IMPACT OF CORPORATE TAX ON FIRM PERFORMANCE IN NIGERIA
NIGERIAN BOTTLING COMPANY PLC
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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Corporate Tax study should be of much importance because it highlights the current status of the company earnings on the basis of which tax liability owe by the company. Looking at the Corporate Income Tax rates charge around different business communities of the world an upward trend is clearly visible in all developed and in few under developed countries. In this study we examined the Impact of Corporate Income Tax on business investments and Net returns (Adeleye, 2011)
Corporation tax is charged on the profits generated by companies, public corporations and unincorporated associations such as industrial and provident societies, clubs and trade associations. After every accounting period tax is charged on profits. Corporation Tax is charged upon the companies since 1965. Before that they were liable to income tax on their total income and also to profits tax. The system introduced in 1965 charged a uniform rate on all profits and an additional charge to income tax was made when profits were distributed. Taxes are considered as an essential item in the company’s financial statements, it is a significant aspect of every company’s performance. Currently taxation is developed in the manner it is a challenge for the companies and for their boards and Audit committees. The participation of boards and audit committees varies by country and organization, in that way their high-level tax strategies create some more misunderstandings regarding this important aspect. They realize the company steadiness for tax minimization against tax assurance. Companies want to have an assurance that the tax authorities will not challenge their tax position as it involves reputational risk and penalty too (Abor, 2008).
Managing complex tax operations for global, multinational corporations requires an Undaunted focus on current federal laws and international tax laws, implement the creative ways to implement the laws for reducing global taxation, determining the related tax risks and finally protect company’s tax positions. The focus shifted from solely designing and implementing tax structures to minimizing global income taxes while accurately accounting for them and the internal controls surrounding this process, this shift has not come easy for today’s tax executives as Most tax executives see the problem as a “tax” problem that can only be solved by experienced, highly skilled tax professionals and Tax Lawyers (Akakpo, 2009).
However, when you examine the causal factors a little further, you find that it is not so much a tax problem as it is a “data” problem. To produce accurate, timely and comprehensible global income tax provisions and required disclosures, every company takes its global financial data, processes it according to all of its jurisdiction’s tax rules and reports the outcomes in accordance with its financial reporting standards. So, there are three potential areas where the problem could arise, data, tax rules and reporting rules & could overcome these problems through above process.
Firm Size is very vital in several Economic Scenarios. Krishna (1999) analyzed that at the industry level they find that the firms in the utility sector are large, may be because they enjoy Natural, or Officially Sanctioned, monopoly. Physical Capital Intensive industries, High wage industries, and industries that keep a lot focus on Research and development have Larger Firms, as do industries that require small volume of external financing. Further, Ghosal and Prakash loungani (1996) has been found that industries dominated with small firms, besides having uncertainty of profits has virtually no effect or positive effect over investment. Rajan and Zingales (1998a) explored that Two-Third of the growth in industries over the 1980’s occurred by the growth in the size of existing establishments and only One-Third by the construction of new ones’, they further propose that financial development does leads to facilitate growth. Since a significant Portion of growth appears from the growth in average size of organizations; an important source by which financial development supports is by making possible the financing of large firms.
1.2 Statement of the Problem
The corporate income tax rate is placed directly on the accounting profits of incorporated enterprises. Utilizing this tax base creates two problems, a practical one of administration and a theoretical one of being able to determine how the firm responds to the tax and who bears its final burden and incidence. The tax is difficult to administer and enforce because Lawyers and Accountants manipulate businesses and accounts so as to minimise tax payments. The Revenue Service (RS) and State tax-agency Lawyers and Accountants employed their energies in ferreting out evasion and being on guard to see that avoidance techniques are legal and permissible. The tax code is complex when applied to some industries. The complexity arises because economists define profits differently from accountants and the taxing authorities. Consequently, the corporate income tax falls partly on the expected return to equity capital, since this is not a deductable item and partly on economic rent and unanticipated economic profits.
The consensus among economists who have analyzed the effect of high corporate income tax rate on enterprises as a whole is that in the short-run as human-made capital is held constant, the tax has little or no effect on the behaviour of the firm; capital bears the tax burden. However, as capital depreciates, management must decide how to invest. Since the tax falls initially on equity capital, owners will divert their capital to activities or countries with tax preferences because the after-tax return in these will be higher. If the capital is shifted to other countries, the tax will equally shift and ultimately affect Gross Domestic Product (GDP).
1.3 Objectives of the Study
The broad objective of the study is to analyse the impact of corporate tax on firm performance in Nigeria. The specific objective of the study includes the following:
(i) To determine the effect of high corporate tax rate on corporate profitability.
(ii) To find out the effect of corporate tax on firm productivity.
(iii) To measure the effect of corporate tax rate on employees’ turnover.
1.4 Research Question
The following constitute the research question:
- What is the effect of high corporate tax rate on corporate profitability?
(ii) To what extent will corporate tax affect firm productivity?
- To measure the effect of corporate tax rate on employees’ turnover.
1.5 Statement of Hypothesis
In the course of this research work, the following hypothesis was formulated for test.
Ho: High corporate tax rate does not have significant effect on corporate profitability.
H1: High corporate tax rate does not have significant effect on corporate profitability.
1.6 Significance of the Study
It is believed that this study when completed will be beneficial to the followings;
Firstly, the study will be of immense benefit to the company under study – Nigeria Bottling Company.
Secondly, the study shall be of great help to managers in gathering information that will help them while planning for how to manage corporate tax in a firm.
Thirdly, this study will aid student academically to widen the knowledge of the researcher in the field of business and it will serve as a reference source by future researchers.
1.7 Scope of the Study
The study covers the impact of corporate tax on firm performance in Nigeria with special emphasis on Nigerian Bottling Company Plc in Lagos State.
1.8 Definition of Terms
Tax: Tax is money that people have to pay to the government. The government uses the money it gets from taxes to pay for things.
Corporate Tax: A corporate tax is a levy placed on the profit of a firm to raise taxes.
Firm: Firm is a business organization, such as a corporation, limited liability company or partnership that sells goods or services to make a profit.
Profitability: Profitability the degree to which a business or activity yields profit or financial gain.
Firm performance: Firm performance is a relevant construct in strategic management research and frequently used as a dependent variable.
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