The purpose of this research work the Impact of Taxation on Foreign Direct Investment was to find out the extent to which taxation has influence the inflow of foreign direct investment (FDI). The method of simple linear regression using the ordinary least square (OLS) techniques were adopted in the study. The result of the study shows that there exist a linear relationship between Foreign Director Investment and taxation which is not in consonance with the economic apriori, since an increase in taxation ought to discourage investment;
that the overall performance of the independent variable and the estimated model reveal that about 94.5% of the foreign direct investment is statistically significant but low at 5% level of significance as determined by the coefficient of determination, (r2) that the impact of the constant in the model is statistically significant; that there is no autocorrelation in the model the following recommendations were made and they include the following: that government should provide an investment friendly climate that is able to guarantee rewards to the investors who commit their resources. That government should judiciously use the revenue generated from tax to provide the basic infrastructure. That the government should provide a security-tight environment that will guarantee safety of lives and properties of the investors. That government should reduce tax rates and eliminate multiplicity of taxes. Conclusively, foreign capital has not only being a supplement to the available internal resources of the nation for growth and development but its utility has also continued to be a catalyst for rapid industrialization.
TITLE PAGE
THE IMPACT OF TAXATION ON FOREIGN DIRECT INVESTMENT (FDI) (1994-2013)
BEING A RESEARCH PROJECT PRESENTED TO THE DEPARTMENT OF ECONOMICS FACULTY OF SOCIAL SCIENCES EBONYI STATE UNIVERSITY, ABAKALIKI IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF BACHELOR OF SCIENCE DEGREE (B.Sc) IN ECONOMICS
TABLE OF CONTENT
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Title page |
i |
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Approval Page |
ii |
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Dedication |
iii |
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Acknowledgment |
iv |
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Abstracts |
vi |
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Table of contents |
vii |
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CHAPTER ONE: Introduction |
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1.1 |
Background of the study |
1 |
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1.2 |
Statement of Problem |
6 |
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1.3 |
Objectives of the Study |
7 |
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1.4 |
Hypothesis of the Study |
8 |
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1.5 |
Significance of the Study |
8 |
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1.6 |
Scope and Limitation of the Study |
9 |
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1.7 |
References |
10 |
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CHAPTER TWO: Literature Review |
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2.0 |
Theoretical Literature Review |
11 |
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2.1.0 |
Empirical Literature Review |
15 |
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2.2.0 |
Overview of Foreign Direct Investment |
18 |
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Ø |
Size of the Markets |
21 |
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Ø |
Economic Openness |
20 |
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Ø |
Labour cost and productivity |
20 |
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Ø |
Political Risk |
22 |
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Ø |
Infrastructure |
23 |
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2.3.0 |
Taxation and investment in Nigeria |
28 |
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2.3.1. |
The concept of Taxation |
28 |
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2.3.2 |
Taxes and Fiscal Regulation |
28 |
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2.3.3 |
Tax Treaties |
32 |
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2.3.4 |
Nigeria Investment Incentive |
33 |
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2.3.5 |
Tax on Foreign Corporations |
34 |
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2.3.6 |
Investment Tax Allowance |
34 |
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2.4. |
References |
37 |
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CHAPTER THREE: Research Design and Methodology |
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3.1 |
Research design |
38 |
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3.2 |
Model Specification |
38 |
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3.3 |
Method of Evaluation |
39 |
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3.4 |
Data Required and Sources |
41 |
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3.5 |
References |
42 |
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CHAPTER FOUR: Presentation and Analysis of Results |
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4.1 |
Presentation of Results |
43 |
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4.2 |
Analysis of the Results |
43 |
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4.3 |
Evaluation of Working Hypothesis |
46 |
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4.4 |
Implication of the Results |
46 |
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CHAPTER FIVE: |
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5.0 |
Summary of Finding, Conclusion and Recommendations |
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5.1 |
Summary of Findings |
48 |
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5.2 |
Conclusion |
49 |
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5.3 |
Recommendations |
50 |
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Appendix I |
52 |
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Appendix II |
53 |
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
According to Anyator 1996, taxation is a macroeconomics instrument that could be used by the government. It simply refers to a compulsory payment by individuals and organizations to relevant authorities at the federal, state and local government level.
The government imposes tax based on a well-established criterion such as not profit, properly done, income received and some other relevant criteria, in order to enable it raise revenue for such services which it provides for the general public.
Every tax imposed on any organization needs interpretation of its specific applicabilit
y and effects on various transaction of the organization. The field of taxation changes every day as new court rulings are announced and as laws are made.
Taxation on corporate income has been a pervasive issue tendering to effect the economic decision of business activities. On the part of the government, there have been numerous economic measures geared towards controlling adverse economic conditions in the country. Among such measures are tax rules, which are designed to increase revenue and accomplish other economic goals, but invariably, the rules have significant impact upon business investment and other decisions. In order words, any rational decision should be based on other consideration. The aim is to evaluate the impact of macroeconomic measures used by the government to check the effectiveness in encouraging the inflow of investment in the country and how foreign investors react to tax regulation in the country.
According to Adeyemi 1997, one attribute central to the derogatory nicknames of the third world countries-less developing countries, developing countries, etc, is that these countries lack adequate structure to gainfully engage the available human and natural resources.
While many countries are enjoying virtuous economic circle as we move towards the end of the second millennium, members of the less developed countries are suffering from vicious circle of poverty. A general view for a country to develop, is for it to get industrialized since industrialization requires a substantial capital investment which is possible for earning capital exchange or export, borrowing in the international financial market or allowing foreign investor to invest in the country.
In December 1989, a new Nigeria enterprise decree permitted 100% foreign ownership in any venture except those in some selected sectors of the economy such as the financial sector, and mining sector. The government uses an open tender for awarding government contracts. Government scandal, political instability and endemic corruption are regularly ranked as common among most corrupt countries of the world, and this has been an inhibiting factor against foreign investment in Nigeria.
In 1992, the Nigerian free zone net was passed establishing Nigeria Export Processing Zone (NEPZ), free Trade Zone (FTZ) so named in 2001, are expanse of land with improved imports, transportation, warehousing, facilities, uninterrupted electricity and water supply, enhanced telecommunication service, and other facilities to accommodate business operation in the free zone area as long as end products are exported, (although 25% of the products can be sold in the domestic markets) enterprises are exempted from custom duties, local taxes and foreign exchange restriction, qualities for incentives-tax holidays, rent free land, no strike or lockouts, no quota in the European union markets, and United States market until 2008, when fully developed, free trade zone are to encompass industrial production, offshore banking, insurance and re-insurance, international stock commodities and mercantile allied-agro industry, mineral processing and international tourist facilities. As at 2003, Nigeria had Five Free Trade Zones (FTZ’s) being developed. The most advanced, is the Calabar FTZ in the southeast, established in 1992 with accommodation for 80 to 100 businesses, it had only 6 companies in 2001. 13th May 2003, however, 76 licenses had been issued.
For the Calabar FTZ and 53 enterprises where operating. The harbor, which was scheduled for further dredging, serves mainly as berthing port for textile and pharmaceutical products. The one oil and 995 FTZ, near Port Harcourt had about 85 registered oil and gas related enterprise and was generating about $1.2 million in government revenue annually.
The other three FTZ’s Kano, maigatar, and Bank-were still at the stage of infrastructure construction. Under the related export processing zone (EPZ) initiative, seven factor sites in Ondo, Akwa-Ibom and Kano State, with another 1.2 under construction in Lagos, have infrastructure improvements, tax exemption and incentive. Finally, Singaporean have spent bout $169 million, developing the private Lekki FTZ. In 1995, the military government decreed the establishment of Nigerian investment Promotion Commission (NIP) as well as the liberalization of foreign exchange market. These with amendments remain the bases of Nigeria’s policy for encouraging Foreign Investment. Foreign Direct Investment (FDI) inflow was reported at $1.5 billion in 1997 and about $1 billion in both 1998 and 1999. (UNCTAD estimates). In late 2002, the Nigerian government in May 1999, #56.94 billion in 1995; 55 companies invested #20.81 billion in 200; 34 companies invested #21.25 billion in 2001. 43 companies invested #63 billion from January to June 2002. In what may prove to be more decisive developments, the 1>M>F in October 2001, ended its support programme for Nigeria. Subsisting a probability staff monitoring programme (SMP) because of policy lapses by the government and consequent failure to meet prescribed targets, particularly for inflation. After a review in 2002, the IMF decided to put an end to SMP because of failure to meet targets agreed to in December 2001. By the end of 2002, Nigeria foreign reserve had fallen fro $10 billion in 2001 to $7.2 billion. In March 2003, the government announced the withdrawal from IMF economic programmes in favour of its own alternative. Protective tariff of 100% to 150% was put in a number of imported goods to protect local industry.
1.2 STATEMENT OF PROBLEM
Nigeria is like a century caught in a web in the role of foreign capital in economic development. The realities of structural adjustment programme (SAP) and the importance of balance of payment equipment as well as the burden of our current external debt service ration combined to make the injection of foreign capital a sinequanon for economic recovery and accelerated development. Nigeria is dilemma, in need of foreign capital for ongoing internal adjustment, yet she fears that foreign investment may wrest complete cannon of the national economy and render it an appendage, the need for foreign investment has become indispensable if the economy must come out of the woods.
In general, since the inflow of foreign private investment (FPI) in the less developed countries it high according to the World Bank, the share of Nigeria is disturbingly low. The question now is to what extents has Nigerian tax regulation contributed to such decline in foreign private investment or are there other factors apart from tax rules hinder the inflow of foreign private investment.
1.2.5 OBJECTIVES OF THE STUDY
The objectives of the study are as follows;
1. To know the relationship between taxation and foreign direct investment
2. To Evaluate the impact of such tax regulations on foreign direct investment.
3. To proffer solution to any problem discovered from the study.
1.3.5 HYPOTHESIS OF THE STUDY
To find out the impact of taxation in foreign direct investment, the hypothesis therefore is:
H0=bi=0 taxation has made no significant impact on foreign direct investment.
H1=bi = Taxation has made a significant impact on foreign direct investment.
1.3 SIGNIFICANT OF THE STUDY
The significant of the study are stated as follows
1. This research will serve as a reference point to further studies.
2. Further researches will so much benefit form the study as the results constitute a source of secondary data on the problems of taxation as it foreign direct investment.
3. The study is embarked upon so as to help present researchers to understand the relationship between foreign direct investment and taxation.
1.4 SCOPE AND LIMITATION OF THE STUDY
The scope of this work covers the period of 1982-2005. The period in the Nigerian economy ie the period of structural adjustment programme (SAP).
However, due to considerable difficulties, the researcher was constrained by the following factors:
1. Financial resources; there was inadequate finance for proper and intensive data collection.
2. Time factor was another constrained being that there was little or not time combined with the academic calendar of the institution.
3. Insufficient data: data were insufficient. Moreso, access was not allowed to the available as it when needed.
1.5 REFERENCES
Adeyemi J. A. (19970, Foreign Private Investment in Nigeria (Ibadan: Fred Publishers)
Agbachi E. S. (1998), Nigeria and Foreign Investment. (Enugu: Hipnuks Additional Press)
Aremu, J. E. (1991). “Industrial Development Co-ordinating committee and foreign private investment in Nigeria” CBN Economics and Financial Review (June)
Aremu, J. E. (19920 “Marketing Nigerian Investment Environment” Lagos: (Allen Enterprise).
Brown, E. S. (1992) “Tax incentive and Investment” American Economic and Financial review.
Mdado, I. A. (1995) “Foreign Investment Flow” the Nigeria Quarterly magazine (April).
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