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PROJECT TOPIC- RELATIONSHIP BETWEEN CORPORATE TAX AND THE FINANCIAL PERFORMANCE OF MONEY DEPOSIT BANKS IN NIGERIA THROUGH A STUDY OF FIRST BANK PLC, UBA PLC, DIAMOND BANK PLC, ZENITH BANK PLC AND UNION BANK PLC

PROJECT TOPIC- RELATIONSHIP BETWEEN CORPORATE TAX AND THE FINANCIAL PERFORMANCE OF MONEY DEPOSIT BANKS IN NIGERIA THROUGH A STUDY OF FIRST BANK PLC, UBA PLC, DIAMOND BANK PLC, ZENITH BANK PLC AND UNION BANK PLC

CHAPTER ONE

INTRODUCTION

1:1       Background of the Study:

Business Organizations operate to generate wealth for their owners. It is clear that the primary aim of business establishments is to maximize profit so as to increase the wealth of their owners through investment returns. Business investment returns are usually accomplished by minimizing cost so as to give rise to profit. However, tax is one of the major cost elements that corporate organizations like Money Deposit banks incur that affects them much.

Anyanwu (1993) stated that:

Tax is a compulsory transfer or payment of money or occasionally of goods and services from private individuals, institutions or groups to the government, which may be levied upon the wealth, income or in the form of surcharge on prices.

 

According to Anyanwu( 1997):

Taxations primary objectives are to raise revenue for the government. Such funds collected are necessary for the provision of essential services to the people. General administration, maintenance of law and order, provision of social amenities like electricity, water, and construction of roads, among others are some of these services.

Certain taxes are imposed by government to regulate the manufacturing of goods that are considered injurious to health of citizens that consume such goods .Infact; industries are also protected from their foreign counterparts from unfavorable competition. Taxes are used to bridge the gap between the high income earners and the lower income earners among others.  

Despite the above good intentions of the government, the business community still has some misgivings in paying tax to the government. The supporters of business bodies have at some occasions asserted their views in affirmation of the stand of business organizations. One of the protagonists of this view, Ariwodola (2008) posited that:

Tax is anobligatory levy imposed by the government on her citizens that has no direct beneficial effect on the tax paying citizen.

It would suffice at this juncture to have a look at the concept of taxation. Taxation is the system of collecting money by government. The word taxation and tax are often used interchangeably in the literature of tax studies.

Ezejelue (2001) posited that:

Tax is a compulsory payment, for which the government needs not offer explanation before collection, which is used for the provision of services to the people.

This researcher therefore undertook this study to bring up to date the effect of corporate tax on the Money Deposit banks, hence this research topic entitled: Effects of Corporate tax on the Performance of Money Deposit Banks after the Acquisition and Merging of banks by Central Bank of Nigeria. A study of First bank PLC, United Bank for Africa (UBA) PLC, Diamond Bank PLC, Zenith Bank PLC and Union Bank PLC.

PROJECT TOPIC- RELATIONSHIP BETWEEN CORPORATE TAX AND THE FINANCIAL PERFORMANCE OF MONEY DEPOSIT BANKS IN NIGERIA THROUGH A STUDY OF FIRST BANK PLC, UBA PLC, DIAMOND BANK PLC, ZENITH BANK PLC AND UNION BANK PLC

         1:2 Statement of the Problem:

Taxation has always being the sources of revenue to the government, no matter its effect on organizations over the years. Company income tax act of 1990 as amended provides that companies shall pay tax for each year of assessment at a prevailing rate which is currently 30% in the country on the profits of any company. The disturbing aspect of the taxation of banks as noted by Gosh (1990) is that in addition to banks paying the company income tax of 30%, they also pay extra 15% on any other profit termed excess profit.Ronke (2007) stated that:

Government is insensitive to their needs and feelings, increasing taxes and reneging on delivering services. The state of infrastructure, social services, insecurity of lives and property in the country are pointers to the kind of leadership the country has had. Indeed the hike in VAT was a serious bone of contention. If the people feared it, the organized private sector dreaded it.

Money Deposit banks are always much concerned about the effect of taxation on their profit which they pay to the government every year. According to Bello (2014), who is the present Chief Executive Officer of First Bank Holdings of Nigeria, a subsidiary of First Bank PLC, First Bank Holdings of Nigeria PLC’s profit before tax stood at ₦ 24.8 billion in March 2014 against profit before tax of ₦ 31.4 billion in March 2013, a reduction of 21.1% year on year which reflected the cumulative impact of regulatory changes like taxes, which were not in effect in the same period of time a year ago.

The profit after tax declined by 11.8% year to year to ₦ 21.6 billion in March 2014 from ₦24.4 billion in March 2013. He stated that the tax expenses stood at ₦3.2 billion in March 2012 against ₦7.0 billion in March 2013 which translated into an effective rate of 13.0% in March 2012 against 22.2% in March 2013. Due to the profit after tax reduction in First bank PLC, the First Bank’s total comprehensive income attributable to equity holders dropped from ₦55.53 billion in 2012 to ₦53.70 billion in 2013 which led to a decrease of 3.3% in 2013.

The First Bank PLC’s return on average equity dipped from 22.3% in 2012 to 17.9% in 2013.This affected the profit of First Bank Nigeria PLC. Again on March 27th 2014 United Bank for Africa PLC announced its audited financial results for the full year 2013 on UBA Annual Report and Accounts 2013. UBA stated that the bank’s profit before tax grew to ₦56.06 billion by 7.8% in March 2013 as against ₦54.06 billion in March 2012.

However, profit after tax fell by 14.9% from ₦50.551 billion in March 2012 to ₦46.4 billion in March 2013. The profit after tax dropped due to the effective tax rate from 3% in March 2012 to 12% in March 2013 which should been recorded as excess tax burden on the bank. Also according to UBA annual report 2012-2013, UBA made a tax payment of ₦3.63 billion on dividend declared in 2012, the excess dividend tax and disallowed permanent difference made the tax payment spike to ₦ 4.25 billion.

However this excess tax made the UBA returns on earnings dip from 28% in 2012 to 21.80% in 2013. This affected the profit of UBA PLC. Ojelu (2015) stated that UzomaDozie, the Chief Executive Officer of Diamond Bank PLC posited that the bank’s profit after tax fell by 10.72 percent to ₦25.48 billion in 2014, compared to ₦28.54 billion in 2013;this made Diamond Bank PLC to sacked over one thousand workers.

Amangbo (2015), the Chief Executive Officer of Zenith Bank PLC stated that Zenith Bank PLC is narrowing the gap between them, as its pre-tax and post-tax profit profiles indicated very slim differentials. Zenith Bank declared 8.3 percent increase in the profit before tax in its audited result from the financial statement published by the Nigeria Stock Exchange on Thursday 6th march 2015.

Profit before tax rose from ₦110.597 billion to 119.79 billion while the profit after tax edged up by 4.3 percent to ₦99.455 billion from ₦95.318 billion in 2014, earning per share was up by 4.98 percent to ₦3.16 from ₦3.01 in 2013. The researcher therefore undertook this study to ascertain the validity of the above statement. However the specific problems of this research work are the followings:

  1. To identify the relationship between corporate tax and the financial performance of money deposit banks in Nigeria.
  2. To identify the relationship between corporate tax and net profit, dividend paid out, earning per share of the bank.

1:3       Objectives of the Study:

The major objective of this study is to determine the relationship between corporate tax and the financial performance of money deposit banks in Nigeria through a study of First Bank PLC, UBA PLC, Diamond Bank PLC, Zenith Bank PLC and Union Bank PLC.

However, the specific Objectives are:

  1. To examine whether or not there exists any relationship between corporate tax and the net profit of money deposit banks in Nigeria.
  2. To examine whether or not there exists any relationship between corporate tax and dividend paid out to shareholders of money deposit banks in Nigeria.
  3. To examine whether or not there exists any relationship between corporate tax and earnings per share of the money deposit banks in Nigeria.

            1:4       Research Questions:

The following research questions are formulated to guide this study.

  1. What are the relationship between corporate tax and performance of the money deposit bank?
  2. What are the relationships between corporate tax, net profit, dividend paid out to shareholders and earning per share of the banks?
  3. To what extent has corporate tax contributed to the performance of money deposit banks?

            1:5       Statements of Hypotheses:

The researcher formulated the following hypothesis to guide the study:

H01:     There is no significant relationship between corporate tax and the net profits of money deposit banks.

H02:     There is no significant relationship between corporate tax and dividends paid to the shareholders of the money deposit banks.

HO3:    There is no significant relationship between corporate   tax and earnings per share of the money deposit banks.

            1:6       Scope of Study (Delimitation):

The banking system is a very wide one, the researcher decided to concentrate only on the five big money depositbanks quoted in Nigeria stock exchange (NSE) out of the twenty five banks which were able to meet the Central bank of Nigeria policy of bank recapitalization. The study covered the period of 2005 to 2014.Therefore, the researcher believes that they are good representatives of money deposit banks in Nigeria.

            1:7       Significance of the Study:

This study is very important both to the government, the business community, the academic community and the society at large. Nigeria presently is faced with the problem of unemployment due to inadequate industries in the economy. This is partly due to the high tax paid, operating financial costs and at times double taxation that are not favorable to business operations in our country.

Therefore, this work will offer a seasoned solution to the government, on how to handle some of these adverse effects of corporate tax on business organizations in general and money deposit banks in particular. It will enable government also to know some incentives it would give to the business community to serve as motivation to them. It will help government to take care of the fundamental expectations of their owners.

Again, it will help the management of money deposit banks to know how to reduce their tax liabilities legitimately, which will guarantee more financial resources for their operations and returns to their shareholders. To the common man on the street, this study will help to make more funds available for the banks, which will in turn dole out more social responsibilities that would affect him.

This study will enable government to create an enabling business environment that are more conducive for the banks and other business operators through tax reduction, which will boost more investment from within and outside the country. As a result of this measure, the exchange rate of the Naira will appreciate highly. Our foreign reserve would also increase and there will be abundant employment opportunities in the country. Furthermore, investors will start to reap the fruits of their labour as net profit, dividend payout, earnings per share will appreciate.

Finally, the significance of this study cannot be overemphasized as it will provide a platform for other researchers in this area of study to have an easy and successful research study.

            1:8       Limitation of the Study:

  1. The sample horizon for this study is short this work is not as one would have wished especially if one considered studies in the literature that have bigger sample sizes.Because of this, the researcher recommends further works that will have bigger sample size.Compared to other samples in the literature from developed economics. To this end, further researchescan bedone so as to get the right sample size.
  1. Number of Money deposit banks used contributed to the limitations of this study. The analysis was made on only five banks. To make generalizations of the money deposit banks, samples of all the banks after the merging and acquisition of banks will be used to run a panel data of regression.

Availability of relevant literature; in this part of the country, sources of relevant literature are still scanty and a times almost nonexistent. Even relevant institutions that are expected to have materials   like: UBA bank PLC, Diamond bank PLC, Union bank PLC, Zenith bank PLC, and First bank of Nigeria PLC could not help matters. This necessitated the researcher travelling farther afield.

PROJECT TOPIC- RELATIONSHIP BETWEEN CORPORATE TAX AND THE FINANCIAL PERFORMANCE OF MONEY DEPOSIT BANKS IN NIGERIA THROUGH A STUDY OF FIRST BANK PLC, UBA PLC, DIAMOND BANK PLC, ZENITH BANK PLC AND UNION BANK PLC

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