ABSTRACT
The
enabling environment created through generous fiscal policies is expected to
increase the level of foreign private investment in Nigeria beyond the present
level. However, on the contrary what is witness are divestments cum capital
flight out of the country. It is therefore, in line with the above, that this
study seeks to examine the effect of tax incentives on foreign private investment
in Nigeria. Therefore, the objectives of the study, was to examine the extent
to which tax incentives have impacted on foreign private investment in Nigeria,
to examine the impact of tax rate on aggregate foreign private investment in
Nigeria and to examine the relationship between tax rate and foreign private
investment in Nigeria. The research adopted the ex post facto research designed
which utilised secondary data. The study covers the period 1970 – 2007. The
ordinary least square(OLS) regression analyses was adopted in testing the
hypotheses where the dependent variable was foreign private investment(FPI)
while the independent variable was incentive tax rate(ITR), and Normal Tax
rate(NTR). The result as revealed from the tested from the hypotheses was that
tax incentives rate in Nigeria does not have a positive significant impact on
foreign private investment; Normal tax rate does not have significant impact on
foreign private investment and there is no positive relationship between tax
rate and foreign private investment in Nigeria. Therefore, in line with the
findings, the study recommends that the federal government of Nigeria should
seek more avenues to increase foreign private investment in Nigeria like
increased infrastructure facilities and creating an enabling environment for
foreign private investment in Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE PROBLEM
Over the past two decades, most
government have been actively promoting their countries as investment locations
to attract scare private capital and associated technology and managerial
skills in order to help achieve their development goals. They have increasingly
adopted measures to facilitate the entry of Foreign Private Investment (FPI).
Examples of such measures include liberalizing the laws and regulations for the
admission and establishment of foreign investment; providing guarantees for
repatriation of investment and profits; and establishing mechanisms for the
settlement of investment disputes. Tax incentives are also part of these
promotional efforts.
The role of incentives in
promoting FPI has been the subject of many studies, but their relative advantages
and disadvantages have never been clearly established. There have been
spectacular successes as well as notable failures in their role as facilitators
of FPI. As a factor in attracting FPI, incentives are secondary to more
fundamental determinants, such as market size, access to raw materials and
availability of skilled labour. Investors generally tend to adopt a two stage
process when evaluating countries as investment locations. In the first stage,
they screen countries based on their fundamental determinants. Only those that
pass these criteria go on to the next stage of evaluation where tax rates and
other incentives may become important. Thus, it is generally recognised that
investment incentives have only moderate importance in attracting FPI.
In some cases, and with some types
of investment, however, their impact may be more pronounced. For some foreign
investors, such as footloose, export-oriented investors, tax incentives can be
a major factor in their investment location decision. Also among countries with
similarly attractive features, the importance of tax incentives may be more
pronounced. In addition, government can quickly and easily change the range and
extent of the tax incentives they offer. However, changing other factors that
influence the foreign investment location decision may be more difficult and
time consuming or even outside government control entirely. For these reasons,
investment experts particularly from investment promotion agencies, view
incentives as an important policy variable in their strategies to attract FPI
for economic development.
Most countries irrespective of
their stage of development employ a wide variety of incentives to realise their
investment objectives. Developed countries, however, more frequently employ
financial incentives such as grants, subsidized loans or loan guarantees. It is
generally recognised that financial incentives are a direct drain on the
government budget, and as such they are not generally offered by developing countries
to foreign investors. Instead these countries use fiscal incentives that
require upfront use of government funds.
Because tax incentives are
intended to encourage investment in certain sector or geographical areas, they
are rarely provided without conditions attached. Very often countries design
special incentives regimes that detail the tax benefits as well as the key
restrictions. For instance, these regimes may require that a facility be
established in certain region(s), have a certain turnover, require the transfer
of technology from abroad or employ a certain number of individuals. For
example china offers foreign invested firms a tax refund of 40 per cent on
profit that are reinvested to increase the capital of the firm or launch
another firm. The profit must be reinvested for at least five years. If the reinvested amount is withdrawn
within five years, the firm has to pay the taxes. Nigeria, similarly, has
incentives system that gives allowances ranging from 100 per cent to 5 per cent
to companies that establish operations in rural areas where there are no
facilities such as electricity, tarred roads, telephones and water supply.
1.2 STATEMENT OF THE PROBLEM
In view of the enabling
environment Created through generous fiscal policies like tax incentives, it is
expected that level of foreign private investment in Nigeria should have risen
beyond the present level. On the contrary, what is being witnessed is
divestment cum capital flight out of the country. It is, therefore, pertinent
to determine the extent foreign private investors have been induced to invest
in Nigeria by domestic taxes concessions. The knowledge will enable us to
ascertain the effectiveness of domestic taxes on foreign investments.
1.3 OBJECTIVES
OF THE STUDY
As a result of the problem stated above, the main
objectives of the study are;
(1) To investigate the extent to which tax incentives
have an impact on foreign private investment in Nigeria.
(2) To examine the impact of tax rates on aggregate
foreign private investment in Nigeria and
(3) To examine the relationship between tax rates and
foreign private
investment in Nigeria.
1.4 RESEARCH
QUESTIONS
From the resultant objectives
above, the following research questions were raised;
(1)To what extent does tax rates have an impact on
foreign private investment in Nigeria?
(3)What is the relationship between Nigeria’s tax rate
and foreign private investment in Nigeria?
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Item Type: Postgraduate Material | Attribute: 51 pages | Chapters: 1-5
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