EFFECT OF MULTIPLE TAXATION ON FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH IN NIGERIA (A CASE STUDY OF FEDERAL INLAND REVENUE SERVICE (FIRS), ABUJA)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Countries have recognized the importance of attracting foreign direct investment as a means of revitalizing their economies and stimulating growth. This has prompted many countries to work on developing favourable conditions to promote foreign direct investment but there are a variety of factors that influence foreign direct investment [Tomonori, 2012].

Over the years, more and more businesses are investing in other countries and it is easily evident that one of their strategies in achieving the desired competitive advantage is the search for new locations that are more attractive from several reasons such as cheap labour, exemption from tax payment, tax secrecy or other taxation benefits, not forgetting geographical benefits [Drago-Paun, 2013].

A conducive business environment depends both on companies operating in that environment and on the rules and regulations provided by the country also seeking to obtain a higher profit through market share and in this sense they develop policies and strategies to differentiate them from the competition. At the same time, governments are struggling to gain a competitive advantage in order to attract greater investment in their territory.

They are doing this because it will create new jobs, will boost revenues from taxation, lead to the formation of local budget and will also increase property value. The main reasons why some businesses tend to have a higher interest in some countries rather than others is provided by the economic and fiscal policies of those countries, and the level of bureaucracy or the presence of the necessary infrastructure.

Tax policies occupy a central place in the final destination of choice for a company wishing to invest in a country other than the country of origin [Justman, Thisse & Van, 2014]. Bearing this in mind, it can be deduced that a country is even more attractive to investors if its taxes are low and well-coordinated. Moreover, the size of the economy, its purchasing power and other market related factors can be compensated if there are fiscal incentives for companies [Bucovetsky, 2012].

In this way, each country wants to attract more foreign investors and it will act accordingly in terms of the administrative and legal framework. According to Yin, [1999], the increase of foreign direct investments is seen as a positive aspect, not only from an industry point of view but also from a social and economic point of view.

Countries use tax incentives and tax reductions to stimulate the inflow of foreign direct investments. Subsequently, many countries have reduced their corporate tax rates and provided certain incentives, but there are a variety of factors that influence foreign direct investment, and the effects of taxes on foreign direct investment are not self-evident.

Multinationals have to deal with a plethora of issues in order to overcome many hurdles to become established, achieve the desired competitive advantage and remain afloat in a foreign land. This ranges from business registration to obtaining permits, raising capital, registering property, dealing with customs in some cases, getting the right people to engage, handling customer relations, internal control and fraud prevention, financial reporting, investors and other stakeholder management, and paying taxes among others [Oyedele, 2015].

It has been observed over the years that generated tax revenue has been grossly understated due to improper tax administration arising from under assessment and inefficient machinery for collection (Adegbie and Fakile, 2011).

According to Naiyeju (2012) the success or failure of any tax system depends on the extent to which it is properly managed; the extent to which the tax law is properly interpreted and implemented. The role of taxation in promoting economic growth in Nigeria is not fully felt, and optimal tax is not been realized that can engine economic growth primarily because of its poor administration.

Even after some tax policies the tax authority has put in place over the few years such as the E- Payment scheme, Tax Identification Number (TIN), Anti-Tax Avoidance legislation, major tax challenges still exists which include frontiers of professionalism, poor accountability, lack of awareness of the general public on the imperatives and benefits of taxation, corruption of tax officials, tax avoidance and evasion by taxing units, connivance of taxing officials with taxing population, high rate of tax, poor method of tax collection.

Taxation plays a crucial role in promoting economic and social activities and growth. Through taxation, government ensures that resources are channelled towards important projects in the society while giving support to the weak. In support of Olashore, Orjih (2014), stated that taxation is useful in raising revenue, controlling the consumption of certain commodities, controlling monopoly, reducing income inequalities, improving the balance of payments as well as protecting infant industries.

In essence, taxation is a core pillar of a country’s regulatory framework for investment and growth. Therefore, the aim of this research work is to evaluate the effect of multiple taxation on foreign direct investment and economic growth in Nigeria.

1.2 STATEMENT OF THE PROBLEM

The issue of multiple-taxation has been described as a cankerworm threatening the continued existence of small, medium size and major corporate organizations in Nigeria. The stunted growth of the economy has often been blamed on many factors, top of which is the challenge of uncoordinated tax administration that has crippled production capacity of the manufacturing sector and forced others to relocate to other neighbouring countries considered as tax havens [Okereocha, 2014].

The sector’s contribution to the Gross Domestic Product (GDP) declined significantly from 9.5 per cent in 1975 to 6.65 per cent in 2013, 3.42 per cent in 2015 and in 2009 it peaked marginally to stand at 4.0 per cent with no sign of improvement by the end of 2010.

According to estimates from the Manufacturers Association of Nigeria [2010] about 1,000 manufacturing firms that set out to do business in the country annually end up shutting down due to the unfriendly business environment. MAN [2010] said, aside the problem of infrastructure like unstable electricity, the yoke of multiple taxes on manufacturers ranked second among the factors stunting the growth of the real sector.

It is a heavy yoke that frustrates existing investors, and scares away prospective ones. How Nigeria hopes to grow the economy under this yoke and meet its vision 20-20-20 target of getting enlisted as one of the top 20 economies globally continues to top discussions among economic analysts. Nigerians however, continually bemoan the amount and number of taxes levied on them and their businesses.

The then Chairman of the JTB who was also chairman of the Federal Inland Revenue Service (FIRS), Mrs. Ifueko Omoigui [2010], noted that multiple taxation is ‘evil and illegal’. She explained that the practice, which stifles the business environment, is as bad as other reported cases of illegal collection of sundry levies and taxes by local councils across the federation.

The present economic doldrums in Nigeria as a result of the militancy in the Niger Delta region has crippled the revenue generation prowess of the country. The paucity of fund has further exacerbated the problem of multiple- taxation. All the three tiers of government now find solace in taxation as more uncoordinated moves are being channelled towards shoring up their revenues.

The report of the committee set up in the year 2010 by the Joint Tax Board to proffer solutions to the problem of multiple-taxation in the country also confirmed that multiple-taxation of business operations in Nigeria has unsavoury consequences Joint Tax Board [2010]. The committee identified the problem as one of the major drawbacks to sustainable economic growth.

It further averred that the burden it places on companies is choking, as it makes it difficult for them to run their operations profitably which also contributes to inflation. Efficient tax system is tantamount to economic growth and development. Any country that treats it with hand glove is heading towards a precipice.

In Nigeria, tax evasion and other related tax offences are very prevalent. Citizens and non-citizens alike evade tax with reckless abandon owing to the government attitude towards taxation in Nigeria. Moreover, because of lack of efficient tax system in Nigeria, there is a conflict of interest amongst the Federal, State and Local Government in tax collection which culminates into double taxation which does not augur well with the Nigerian Economy.

A major problem in Nigerian tax regime is the multiplicity of tax imposing and tax-collecting entities at federal, state, and local government levels. Like the Nigerian federation itself, there is little clarity on jurisdictional competencies and indeed, many observers doubt whether there is genuine fiscal federalism in Nigeria. It is against these backdrops that this study aims at establishing the relationship between multiple taxes and foreign direct investment inflow into the Nigerian economy.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine the effect of multiple taxation on Foreign Direct Investment and economic growth in Nigeria. Other general objectives of the study are:

1. To examine the impact of Company Income Tax on  Foreign Direct Investment and economic growth in Nigeria
2. To assess the relationship between multiple taxation and Foreign Direct Investment
3. To assess the effect of multiple taxation on  Foreign Direct Investment and economic growth in Nigeria
4. To examine the extent to which multiple taxation affects foreign Direct Investment and Economic growth
5. To examine the relationship between multiple taxation and Economic growth in Nigeria.
6. To examine ways of remedying multiple taxation in Nigeria.

1.4 RESEARCH QUESTIONS

1. What is the impact of Company Income Tax on Foreign Direct Investment and economic growth in Nigeria?
2. What is the relationship between multiple taxation and Foreign Direct Investment?
3. What is the effect of multiple taxation on Foreign Direct Investment and economic growth in Nigeria?
4. What is the extent to which multiple taxation affects foreign Direct Investment and Economic growth?
5. What is the relationship between multiple taxation and Economic growth in Nigeria?
6. What are the ways of remedying multiple taxation in Nigeria?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no significant effect of multiple taxation on Foreign Direct Investment and economic growth in Nigeria.

H1: There is a significant effect of multiple taxation on Foreign Direct Investment and economic growth in Nigeria.

Hypothesis 2

H0: There is no significant relationship between multiple taxation and Foreign Direct Investment

H1: There is a significant relationship between multiple taxation and Foreign Direct Investment

Hypothesis 3

H0: There is no significant relationship between multiple taxation and Economic growth in Nigeria

H1: There is a significant relationship between multiple taxation and Economic growth in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

The relevance of this study therefore, stems from the fact that it is directed towards providing solutions to the problems identified earlier thus: The study will enables the federal government to know the present trend of revenue generated from investments into the Federation Account, and how such performance can further be improved upon to enhance both economic and social growth.

It will also pinpoint the aspect of the Income Tax Act that needs amendment and how to formulate the necessary policies towards creating conducive environment for our investors and businesses in Nigeria.

The study will in no doubt be a working document to the Federal Inland Revenue Service in identifying the various loopholes and ways of improving the assessment, collection and effective administration of the various taxes collected from registered companies.

It shall also enable the registered companies to appreciate their roles in the country’s economic development through their prompt and efficient remittance of their taxes to the government. Tax collectors will find this study useful as some of the problems being faced are solved;

in addition, accounting and management students will be adequately informed on the effect of multiple taxes on foreign Direct Investment and economy like Nigeria. Hence, this work will specifically explain in detail the effect of not only multiple taxation but also taxation in general. This will also contribute to the general body of knowledge and form a basis for further research.

1.7    SCOPE OF THE STUDY 

The study is based on the effect of multiple taxation on foreign Direct Investment and economic growth in Nigeria, a case study of Federal Inland Revenue Service (FIRS), 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

Impact: Impact in this study refers to the effect of revenue generated on service delivery by state government. It also determined the extent to which state government was able to deliver services with resources at its disposal.

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

Multiple Taxation: Spurious, unjustifiable and/or inappropriate levies imposed by MDAs at the Federal, State or Local Government levels on small and medium scale enterprises operations. “Taxation” used generically, not within its classical context.