Key Features:
No of Chapters: 5
No of Pages: 78
Methodology: Regression Analysis
Introduction:
1.1 Background to the Study
Taxes have existed since ancient times and it is believed to have occurred in the evolution of human society in the first state formations, being determined by the need for maintenance of those materials exercising public power, performing management tasks (Liu & Cao, 2007). Taxes have been designed differently, influenced especially by social and economic development and public spending supported by each state.
According to investopedia, taxes are generally an involuntary fee levied on individuals or corporations that is enforced by a government entity, whether local, regional or national in order to finance government activities. Investopedia defines a tax rate as the percentage at which an individual or corporation is taxed and effective tax rate as the average rate at which an individual or corporation is taxed. The effective tax rate (ETR) for a individuals is the average rate at which their earned income is taxed while that of a corporation is the average rate at which its pre tax profits are taxed. Effective tax rate includes all taxes and fiscal obligations incurred by a taxpayer. Effective tax rate (ETR) has been a subject of considerable discussion around the world. There seems to be a competition among countries to lower their ETR in order to attract more business, and thus to improve their economies. Developing countries like Nigeria seems to be losing this competition.
According to Ghinamo, Panteghini and Revelli (2007), Forbes Global (2000), companies headquartered in the US had an average corporate ETR of 27.7 percent for tax years 2006-2009. Similar companies headquartered in other countries had an average ETR of only 19.5 percent. Reportedly, the US statutory corporate tax rate was 14 percentage points higher than the average of the 34 countries in the Organization for Economic Co-operation and Development (OECD). According to McKinnon and Thurm, (2012) more US companies are changing their official incorporation location to other countries, largely due to the lower effective tax rates offered abroad.
Although Nigeria is not a current OECD member, many companies have an interest in exploring investments and partnerships in Nigeria. The ways in which Nigerian companies are taxed and the effective corporate tax rate on Nigerian companies are important factors in analysing these potential investments.
Statement of the Research Problem
There has been heightened interest on determinants of effective tax rate over the years. A study of 19 developed OECD countries indicate that the corporate tax rates have declined from an average of 48.1 percent in 1979 to an average of 31.4 percent in 2005, and continue to decrease, downwards to 27.8 percent in 2011 (OECD, 2011). The variation between countries is substantial, however, and several countries have rates that are much higher than others. In France, Belgium, and the US, for instance, the combined corporate tax rate in 2011 was 34.4, 34, and 39.1 percent, respectively, while the same tax rate was 12.5 and 25 percent in Ireland and the Netherlands, respectively. What explains these differences?
While there are a number of studies that examine the determinants of corporate tax rates, these studies tend to focus primarily on either economic or political factors. This may be natural as economists tend to be concerned with economic determinants, while political scientists are mainly concerned about political determinants. Economic factors found to be important include market size and openness (the international flow of capital). For instance, countries with larger market size and more closed economies are able to impose higher tax rates than smaller open countries (Hines & Summers, 2009). Studies focusing on political factors, on the other hand, find the political process and the institutional set-up to be important determinants. However most of these studies (Basinger&Hallerberg, 2004; Cassette &Paty, 2008) failed to examine the determinants of effective tax rates in developing nations such as Nigeria.
If taxes are a significant element for macroeconomic policy, they are also important for firms’ strategic decisions. As well documented by Graham (2003) effective tax rates can affect corporate decision making and other related aspects such as capital structure, payout policy and risk management. Taxes are ever more viewed as an enhancing component of bottom line firms’ performance. Robinson et al. (2010) show that evaluating a firms’ tax department as a “profit centre” is associated with lower effective tax rates than if it was categorized as a “cost centre”. Therefore, any reduction of taxes paid contributes to an increase of earnings disclosed in the financial statements. Considering that the main purpose of firms’ activity should be creating value to shareholders, actions to minimize the tax burden are in line with that objective. According to this perspective, firms’ characteristics are examined to show whether they are determinants of effective tax rates. Similar approach like that of Richardson and Lanis (2007) and, more recently, by Kraft (2014) is followed to estimate the impact of firms’ characteristics on effective tax rates. Many studies have paid attention to the influence of firms’ specific characteristics on ETRs (Gupta and Newberry, 1997; Desai and Dharmapala, 2006; Armstrong et al 2012). Following previous existing literature, the interest here is based on the influence of size, profitability, capital intensity and leverage on effective tax rate. Also there is little knowledge about the combined effect of firm attributes on effective tax rate in Nigeria. This study will therefore fill these gaps by examining how firm specific characteristics affect effective tax rate in Nigeria. The following questions are therefore asked in this study.
What is the effect of capital intensity on effective tax rate?
What is the effect of firm size on effective tax rate?
What is the effect of leverage on effective tax rate?
What is the effect of profitability on effective tax rate?
1.3. Objectives of the Study
The broad objective of this study is to examine the determinants of effective tax rate in Nigeria. The specific objectives are to:
examine the effect of capital intensity on effective tax rate;
ascertain the effect of firm size on effective tax rate;
investigate the effect of leverage on effective tax rate;
ascertain the effect of profitability on effective tax rate;
Research Hypotheses
The following hypothesis stated in null form will be tested in this study.
Capital intensity has no significant impact on effective tax rate.
Firm size has no significant impact on effective tax rate.
Leverage has no significant impact on effective tax rate.
Profitability has no significant impact on effective tax rate.
1.5. Scope of the Study
This study examined the determinants of effective tax rate in Nigeria. Geographically, this study was limited to companies quoted on the Nigerian Stock Exchange. The time frame for this study was for a period of five years (2011-2015). The sample size will consist of 30 firms quoted on the Nigerian Stock Exchange as at 2015.
1.6 Significance of the Study
This study is significant in the sense that it will provide an insight into the effect of firm attributes on effective tax rate in Nigeria.
Another significance of this study is that it will contribute to existing body of knowledge of effective tax rates and its determinants and also would assist prospective researchers who would want to conduct further research in this area by providing a basis for them to carry out their research.
References
Armstrong, R. B., Hermanlin, B. E., and Weisbach, M. S. (2010), “The Role of Boards of Directors in Corporate Governance: A Conceptual Frame work and Survey”. Journal of Economic Literature, 48(1): 58-107.
Basinger, S. J., &Hallerberg, M. (2004).Remodeling the competition for capital: how domestic politics erases, the race to the bottom, American Political Science Review, 98, 261-276.
Cassette, A., &Paty, S. (2008). Tax competition among Eastern and Western European countries: with whom do countries compete?Economic Systems, 32, 307-325.
Desai, M., and Dharmapala, D. (2009), “Corporate tax avoidance and firm value”, The Review of Economics and Statistics, 91 (3): 537-546.
Kraft, A. (2014), “What really affects German firms’ effective tax rate?”, International Journal of Financial Research, 5(3).
Ghinamo, M., Panteghini, P., &Revelli, F. (2007).FDI determination and corporate tax competition in a volatile world.Cesifo working paper 1965.
Graham, J. R. (2003), “Taxes and Corporate Finance: A review”, Review of Financial Studies, 16:1075-1129.
Gupta, S., and Newberry, K. (1997),” Determinants of the Variability of Corporate Effective Tax Rates: Evidence from Longitudinal Data”, Journal of Accounting and Public Policy, 16:1-34.
Hines. J., &Summers, L. (2009). How globalization affects tax design, National Bureau of Economic Research Working Paper 14664, Cambridge, Massachusetts.
Liu,X., & Cao, S. (2007). Determinants of corporate effective tax rates.The Chinese Economy, 40(6), 49-67.
McKinnon, J. D, &Thurm, S. (2012). U.S. firms move abroad; despite 2004 law, companies reincorporate overseas, saving big sums on taxes. Wall Street Journal, 8, 28.
Organization for Economic Co-operation and Development (2011) Tax database, OECD, Paris.
Richardson, G. And Lanis, R. (2007),” Determinants of the Variability in Corporate Effective Tax Rates and Tax Reforms: Evidence from Australia”, Journal of Accounting and Public Policy, 26: 689-704
Shevlin, T., & Porter, S. (1992). The corporate tax comeback in 1987: Some further evidence. Journal of the American Taxation Association 14, 58-79.
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