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PROJECT TOPIC:THE IMPACT OF TAXATION ON FOREIGN DIRECT INVESTMENT IN NIGERIA (1980-2004)

THE IMPACT OF TAXATION ON FOREIGN DIRECT INVESTMENT IN NIGERIA  (1980-2004)

 

          ABSTRACT

Nigeria is like a country caught in a web on the role foreign capital investment in the pursuit of her economic development. The realities of Structural Adjustment Programme (SAP) and the imperative of a balance of payment disequilibria as well as the burden of our current external debt services ratio continue to make the injection of foreign capital and accelerated development low. However, no country ever rests on her oars and expect fortune seeking foreign investors to develop her economy for her. Thus it is up to the recipient country of foreign investment to exploit through judicious use of macroeconomic policies deliberately designed to take advantage of available foreign investment for the national  economic benefit.

Therefore, the essence of this study attempts towards ascertaining the level of foreign direct investment in Nigeria and also to determine how taxation (one of the macroeconomic policies) could be used by government to affect the flow of foreign direct investment in Nigeria. In the process, data was sourced through secondary sources; level of Foreign Direct Investment (FDI) and Company Income Tax (CIT) for the period 1980 to 2004. FDI is the dependent variable while CIT serves as the independent variable. From the analysis obtained through the use of econometric technique of the OLS method; it was discovered that the level of FDI in Nigeria is inadequate. Furthermore 2.6% of the variation in the flow of foreign direct investment could be attributed to the change in tax structure. However, the study thus recommended among others that government should use revenue generated from tax to provide the basic infrastructures like pipe-borne water, electricity, good roads and enhanced  communication networks that is relatively cheap so as to attract investors.

 

  CHAPTER ONEINTRODUCTION

   1.1  BACKGROUND OF THE STUDY

 According to Adeyemi, (1997) “one attribute that is central to the various derogatory  “nicknames” of the third world are Under Developed Countries, Less Developed countries (LDCs), Developing countries, e.t.c. Is it that these countries’ economies lack adequate resources to gainfully engage the available human and material resources of their countries? While many countries of the world are enjoying a “virtuous” economic cycle as we move towards the  end of this second millennium;  members of 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 (i.e. low income, low savings, low investment and low production) which and react upon one another are keeping these countries in perpetual poverty. A general belief for a country to develop rapidly is for it to industrialize since industrialised countries appear to be most developed. However, to industrialise, countries requires substantial capital investment, which is possible through either earning of foreign exchange for exports, borrowing or the international financial  markets or allowing foreign business men to invest in her economy.

Since the beginning of the oil glut, earnings of Nigeria economy from export had been fluctuating  downward with the consequent debt crisis pushing the economy into depression to the extent that the international financial community are reluctant to grant further extra credit facility until there  exit a practical demonstration  of improved ability to pay. Unfortunately, the alternative Official Development Assistance (O.D.A., at  concessional low interest rate had persistently    witnessed declining trend due  to the country’s political impasse. Thus in spite of the various attempt at industrialisation, Nigeria is still characterised by dominance of primary commodities, dependence  on external sources of most factor input such as capital gods technology as well as essential specialised services.

The Federal Government in recognition of the importance of foreign investment as an important  vehicle for industrial progress in her 1997 budget  expressed here readiness to enter into bilateral agreement with foreign               governments, or private organisations that wish to invest in Nigeria as well as discuss  the additional incentives.

However, Agbachi (1998) advised that “no country should over rest on  her oars  and expect fortune seeking foreign investors to develop her economy for her. It is up to the recipient economy of foreign investment to “exploit” the foreign investment through the judicious  use of her macro-economic policies deliberately designed to take advantage of the available foreign investment for the national economic benefits.”.

According to Anyafor, (1996) “Taxation as a macro-economic instrument that could be used by government refers  to compulsory payments by individuals and organisations to the relevant inland or internal revenue authorities at the federal state or local government levels”.

Taxes are sums  of money that government imposes in accordance with some established criterion such as  net profit earned, property owned, income received, e.t.c in  order to raise revenue to provide services which can be most efficiently provided by the state than by  individuals themselves. The services provided in return are without  charge but the payment of the tax does not in itself enable the tax payer to receive any government services to which he would not otherwise be eligible. He argued that the basic distinction between taxes and other sources of government revenues is the compulsory element involved. The tax payer has no choice in the  matter if eligible for payment on the basis of the predetermined standard. Every tax imposed on an organisation need continual interpretation of its specific applicability and effects on various transactions of the organisation. The fields of taxation changes everyday as new rules and edicts are made, every business organisation must therefore be alert to  such changes precedents.

Since its inception, taxation of corporate income had been a pervasive force tending to influence the economic decisions of business entities. On the part of government, there had been numerous economic measures geared toward controlling the adverse   economic conditions in the country.  Among such  measures are tax rules are designed to increase revenue and accomplish other economic goals. But invariably, these rules significant impact upon business and investment decision. In other words, any rational decision should be based on after tax consideration.

The aim of this research is to evaluate the impact of taxation as the macro-economic policy used by government, so as to ascertain its effectiveness in encouraging the flow of foreign investment in  the country and how foreign investors react to tax policies in Nigeria.

THE IMPACT OF TAXATION ON FOREIGN DIRECT INVESTMENT IN NIGERIA  (1980-2004)

 

        1.2       STATEMENT OF THE PROBLEM

Nigeria is like a country caught in a web on the role of foreign  capital in her quest for development. The realities of   Structural Adjustment Programme (SAP) and the imperatives of a balanced of payment equilibrium, as  well as the burden of our current external debt services ratio, combined to make  injection of  foreign capital a sine qua non for economic recovery and accelerated development.

On the other hand, we are aware that the inflows of foreign capital are not clarity. Agbachi (1998) noted that foreign investors are no Santa Claus. They invest in an economy to primarily  maximise their returns. In the course of this, the foreign investor is said to have emasculated and preyed on domestic economy, thus retarding real growth. Despite these changes, the foreign investors are not entirely predacious in his operations in the domestic economy. Influx of foreign capital consequent upon his investment is known to have served as both a fillip and catalyst to growth and development.

Nigeria is therefore in dilemma she is in dire need of foreign capital for the on-going  internal adjustment, yet  she fears that commanding heights of some sectors of the economy may wrest complete control of the national economy and render it  an appendage, the need for foreign capital has become indispensable if the  economy must come out of the woods, similarly, most of the economic blue prints that  have been recommended on the inevitability of foreign capital.

A critical look at the inflow of foreign private investment into Nigerian from World Bank report displays a very distributing development. While the net flows into the less developed countries have been growing steadily since 1989, the share of the increasing flow attracted into Nigerian economy maintained a consistent decline to less developed by 1993 ($ 900. 00 million). On the contrary, the report stated that China attracted $26 billion worth of foreign private investment (FPI) in 1993 representing 39.0 percent of the total flow in the entire less developed countries in spite of her long  restrictive policies and her only recent liberalisation policies.

The question now is, to what extent has the Nigerian tax policies  contributed to the decline in the flow of foreign investment or are there any other factors apart form the tax rules that affected the inflow of foreign capital into the economy.

THE IMPACT OF TAXATION ON FOREIGN DIRECT INVESTMENT IN NIGERIA  (1980-2004)

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