Corporate Tax Planning and Financial Performance of Quoted Oil and Gas Firms in Nigeria
Chapter One
Objective of the Study
The main objective of this study was to evaluate the effect of corporate tax planning on financial performance of quoted Oil and Gas firms in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
Conceptual Review
Corporate Tax Planning
Corporate tax planning is legitimate activities undertaken by firms to manage their income and expenses with the objectives of eliminating, minimising and deferring tax within the ambit of the tax laws [58]. (Pniowsky 2010) defined tax planning as the process of structuring one’s affairs in order to defer, reduce or eliminate the amount of taxes payable to government [44]. Tax planning could be the legal steps taken by tax payers to lessen their tax burden in order to obtain tax savings benefits.
Tax planning involves the application of relevant incentive provisions for corporate tax payers based on enabling laws such as the CITA, PITA, VAT and other enactments. These laws provided some incentives such as pioneer status incentive, commencement rule, cessation rule, investment allowance, roll-over loss relief tax exemptions, deductions, rebate and other tax concessions allowed by tax statutes, which tax planning by organization can be built on.
According to (Nwaobia and Jayeoba 2016), tax planning activities can be considered as “active” or “passive” depending on the taxpayer’s intentions in conducting a transaction [37]. (Yimbila, 2017) Posited that active corporate tax planning is relevant in a situation where a transaction is carried out with an aim to reduce the tax burden [58]. While passive tax planning is a situation whereby a transaction is carried out without an earlier intent or purpose to reduce the tax burden. Dada, S. 0. & Adetola, R., 2017) stated that tax planning can lead to a reduction in firm value when managers have both the opportunity to undervalue reported accounting profit and the incentive to reduce company income tax liability by understating taxable income [12].
(Khalid et al. 2017) established the following as elements of corporate tax planning [28]
- Planning to eliminate the tax, if that was legally permitted through tax exemptions.
- Benefitting from the costs that are subjected to tax deduction and using cost items that are subjected to deduction instead of using non-cost items, such as using funding by loans instead of self-funding.
iii. Postponing the date on which the tax shall be due to be paid as much as possible.
- Benefitting from all the tax exemptions that are stated in the tax law and the relevant laws.
- Choosing the appropriate legal form for the relevant enterprise.
- Stated that corporate tax planning process is an ongoing process that its use is not restricted to a certain financial period.
Tax Rate
This is the rate that is applicable to different types of taxes as agreed by the government to be deducted from individuals, companies and services. Tax rate is the stipulated percentage that is backed by laws which taxpayers are expected to pay from their incomes. According to (Madugba, J.U., Ogbonnaya, A.K. & Okpe I.I. 2016), direct tax is levied or imposed on the income, profits and properties of individual and corporate bodies. Indirect tax on the other hand is defined as taxes levied on goods and service rendered which are shifted in part or in full to either the final consumer who does not even know when he pays or the exact amount he pays [32]. However, the focus of this study is on company income tax, which is a direct type of tax.
It should be noted that tax rate is different countries by countries and according to the nature of the tax. The tax policies and legislations determines the tax rates of various forms of tax such as company income tax, petroleum profit tax, capital gain tax etc [2]. But the focus of this study is on corporate income tax. In Nigeria, tax rate has been fluctuating since the independence of Nigeria. The present tax rate in Nigeria as at the time of conducting this study are 30% for company income tax, 24% for personal income tax and 5% for value added tax.
According to (Gravelle and Marples 2014), (Ferede and Dahlby 2012), higher corporate tax rate negatively affect the profitability of the corporate organization but has good impact on government revenue and the growth of the economy [20, 16]. And the same could be said for income tax rate generally. Lower tax rate will enhance the purchasing power of the tax payers.
The higher the tax rate the lower the number of tax payer in the tax bracket. When the tax rate is higher it encourages tax evasion, and tax avoidance on the part of the tax payer. This means more revenue to government and relief also for the companies, this I think Nigeria government should follow.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
This section explain the method employed for the collection and analyzing the data. The study examined the effect of corporate tax planning and market value of oil and gas companies listed on the floor of the Nigerian stock exchange as at 31/12/2014. The study covers period of Ten years (2005-2014), the data was obtained from the annual report and account of the sample companies for the period. Ordinary least square was used to analyze the data using stata 12.
Population of study
The target population for this study comprised of fifteen (15) quoted foods and beverages manufacturing firms on the Nigerian Stock Exchange as at December 2018. There are 15 firms under the foods and beverages industry as quoted on the Nigerian Stock Exchange as at this period. The foods and beverage industry was chosen for this research because of the sizeable growth of this industry, its sustain profitability and the possible change of the industry.
Sample Size & Sampling Technique
Since the number of listed foods and beverages firms in Nigeria was not so large and the present study was aimed to come up with a predictive model on how corporate tax planning affects firm financial performance of listed foods and beverages firms, all the 15 firms formed the sample. The approach was total enumeration sampling method.
CHAPTER FOUR
RESULTS AND FINDINGS
Descriptive Analysis
Table 1 present the descriptive analysis of the variables. This involves summary statistic of both dependent and Independents variables.
CHAPTER FIVE
CONCLUSION AND RECOMMENDATION
Conclusion
This study examined the effect of corporate tax planning financial performance of food and beverage firms in Nigeria. Numerical description of all variables under study was captured to depict the movement of values and determine the fluctuations of each of the independent variables with the dependent variables, also moderated by a variable.
Findings of this study therefore provide insight into the effect of corporate tax planning measured by effective tax rate, capital intensity, and thin capitalization on financial performance measured by return on capital employed, return of assets, return on equity and earnings per share of food and beverage firms in Nigeria for the period between 2008 and 2017. It also provides an affirmation of the extent to which the variations in the dependent variable are caused by the independent variables covered in the models as depicted by the R-squared and adjusted R-squared.
Thus, the study concluded that having found a significant relationship between corporate tax planning and financial performance in the food and beverage industry. Abuse of the tax planning mechanism and also high tax rate and challenges facing the tax system in Nigeria might be responsible for the negative relationship some measures of tax planning have with some measure of financial performance.
Recommendations
Based on the findings and conclusions of this study, the following recommendations are made to policy makers, and academia:
The existence of a positive relationship with thin capitalization and most measures of financial performance is an indication that companies can maximize thin capitalization in order to improve their financial performance. A collaboration between the Federal Inland Revenue Service, Corporate Affairs Commission and the Organised Private Sector groups like the various Chamber of Commerce should evolve a policy and procedure to avoid abuse and its negative impact.
Firms should avail themselves with various corporate tax planning mechanism and optimally utilize the best option that will enhance the performance of the company. This is possible with engagement of independent professional qualified tax consultant to review the available options and consequences.
Tax planning is not an absolute policy prescription for all firms; it depends to a greater extent on the associated benefits involved. Hence, it is recommended that Firms should ensure that proper analysis of the cost and benefits is done before embarking on it.
Firms can deal in tax favoured or tax -exempt investments as a mean of tax planning and this can be done with the pre-engagement of applicable Tax statutes and authorities, including reliance on decided court cases.
Corporate tax planning should be done in line with proper corporate governance mechanism in other to avoid earnings management. This can be internally initiated with suitably qualified tax experts.
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