IMPACT OF TAXATION AND TAX INCENTIVES ON FOREIGN DIRECT INVESTMENT IN THE NIGERIAN CAPITAL MARKET

IMPACT OF TAXATION AND TAX INCENTIVES ON FOREIGN DIRECT INVESTMENT IN THE NIGERIAN CAPITAL MARKET

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TABLE OF CONTENT

Title Page        -           -           -           -           -           -           -           -           -           -           i

Declaration      -           -           -           -           -           -           -           -           -           -           ii

Certification    -           -           -           -           -           -           -           -           -           -           iii

Approval Page            -           -           -           -           -           -           -           -           -           -           iv

Dedication      -           -           -           -           -           -           -           -           -           -           v

Acknowledgement      -           -           -           -           -           -           -           -           -           vi

Table of Contents       -           -           -           -           -           -           -           -           -           vii

Abstract          -           -           -           -           -           -           -           -           -           -           viii

CHAPTER ONE: INTRODUCTION

1.1  Background to the Study -           -           -           -           -           -           -           -           1         

1.2  Statement of the problem -           -           -           -           -           -           -           -           2

1.3  Objectives of the Study    -           -           -           -           -           -           -           -           3

1.4  Research questions            -           -           -           -           -           -           -           -           3

1.5  Research Hypotheses        -           -           -           -           -           -           -           -           3

1.6  Scope of the Study           -           -           -           -           -           -           -           -           4

1.7Significance of the study   -           -           -           -           -           -           -           -           4

1.8Definitions of Key Terms -            -           -           -           -           -           -           -           4

CHAPTER TWO: LITERATURE REVIEW

2.1. Introduction         -           -           -           -           -           -           -           -           -           6

2.2. Concept of Foreign Direct Investment    -           -           -           -           -           -           6

2.3 The Theory of Foreign Investment -         -           -           -           -           -           -           7

2.4 Divergence of View -       -           -           -           -           -           -           -           -           9

2.5. Determination of Foreign Investment     -           -           -           -           -           -           10

2.6. Foreign Direct Investment In Nigeria      -           -           -           -           -           -           14

2.7. Evaluation of the Nigerian Tax System –            -           -           -           -           -           17

2.8. Forms of Taxes on Foreign Direct Investments   -           -           -           -           -           19

2.9.. Company Income Tax     -           -           -           -           -           -           -           -           19

2.10. Petroleum Profits Tax    -           -           -           -           -           -           -           -           20

2.11. Capital Gains Tax-    -                -          -            -          -          -           -           -          20

2.12. Value Added Tax          -           -           -           -           -           -           -           -           20

2.13. Education Tax - -           -           -           -           -           -           -           -           -           20

2.14. Impact of Taxation on Nigerian Capital Market            -           -           -           -           21

2.15. Tax Incentives Applicable to FDIs in Nigeria -             -           -           -           -           22

2.16. Limits of Taxation         -           -           -           -           -           -           -           -           22

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction          -           -           -           -           -           -           -           -           -           24

3.2 Research Design               -           -           -           -           -           -           -           -           -           24

3.3 Sources of Data    -           -           -           -           -           -           -           -           -           24

3.4 Method of Data Collection  -       -           -           -           -           -           -           -           24

3.5 Population of the Study    -           -           -           -           -           -           -           -           24

3.6 Sampling technique and sample size         -           -           -           -           -           -           24

3.7 Method of Data Analysis -           -           -           -           -           -           -           -           25

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS, AND INTERPRETATION

4.1 Introduction                      -           -           -           -           -           -           -           -           26

4.2 Data Presentation              -           -           -           -           -           -           -           -           26

4.3 Data Analysis        -           -           -           -           -           -           -           -           -           27

4.4 Test of Hypotheses           -           -           -           -           -           -           -           -           39

4.5 Summary of Findings       -           -           -           -           -           -           -           -           39

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary   -           -           -           -           -           -           -           -           -           -           45

5.2 Conclusion            -           -           -           -           -           -           -           -           -           46

5.3 Recommendations            -           -           -           -           -           -           -           -           46

   Bibliography         -           -           -           -           -           -           -           -           -           49


ABSTRACT

Despite the various tax policies as well as tax incentives and other government programmes the impact of foreign private direct investment in the Nigeria economy is still not encouraging. More so, only handful areas within the economy attract foreign investment and even in those areas, the World Bank report displays a fluctuating flow as one of the major problems of foreign investment in the country.. It is true that the problem of tax is universal but the third world countries of which Nigeria is one seem to be more plagued and inflicted both in weight and magnitude than the developed nations of the world. It is in the light of the above, that this study assessed the Impacts of Taxation and tax incentives on Foreign Direct Investment (FDI) in Nigeria Capital Market. The Descriptive research method was adopted for this study while both primary and secondary data were used for the study. The t-test was used to test the hypotheses formulated for study. The findings of the study revealed that taxation and tax incentives have a significant impact on FDI in Nigeria and the flow of FDI is FDI in Nigeria was seen inadequate. It is therefore recommended that government should provide an investment-friendly climate or a conducive business environment, for investors to maximize their returns on investment. On the issue of taxation; government should review the tax laws and make more provisions for incentives in order to encourage FDI in the real sector of the economy. The issue of corruption and security should be given a serious in order to attract meaningful FDI into the economy.

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

The low level of savings in this part of the world (the third world), has caused a slow spate of development and is usually traceable to inadequate resources to speed up economic growth and development. According to Adeyemi. (1997), one attribute that is central to the various derogatory ‘nicknames’ of the third world, Under Developed Countries, Less Developed Countries (LDCs), Developing countries etc. Is it that these economies lack adequate resources to gainfully engage the available human and material resources of their countries? While many countries in the world are gainfully enjoying a ‘virtuous’ economic circle.  As the struggle continues in this 21st century, members of the less developed countries are suffering from vicious economic cycle of poverty. It is becoming increasingly difficult for them to witness reasonable standard of living without external injection of resources as the circular constellation of forces (low income, low savings, low investment, and low production) which react upon one another, are keeping these countries in perpetual poverty. A general brief for a country to develop rapidly is for it to industrialise since industrialised countries appear to be most developed.

The Nigerian economy has been developing with income/revenue being generated from various sources amongst which includes tax imposed on income, goods of individuals, companies and other parastatals for the provision of the needed infrastructure in Nigeria and rate of returns earned from the activities that go on in the Nigeria Capital Market.

The Nigeria Capital Market plays an effective role of boosting the economy, they do this by making foreign investment possible in Nigeria and also has designed effective tax incentive plans to attract prospective foreign investors to Nigeria. The involvement of Foreign Direct Investment in the Nigerian Capital Market by foreign investors has since then been working out very fine.

The Nigerian economy has been under the siege of vicissitudes: Social crisis, political crisis, instabilities and tax. It was stated by Musgrave and Musgrave (2004) 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. There has been adjustment by the government on its’ tax rates and reforms all in order to have a positive impact on the economy like controlling the supply of money in circulation, regulate importation on certain goods, increase revenue and most importantly tax rates are used on floor of the Nigerian Capital Market. The mono-product nature of the country’s economy, especially following heavy increase in oil revenue in the 1970s results in lesser and lesser attention being paid to the other sectors of the economy.  The indigenization policy of the same period (precisely, 1972), worsened the situation, which led to a reduction in foreign investments in major sectors in a bid to encourage local investors to take the economic destiny of their country in their hands.

 Consequently, in spite of the various attempt at industrialising Nigeria, it is still characterized by dominance of primary commodities dependence on external such as capital goods, technology as well as essential specialize services.

1.2       Statement of the Problem

In less developed countries (LDCs), one of the major problems is low capital formation to finance the necessary investment for economic growth. The role of capital in economic growth is still regarded as very crucial. The theory of big push simply states that the stagnant and underdeveloped economies need huge and sudden injection of large capital from FDI.

Also, we are aware that the inflow of foreign capital is not a charity. Agbachi (1998), states that foreign investors are not ‘Santa Clause’. They invest in an economy to primarily maximise their returns. Despite this, foreign investment serves as both a fillip and catalyst to growth and development.

Most studies on FDI and growth are cross-country studies. However FDI and growth debates are country-specific. Among Nigerian studies like those by Otepola (2002), Oyejjide (2005) and Akinlo (2004) examined the importance of FDI on growth for which it benefits the economy.

Sequel to the above, Nigeria is therefore in dilemma. She is in dire need of foreign capital to gainfully utilize her human and natural resources. Despite the various policies and programmes by government to encourage the inflow of foreign private investment in the country, the World Bank report displays a fluctuating flow One of the major problems of foreign investment in the country.

Tax administration has an effect on the FDI on the capital market. In the tax system, tax and tax incentives has had their various effects on the FDI positively and negatively. It is true that the problem of tax is universal but the third world countries of which Nigeria is one seem to be more plagued and inflicted both in weight and magnitude than the developed nations of the world.

On the part of tax incentives, a school of thought believes that tax incentives encourage economic growth while another believes that it reduces revenue accruable to the government. This examined the nature of tax incentives that are extended to the market and the interaction that exists between the tax incentives and the market.

The question now is, to what extent has Nigerian tax regulation contributed to such decline on inflow of foreign investment, or are there other factors apart from the tax rules that hinder the inflow of foreign investment?

1.3       Objectives of the Study

The main objective of this study is to access the impact of taxation and tax incentives on Foreign Direct Investment in Nigeria. Other specific objectives are to:

i.                    Examine the impact of tax regulation on foreign direct investment in Nigeria.

ii.      Determine whether tax incentives have an impact on foreign direct investment Nigeria.

iii.     Ascertain the adequacy and level of tax incentives given to foreign investors in Nigeria.

1.4       Research Questions





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