Corporate Tax on the Profitability of Listed Firms in Nigeria

Corporate Tax on the Profitability of Listed Firms in Nigeria

Abstract

This study investigated the impact of corporate taxation on the profitability and investment behaviour of listed firms in Nigeria. A correlational research design was adopted to explore the relationships between corporate tax rates, profitability, and investment behaviour among firms listed on the Nigerian Stock Exchange. Data were collected from secondary sources, including financial statements of the listed firms, official online sources, and databases. The study period covered a decade, from 2013 to 2023, providing a comprehensive view of the long-term impacts of corporate tax policies. Eviews 10 was used to present and analyze the data collected. Descriptive statistics, correlation estimates, and multiple regression analyses were conducted to understand the relationships and impacts of the variables under study. The F-statistic was utilized to test the stated hypotheses, providing insights into the significance of the observed relationships. The findings revealed that corporate tax rates had a significant impact on the profitability of firms across different sectors listed on the Nigerian Stock Exchange. It was observed that higher corporate tax rates tended to reduce the net profitability of firms. Additionally, changes in corporate tax policies significantly influenced the long-term investment behaviours of listed firms, with firms adjusting their investment strategies in response to tax policy changes. Macroeconomic variables, such as inflation and exchange rates, were also found to significantly influence corporate tax and firm profitability, highlighting the interconnectedness of these factors in the Nigerian business environment. In conclusion, the study provided substantial evidence that corporate taxation plays a crucial role in shaping the financial performance and investment decisions of firms. It was recommended that policymakers consider the sector-specific impacts of tax policies and the broader macroeconomic context when designing tax regimes. Additionally, firms were advised to incorporate tax considerations into their strategic planning to enhance profitability and sustain long-term growth. The study’s findings contributed to the existing body of knowledge by offering a detailed analysis of the interactions between corporate tax, profitability, and investment behaviour in the Nigerian context.

 

 

CHAPTER ONE

INTRODUCTION

Background to the Study

Corporate tax is a crucial component of the fiscal policy framework in many countries, including Nigeria. It serves as a significant source of government revenue, which is utilized to fund public goods and services. However, the imposition of corporate tax has far-reaching implications on the profitability of businesses, particularly those listed on the stock exchange. In Nigeria, the interaction between corporate taxation and firm profitability is a subject of considerable interest given the dynamic and often challenging business environment. According to Uchime and Anichebe (2019), taxation policies significantly impact domestic investments, which in turn affect the profitability of firms.

The Nigerian economy is characterized by a diverse range of industries, with many firms listed on the Nigerian Stock Exchange (NSE). These firms span various sectors such as banking, manufacturing, telecommunications, and oil and gas. For these firms, profitability is a key performance indicator that attracts investors and sustains operations. However, corporate tax policies can influence their financial outcomes significantly. Samuel and Tyokoso (2022) highlight that efficient taxation and revenue generation are pivotal for economic stability and growth, impacting the overall performance of firms.

Corporate tax can affect profitability through several channels. It directly reduces the net income of firms by taking a portion of their earnings. Additionally, high corporate tax rates can discourage investment by reducing the after-tax return on investment. On the other hand, reasonable tax rates can enhance the attractiveness of the business environment, encouraging both domestic and foreign investments. Understanding the balance between these effects is essential for policymakers, business managers, and investors. Williams, Onmonya, and Ebire (2023) provide evidence that corporate tax significantly influences financial performance, particularly in consumer goods firms.

This study explores the relationship between corporate tax and the profitability of listed firms in Nigeria. It seeks to provide empirical evidence on how corporate tax policies influence the financial performance of these firms, considering various industry contexts and economic conditions. By doing so, the study aims to contribute to the broader discourse on tax policy and business performance in emerging economies. Taiwo and Oyedokun (2022) demonstrate that corporate taxes are directly linked to the financial health of small and medium enterprises, shedding light on the broader implications for larger firms.

The corporate tax rate in Nigeria has been subject to changes over the years, reflecting the government’s fiscal policy shifts aimed at stimulating economic growth while ensuring adequate revenue generation. These changes often mirror the global economic environment and domestic fiscal needs. For instance, during periods of economic downturn, the government might adjust tax rates to encourage business investment and economic activity. Yadav, Pahi, and Gangakhedkar (2022) discuss the importance of tax policy in maintaining a balance between firm growth and profitability, emphasizing the role of fiscal measures in economic stability.

Corporate tax policies can have different impacts on various sectors of the economy. In the banking sector, for instance, tax liabilities can affect the ability of banks to extend credit and invest in new technologies. In the manufacturing sector, high corporate taxes can reduce funds available for reinvestment in business operations. Olaoye and Alade (2019) indicate that corporate taxation affects the profitability of firms differently depending on their industry, underlining the need for sector-specific tax policies.

In the telecommunications sector, which is highly capital-intensive, corporate tax can influence the capacity for expansion and innovation. Similarly, in the oil and gas sector, tax policies can determine the level of foreign investment and the overall competitiveness of the industry. Uchime and Anichebe (2019) highlight how taxation impacts domestic investment decisions, which are critical for sectors like telecommunications and oil and gas that require substantial capital investment.

The profitability of firms listed on the NSE is not only influenced by direct tax rates but also by other factors such as tax incentives and rebates offered by the government. These incentives can significantly alter the effective tax burden on firms and, consequently, their profitability. For instance, tax holidays and reduced tax rates for certain sectors can encourage investment and boost profits. Uchime and Anichebe (2019) provide insights into how tax incentives can affect investment decisions and profitability, emphasizing the importance of well-structured tax policies.

Moreover, the administrative efficiency of the tax system plays a crucial role in determining the impact of corporate taxes on profitability. A cumbersome and inefficient tax administration can increase compliance costs and create an uncertain business environment, which can negatively affect profitability. On the contrary, a transparent and efficient tax system can enhance business confidence and encourage compliance. Samuel and Tyokoso (2022) argue that efficient tax administration is vital for maximizing revenue generation without stifling business growth.

Another critical aspect to consider is the informal sector’s impact on tax revenue and business profitability. In many emerging economies, a significant portion of economic activity occurs in the informal sector, which is often outside the tax net. This situation can create an uneven playing field for formal sector businesses that bear the full brunt of corporate taxes. Williams, Onmonya, and Ebire (2023) note that the presence of a large informal sector can distort competition and affect the profitability of formal sector firms.

Furthermore, the global economic environment and international tax policies also influence the impact of corporate taxes on profitability. Multinational firms operating in Nigeria must navigate not only local tax laws but also international tax regulations, which can complicate their tax planning and compliance strategies. This complexity can affect their overall profitability. Yadav, Pahi, and Gangakhedkar (2022) emphasize the need for multinational firms to consider both domestic and international tax policies in their financial planning.

The interplay between corporate tax and firm profitability is also affected by the macroeconomic environment. Factors such as inflation, exchange rates, and economic growth rates can influence how corporate taxes impact businesses. For example, during periods of high inflation, the real burden of taxes can increase, further squeezing profitability. Taiwo and Oyedokun (2022) highlight the relationship between macroeconomic conditions and tax policies, suggesting that economic stability is crucial for maintaining favourable business conditions.

Consequently, corporate tax is a critical element of Nigeria’s fiscal policy framework, with significant implications for the profitability of listed firms. The diverse range of industries in the Nigerian economy, each with its unique characteristics and challenges, requires nuanced and well-considered tax policies. By understanding the complex relationship between corporate tax and profitability, policymakers can design tax systems that support economic growth while ensuring adequate revenue generation. As highlighted by various studies, including those by Uchime and Anichebe (2019) and Samuel and Tyokoso (2022), a balanced approach to corporate taxation can enhance the business environment, attract investment, and ultimately contribute to the sustainable development of the Nigerian economy.

Statement of Problem

The relationship between corporate tax and firm profitability in Nigeria remains an area of significant academic and practical interest. While extensive research has been conducted on the effects of corporate taxation on businesses, several critical gaps still need to be addressed. One major gap is the lack of industry-specific analysis within the Nigerian context. Many existing studies, such as those by Uchime and Anichebe (2019), have broadly examined the impact of corporate tax on overall firm profitability but have not delved into sector-specific nuances. This oversight is particularly important given the diverse nature of Nigeria’s economy, where different industries, such as banking, manufacturing, telecommunications, and oil and gas, may experience the effects of corporate tax policies differently.

Additionally, there is limited empirical evidence on the long-term impacts of corporate tax changes on the investment behaviours of firms listed on the Nigerian Stock Exchange (NSE). Most studies, including Samuel and Tyokoso (2022), have primarily focused on short-term effects, leaving a gap in understanding the sustained influence of tax policies over extended periods. This is crucial for policymakers aiming to design tax regimes that promote long-term economic stability and growth.

Furthermore, existing research often fails to account for the dynamic interplay between corporate tax and other macroeconomic variables, such as inflation and exchange rates, which can significantly affect profitability (Taiwo & Oyedokun, 2022). By not integrating these factors, current studies provide an incomplete picture of the real-world scenarios firms face, thereby limiting the practical applicability of their findings.

Moreover, the role of tax incentives and rebates, which are critical components of Nigeria’s tax policy aimed at stimulating investment, is not sufficiently explored. Studies like those of Williams, Onmonya, and Ebire (2023) have highlighted the importance of these incentives but have not comprehensively evaluated their effectiveness across different sectors and economic conditions.

Objectives of the Study

The primary objective of this study was to investigate the impact of corporate tax on the profitability of listed firms in Nigeria. The specific objectives were:

1. To examine the sector-specific effects of corporate tax rates on the profitability of firms listed on the Nigerian Stock Exchange (NSE).
2. To assess the long-term impacts of corporate tax changes on the investment behaviours of listed firms in Nigeria.
3. To analyze the influence of macroeconomic variables, such as inflation and exchange rates, on the relationship between corporate tax and firm profitability in Nigeria.

 Research Questions

To achieve the objectives outlined above, this study was guided by the following research questions:

1. How do corporate tax rates affect the profitability of firms in different sectors listed on the Nigerian Stock Exchange?
2. What are the long-term impacts of corporate tax policy changes on the investment behaviours of listed firms in Nigeria?
3. How do macroeconomic variables, such as inflation and exchange rates, influence the relationship between corporate tax and firm profitability in Nigeria?

 Research Hypotheses

Based on the research questions, the following hypotheses were formulated for this study:

1. Corporate tax rates do not significantly affect the profitability of firms in different sectors listed on the Nigerian Stock Exchange.
2. Changes in corporate tax policies do not significantly influence the long-term investment behaviours of listed firms in Nigeria.
3. Macroeconomic variables, such as inflation and exchange rates, do not significantly influence corporate tax and firm profitability in Nigeria.

 Significance of the Study

The significance of studying the impact of corporate tax on the profitability of listed firms in Nigeria is multifaceted, encompassing economic, policy-making, academic, and business practice dimensions. This research holds critical value for various stakeholders, including policymakers, business managers, investors, and academics, by providing in-depth insights into how tax policies influence corporate performance within the Nigerian context.

Firstly, this study is significant for policymakers who design and implement tax policies. Understanding the relationship between corporate tax and firm profitability is essential for crafting policies that balance revenue generation with economic growth. By examining how different tax rates and structures affect various industries, policymakers can develop more targeted tax regimes that promote investment, foster business growth, and enhance overall economic stability. This research can inform decisions on optimal tax rates, potential tax incentives, and rebates, ultimately aiding in the creation of a more conducive business environment.

For business managers and corporate executives, the study provides valuable insights into strategic financial planning and decision-making. By highlighting the direct and indirect effects of corporate taxation on profitability, managers can better navigate tax obligations and optimize their financial strategies to maximize after-tax earnings. This knowledge is crucial for making informed decisions regarding investment, expansion, and resource allocation. Moreover, understanding the nuances of tax policies can help businesses advocate for favourable tax conditions and engage more effectively with regulatory bodies.

Investors and financial analysts also stand to benefit from this research. Profitability is a key determinant of a firm’s attractiveness to investors. By elucidating the impact of corporate tax on profitability, the study helps investors assess the financial health and potential of companies more accurately. This information can guide investment decisions, portfolio management, and risk assessment, contributing to more informed and strategic investment practices. Additionally, a deeper understanding of tax impacts can assist investors in evaluating the sustainability and growth prospects of firms within different sectors.

Academically, this study fills existing gaps in the literature by providing a comprehensive analysis of corporate tax impacts within the Nigerian context. While there is extensive global research on this topic, specific studies focusing on Nigeria’s unique economic and regulatory environment are limited. This research contributes to the body of knowledge by offering empirical evidence and theoretical insights tailored to Nigeria, thereby enhancing the academic discourse on taxation and corporate profitability. It also paves the way for future research, encouraging scholars to explore related issues such as the long-term effects of tax policies, sector-specific impacts, and the role of macroeconomic factors.

Finally, the study has broader economic implications. By shedding light on how corporate tax policies influence firm profitability and, by extension, economic activity, this research can contribute to national economic planning and development. Effective tax policies that support profitable businesses can lead to job creation, increased investment, and overall economic growth. Additionally, a better understanding of tax impacts can help reduce tax evasion and improve compliance, leading to more stable and predictable government revenue streams.

 Scope of the Study

The scope of this study was limited to listed firms on the Nigerian Stock Exchange (NSE). The study focused on the period from 2010 to 2020, capturing a decade of corporate tax policies and their impacts on firm profitability. The analysis included firms from various sectors such as banking, manufacturing, telecommunications, and oil and gas. By concentrating on listed firms, the study leveraged publicly available financial data to ensure accuracy and reliability in the findings.

1.8 Operational Definition of Terms

1. Corporate Tax: A tax imposed on the net income or profit of corporations by the government. In Nigeria, it is regulated by the Federal Inland Revenue Service (FIRS).
2. Profitability: A financial metric used to assess a firm’s ability to generate earnings relative to its revenue, operating costs, and other expenses over a specific period.
3. Listed Firms: Companies whose shares are traded on the Nigerian Stock Exchange (NSE), making their financial performance publicly accessible.
4. Net Profit: The actual profit after working expenses not included in the calculation of gross profit have been paid. It is the profit attributable to shareholders after all expenses, taxes, and costs have been deducted.
5. Sectoral Differences: Variations in the impact of corporate tax on profitability across different industries or sectors.
6. Investment Decisions: Choices made by firms regarding where, how, and how much capital to allocate to various projects or assets, influenced by expected returns and risks.
7. Tax Policy: The laws and regulations enacted by the government regarding how much tax corporations must pay, including rates, exemptions, and compliance requirements.
8. Fiscal Policy: Government policies regarding taxation and spending, aimed at influencing economic conditions, including growth, inflation, and employment.

References

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