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THE EFFECT OF CORPORATE TAX ON THE PROFITABILITY OF BUSINESS ORGANIZATION.

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

Fiscal Policy can be defined as government policies which are used to determine the revenue and expenditure proponents of the Organization. Fiscal policy is a tool used by the government to aid the efficient allocation of resources in the economy (Veronika & Lenka, 2014). The tools of fiscal policy which is engaged in the allocation and redistribution of income and revenue includes: tax, budget, fines e.t.c. In the bane to attain economic development and growth the corporate and business organization must play the part in effective payment of their tax amidst the different kinds of tax in the economic system peculiar to Nigerian system include corporate tax, Education Tax, Petroleum Profit Tax e.t.c. Taxation which of no doubt is a source of generating receipt which will aid the government to meet their economic and social responsibilities to their citizens (Ezugwu & Akubo, 2014).

Payment of tax can be dated back the colonial era when the colonial master where regarded as tax masters due to the tax imposed on the people of the state before it was named Nigeria. Taxation as a policy of revenue and expenditure depending on the party that is on either the receiving side or the giving side. Taxation provides an avenue to influence consumer demands and provides economic incentives which will stimulate production, investments and savings. If tax are cogent for attaining favorable macroeconomic environment it is also of importance for corporate bodies to improve productivity is induced well in the investment decision process. Tax represents a cost to their profit attainment prospects which affects the profitability and performance (Dyreng et al., 2008; Minick and Noga, 2010; Armstrong et al., 2012; Vieira, 2013; Kraft, 2014, cited in Bauer, Kourouxous & Krenn, 2018). further argue that an intuitive indicator with capacity to influence effective tax rate is firms’ profitability. Thus, when profitability is measured based on pre-tax income, the expectation is that more profitable firms have higher earnings and, consequently, pay more taxes. This position is evident in the literature. Tax are receipts required from the wealth of individuals, partnerships, trustees and companies used by the governments. The tax system is peculiar obligatory responsibility required from the Federal, State or Local Governments levels (Oladele & Agbaje, 2017). Tax is an obligatory responsibility which is used in attaining fiscal and budgetary functions in the distribution of revenue in the economy. Tax is a legal responsibility which is required and mandated for any eligible citizen to pay into the treasury of the governments. Corporate tax is the most economical and productive revenue source of receipt that the government gather from an organization which is part of the economic unit in the circular flow of the economic system (Ogbonna & Appah, 2012).

Corporate tax is the payment which is paid by an organization from the profit which have been generated from the proceeds of sales in rendering goods and services to the populace. Any corporate organization is established to maximize and minimize profit and cost within (Oladele & Agbaje, 2017). However, corporation tax has many problems associated with collection of the revenue from the organization which includes bad governance, corruption, compliance with related laws administrative procedure and human capital management problem. Thus, the corporate tax as currently applied is not a tax on pure profits or economic rents. It is believed, however, that tax reliefs and rebates will influence investment decisions, growth and ultimately the performance of the companies. Companies provide funds for three principal activities of payment of dividend to shareholders, investment in operating assets and repayment of loan capital. Multiple taxes and perceived high tax rate remain teething problems to businesses operating in Nigeria. To mitigate their tax liabilities; they indulge in declaring inaccurate financial figures as profits. This reduces the tax accruable to the government because of these practices.

However, many studies on taxation and financial performance reveal that taxes have significant effect on the performance of companies (negative) and few others reveal mixed results that are inconclusive (Teraoui and Kaddour, 2012; Gatsi, Gadzo and Kportorgbi, 2013; Onuorah and Chigbu, 2013; Mucai, Kinya, Noor & James, 2014; Neghina, n.d.) The consumer goods sector is also an important sector just like the other sectors because it produces goods for the daily consumption of man which is needed for survival. It is also the third major contributor to the market capitalization of the Nigeria Stock Exchange, contributing around 28% (Factbook, 2016). Recently, because of the high cost of production they face mainly due to scarcity of foreign exchange, critical inputs, about 50% of input requirement for production could not be imported (Dexter analytics, 2016). A rise in inflation from 8.20% in January 2015 to 15.60% in May 2016 also affects performance.

Based on this premises, this study will investigate into the effect the corporate tax on the profitability of business organizations.

1.2 Statement of the Problem

The corporate organization has the systematic responsibility in maximizing profit at the extent of the indispensable cost that will be incurred in actualizing the profit. The corporate tax manager which is saddled with the responsibility on understanding and expending the tax liability. Tax liability is proportionally profitability. Tax liability poses a major challenge on the wealth maximizing objective of the firm.

A corporate tax, therefore, can be referred to as a levy placed on the profit of a firm. Albertazzi and Gambacorta (2006) further add that they are taxes against profits earned by businesses during a given taxable period which are generally applied to companies operating earnings after expenses such as cost of goods sold, selling, general and administrative expenses and depreciation have been deducted from revenues. Lederman (2002) stresses that tax incidence must be traced to people, since corporations cannot bear the burden of a tax. If such is the case, then corporations should not be taxed. But then, there are several possible justifications. First, (Myles, 2007) there are valuable benefits, such as limited liability, to incorporation. The corporate tax could be seen as simply a tax on that value. Secondly, corporations are also taxed because they may earn some pure economic profits, profits that are in excess of the return to capital (Lederman, 2002; Myles, 2007). This does not; of course, justify taxing such profits at the corporate level rather than when the individuals owning the corporation receive them. The corporate tax is also seen as a way to soak up foreign tax credits or export taxes to foreigners who own capital. Since individuals who live in other countries cannot be taxed on their income, the corporate tax is a way to get at their income from domestic assets indirectly (Myles, 2007, Johansson, Heady, Arnold, Brys & Vartia, 2008). Lastly, the scholars are also of the view that corporate income tax can serve as a backstop for the personal income tax. Individuals may try to avoid the personal income tax by making it difficult for the government to observe the recipients of corporate income. In this case, it may be more efficient to tax corporations instead. Each of these rationales for the corporate income tax has specific implications for how an efficient corporate tax will be structured (Schwellnus & Arnold, 2008).

Corporate Tax is defined by Scholes, Wolfson, Erickson, Maydew, & Shevlin, (2009) as a tax that maximize the firm’s expected discounted after-tax cash flows. Apart from being vast in the tax laws, the tax consultants of any organization should have extensive knowledge of the company, its history and how the organization operates. It extends to the coordination of parties with diverse interests and information, involving domestic and foreign operations across multiple segments of the business including finance and financial reporting, management and technology (Maydew & Shackelford, 2005).

However, corporate tax which has effect on the profitability, investment and macro-economic prospects of a country. Due to the fact that corporate tax is a major productive tax that aid the government in improving revenue and in the economic and social responsibility policy of the government.

Based on the challenges of corporate tax on the profitability on an organization. This study will fill the gap in investigating the effect of corporate tax on the profitability of consumer goods Company in Nigeria.

1.3       Objective of the Study

The broad objective of the study intends to investigate into the effect of corporate tax on the profitability status of consumer goods companies in Nigeria.

1.   To examine the effect of return on equity on corporate tax and leverage

2.   To investigate into the impact of return on equity on corporate tax and investment decision

3.   To explore the effect of return on equity on corporate tax, leverage and investment decision

1.4 Research Question

The following research question includes;

1.   What is the effect of return on equity on corporate tax and leverage

2.   What impact does return on equity on corporate tax and investment decision

3.   Does return on equity have impact on corporate tax, leverage and investment decision

1.5       Research Hypotheses

Hypothesis One

H0= Return on Equity has no significant impact on corporate tax and leverage

H1= Return on Equity has significant impact on corporate tax and leverage

Hypothesis Two

H0= Return on Equity has no significant effect on corporate tax and investment decision

H1= Return on Equity has significant effect on corporate tax and investment decision

Hypothesis Three

H0= Return on Equity has no significant effect on corporate tax, investment decision and leverage

H1= Return on Equity has significant effect on corporate tax, investment decision and leverage

1.6 Significance of the Study

The following will benefit from the findings of the study which includes: Corporate Tax Manager, Strategic Level Management and Government (FIRS).

The corporate Tax manager will from the findings of the study have a broad knowledge about how the tax liability of the organization reduce or affect the profitability status of the organization. The tax mangers will from the findings of the study have an additional knowledge on how tax liability has relationship with other corporate specific attributes that influence the direction of profit of firm

The Strategic Level Management will from the findings of the study, take good strategic positions that will affect and influence the profitability of the firm, even after enjoying the tax savings on tax payment of organizations.

The government (Federal Inland Revenue Service) will from the findings of the study, know the policies and strategies that will improve the collection of corporate tax in the organization.

1.7       Scope of the study

The study is set to examine the effect of corporate tax on profitability of business organization in Nigeria. However, the study selected the non-financial firms quoted on the Nigeria Stock Exchange. The time period will between 2014-2018, drawing the required dependent and independent variables from their financial statement.

1.8 Operational Definition of Terms

Tax: it is the compulsory levy that is paid by economic agents in the country

Corporate Tax: it is the tax levied and paid by an organization who has separate legal autonomy to involve in the buying and selling on goods and services in the organization.

Profitability: it can be defined as the overall outcome of the organization within a calendar year.

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