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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
1.0 INTRODUCTION
MEANING OF FOREIGN DIRECT INVESTMENT (FDI)
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.
1.1 BACKGROUND OF THE STUDY
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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