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THE IMPACT OF TAXATION ON FOREIGN DIRECT INVESTMENT (FDI) IN NIGERIA

ABSTRACT

The work was on the impact of taxation on foreign direct investment in Nigeria (1970-2009), dealing with secondary data from the Central Bank of Nigeria (CBN) and the National Bureau of Statistics. Regression analysis with (OLS) technique was used. Our findings indicate that there is a positive correlation between government expenditure, manufacturing output, inflation and foreign direct investment (FDI). However, company tax was negatively correlated. Based on these findings, we found out that taxation has contributed insignificantly to foreign direct investment (FDI) and therefore recommend that, government intensifies efforts towards positive fiscal policy reform by encouraging foreign direct investment (FDI) through low corporate tax rates and identify and implement instruments including control of inflation that encourage foreign direct investment.

CHAPTER ONE

INTRODUCTION

1.1   Background of the Study

Foreign direct investment (FDI) is the acquisition by residents of a country of real assets abroad. This may be done by remitting money abroad to be spent on acquiring land, constructing buildings, mines or machinery, of buying existing foreign businesses. Inward foreign direct investment (FDI) similarly is acquisition by non-residents of real assets within a country. Once a country has real assets abroad, if these make profits which are ploughed back into expanding enterprises, this should ideally be shown in the balanced by an outflow on capital account. In fact balance-of-payment accounts often show only net remittances of profits as a current account item, ignoring profit earned abroad and ploughed back in both current and capital accounts. (Oladuni, 2007).

The acquisition by residents of a country of assets abroad. These assets may be real, in the case of foreign direct investment, or financial, in case of acquisition of foreign securities or bank deposits. Foreign investment may be carried out by the state or private sector, and foreign securities required may represent private or government debt. It is also possible for foreign residents to invest in real or financial assets in a country: this is inward foreign investment. Net foreign investment is the excess of outward over inward foreign investment. All these facilitate and bring economic growth in developing countries.

In a world where an increasing number of government complete hard to attract multinational companies, fiscal incentives have become a global phenomenon. Nigeria today, rely on tax holiday and import duty exemption while industrial western European  countries allow investment, allowances or accelerated depreciation.

However, Foreign Direct Investment is viewed as a major stimulus to economic growth in developing countries. The need to accelerate the pace of economic growth and development by the developing countries has propelled them to make deliberate effect to attract foreign direct investment (FDI) (Salako 2000).

Foreign direct investment (FDI) has long been as a major sources of technology and technical know-how to developing countries. This is because most developing countries are characterized with low skills, while developed countries with high powered skills. The gap in skill could be bridged through foreign direct investment (FDI) to transfer not on production of investment such as managerial skills that distinguish it from all other forms of investment such as portfolio capital flow.

Over the past decade, foreign direct investment (FDI) has been long a subject of great interest in the field of international development. In an era of volatile flows of global capital for developing economics has once again renewed interest in its linkages with sustainable economics growth.

Despite this fact, foreign indirect investment is of high fluidity and sensitive to changes in economic policies and investment climate, foreign experience shows that there are three basic conditions for sources of the program to sell shares from equalized companies to foreign investor. The foreign investor. The fact condition is political commitment. Foreign investors only become interested in the equalization program when they are persuaded of the government’s economic reform.

The second is that the equalization program should be trade oriented. Because a program prolonged by the red tape means more cost for investors and less attractive in their eyes.

Thirdly, the equalization program should be based on principles of transparency and equality and not some other things else.

Furthermore, the objectives of the paper is to review the existing literature on impact of taxation on foreign direct investment (FDI) in Nigeria, as well as to explore possibilities for future research, taxes affect the net return on capital and should  at least in the mind of numerous policy makers influence the capital movement between countries. For this reason, the early literature attempted to evaluate if a generous tax policy could compensate for other obstacles in the business environment and thus attract multinational companies. In the mid-1980, the literature went one step further by exploring what kind of task instrument should have the greatest impact on the location and decision of multinational companies. Special attention was also given to the motivation and tax behavior of the multinational company.

In recent years, the globalization process has led to the emergence of new issues not only have companies tended to become more mobile, but also government have to deal with this new dimension in the design of their national tax policy. The gradual elimination of barriers to capital movements have stimulated government to compete for foreign direct investment (F D I) in global market as well as reinforced the role of the tax policy in this process.

Last but not the least, there has been a growing attention to the costs associated with tax incentives and not only to their possible benefits. Tax incentive are likely not only to have direct negative impacts on fiscal revenue but also and frequently create significant possibilities for suspicious behavior from tax administration and companies.

1.1                 STATEMENT OF THE PROBLEM

International trade which recently has been in for Foreign Direct Investment (FDI) has been a major source of economic growth, foreign firms are seen to dominate the strategic area of the Nigerian economy, extractive and mining sector (including oil industries) are dominated by foreign firm. Hence, the discussion of the impact of taxation on Foreign Direct Investment (FDI) in Nigeria.

Furthermore, government should look into the reality that suggests that countries with excessive tax ratios can kill Foreign Direct Investment (FDI) but those with reasonable tax rates may exert little or no influence on it. At the other extreme, the success of tax heavy countries indicates that extremely how tax rates may also attract foreign investors.

Effort will be made at providing answers to the following questions:

1.     To what extent has taxation affected the inflow of foreign direct investment (FDI)?

2.     Has the impact of taxation on Foreign Direct Investment (FDI) contributed positively to economics growth?

1.2                   OBJECTIVES OF THE STUDY

The tax administration and management has posed a lot of problem to several governments in the world which has prompted the research to study the impact of taxation on Foreign Direct Investment (FDI).

However, the research work has been conceived with this objective.

To determine the effect of taxation on Foreign Direct Investment (FDI). The impact will be seen, through the correlation, between the inflow of foreign direct investment in Nigeria and the tax revenue.

1.3                STATEMENT OF THE HYPOTHESIS

The working hypothesis of this study is to analyze the implication of the current tax system as it affects the Foreign Direct Investment (FDI) in Nigeria. Figure have shown that taxation has immensely to the economic growth of Nigeria through Foreign Direct Investment (FDI) but poor management lack of incentives and relief have promoted the evasion and avoidance of taxation in this country there by reducing the revenue that could have been accrued to the government and used for economic development and which would lead to a sustainable economic growth.

Specifically, this study will test the implication as it affects the government and the citizens as a whole.

HO: Taxation has no significant impact on Foreign Direct      Investment in Nigeria.

HI: Taxation has significant impact on Foreign Direct Investment   in Nigeria.

1.5      IMPORTANCE OF THE STUDY

To determine the importance of ascending the impact of tax reform would be foot handy. This is so because further progress to be made, the significant changes brought about by the programmers must be measured and evaluated.

This study will therefore prove useful for the government and development institutions in their quest to uncovering the many loopholes in tax administration and management ant to be the building of bridges that will supplement their reform efforts.

For policy Makers and economic researcher, the findings of this study will help them identify and introduce more effective policies and strategies to reduce tax evasion and will also be base guidance for their tax policy proper implementation.

Furthermore, it will serve as a base for further researcher for students and other interested individuals who are inclined towards the improvement of the economy and as an interesting document for advocates of effective taxation system.

1.6                      SCOPE AND LIMITATIONS OF THE STUDY

This research work on the impact of taxation on foreign direct investment (FDI) in Nigeria covering 1970 to 2009. It has its primary and major focus on the Nigeria economy and there may however be certain limitations of this study

This might come in form of difficulty in getting data and statistic from the relevant institution, difficulty in the accuracy of the data hence, the limitation.

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