significant for the stakeholders in the construction industry and the Nigerian economy at large.

It will help to further enrich the literature in this very important area of macroeconomics and finance in Nigeria. Economic planners, policymakers and macroeconomic managers will find this work as a valuable tool for improved economic planning.

Scope of the Study

The scope of this study is restricted to the impact of corporate income tax on the profitability of construction companies in Nigeria.

Operational Definition of Terms

Corporate Income Tax: Corporate income taxes are paid on a company's taxable income, which includes revenue minus cost of goods sold (COGS), general and administrative (G&A) expenses, selling and marketing, research and development, depreciation, and other operating costs.

Profitability: Profitability is the ability of a company or business to generate revenue over and above its expenses

Construction Company:Construction companies are in the business of conducting engineering works, i.e., erecting buildings and other built physical infrastructure like roads and bridges.

Limitation of the 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.

Organization of the Study

This research work is classified into five main sections. chapter one contains the introduction of the study, chapter two contains the literature review, chapter three contains the methodology, chapter four covers analysis of data and interpretation of result, and chapter five covers the summary, recommendations and conclusion of the study.