The Effect of Tax Planning and Management on Corporate Financial Organization Case Study: Guaranty Trust Bank (GTB), Agbara Branch
Chapter One
OBJECTIVES OF THE STUDY
- To state the effect of tax planning on corporate financial organization in Nigeria
- To determine if Tax management and planning has an outcome or result on financial organization
- To reveal clearly if tax planning on corporate financial organization helps to reduce tax liabilities.
- To achieve the tax planning and management purposes in corporate financial organizations.
CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
This chapter includes a review of literature examining recent and historical studies .it will analyze various theories and their relevance to the study of corporate tax planning and the effects of the practice has on the financial performance of listed companies in Kenya.
THEORETICAL REVIEW
The study will use tax planning theory, taxes and agency cost theory and trade-off theory of capital structure to explain the effectiveness of corporate tax planning on the financial performance of firm.
TAX PLANNING THEORY
Hoffman (1961) established the tax planning theory that supported firms redirecting corporate returns to other firms’ uses than flowing to government authorities. Due to the sophisticated nature of tax process and structures, loopholes in the legal system are inevitable enabling taxpayers to benefit on the tax positions. He explained that tax planning would involve firms using legal ways to reduce the tax liability by maximizing on the loopholes in the legal system. He added that firms should reduce the tax income to a minimum keeping in mind not to affect accounting income. In so doing, a firm will be able to enjoy tax planning benefits without conflicting with the legal authorities. The theory suggests that a tax plan should be flexible ina way that it can accommodates tax law change, it should be personalized according to the needs of the taxpayer, a professional product which is well coordinated to include and support the various types of taxes-corporate, income,capital gains,gift. He further added that a tax plan should be able to resolve conflicting interests of the parties involved, time conscious to factor in future tax requirement of the taxpayer and should be completely honest (Hanlon & Heitzman, 2009)
Tax planning is indispensable if management hopes to minimize the tax cost of operating a business. Tax planning is important because it forces management to utilize and exploit the available resources as best as possible. It also forces it to analyze the deviation resulted from applying and plan and to determine the reasons that led to non-achievement of the achievement of the objectives of the plan and try to deal with these reasons. Summarily, planning is important for the following reasons:
It helps alleviate tax burden on the tax payers in legal ways
It allows companies to direct investments to those businesses that grant good tax savings
It allows companies view valid laws periodically
It helps to meet the goals set by the state to promote investment and the achieve economic development (Alabi, 2001).
Tax are statutory deductions that plays a huge role in the financial performance of all firms especially since it determines the amount the company and investors can distribute among the themselves from the earnings after tax. Tax is a liability of all firms and the tax burden must be managed to a minimum if the company is to maximize on profits.
The possible areas of focus in corporate tax planning are: form, nature and size of business, capital mix, choice of accounting period, market structure, investment policy, dividend policy ( Alaba, 2001; kiabel and Nwikpasi, 2001; Sharayri and Momani, 2009). The form, nature and size of business, the income, assessable profit/loss, are given due consideration in tax planning.
Under the tax laws, interest cost is an allowable expense and results in tax savings, but dividend is not a tax deductible expense. To ensure that control is not lost by equity capital providers and for substantial tax savings, an optimum capital mix (i.e. the ratio of debt to equity) should be maintained. (Kiabel and Nwikpasi, 2001).More so, if there is an element of foreign participation in the company amounting to at least 25% of its equity capital; the company will be exempted from the minimum tax provision (S.33 CITA, 2004). From the date a business commences, periodic reports based on its accounting date will be prepared until the business ceases to exist. The questions: of what date to commence a business? What accounting date is appropriate for periodic reporting? And what date to end the business, have some tax implications. To provide answers to the above questions, under the Nigeria tax system, considerations should be given to the following conditions:
The date commencement should be planned close to the end of the government fiscal year. This will reduce the basis period and consequently the total profit;
The date of cessation should be planned close to the beginning of the government fiscal year.
The choice for a reporting period should be planned such that the accounting year end is as close as possible to the government tax year. This will give the business a substantial tax advantage in terms of when the tax liability falls due;
For capital gains tax considerations, disposal should be planned for the earlier period of assessment year so that the proceeds could be utilized for a long time before the tax is due since capital gains are assessed on a current year basis.
Toachievesometaxbenefits,acompanymayrestructureitsmarket.Forexample,amanufacturingfirmmayrestructureitsmarkettoqualifyasamanufacturingexporter,anexportermayrestructureitsmarketbyengaginginforeigndirectinvestmentinmanufacturing;acompanyinforeigntrademayrestructureitsaffairstodealonlywiththosecountrieswhereNigeriahasadoubletaxationagreementsothatitcouldbenefitfromdoubletaxationrelief;andabankmayrestructureitslendingtoearninterestincomefromtaxexemptsources.Theinterestsexemptedfromtaxinclude:(i)interestreceivablefromforeignloansgranted;(ii)interestonforeigncurrencydomiciliaryaccount;(iii)interestearnedondepositinNigeriaby
non-residentcompanywherethedepositaccountwasopenedwholly;(iv)interestsearnedonloansgrantedforagriculturalpurposeprovidedthatmoratoriumperiodisnotlessthan18monthsandtherateofinterestisnotmorethanthebaselendingrateofthebankatthetimetheloanwasgranted;(v)interestsearnedonloansgrantedonorafter1stApril,1980forthepurposeofmanufacturinggoodsforexport,providedthatatleast50%ofthemanufacturinggoodsareexportedandthatnolessthan75%oftheexportproceedsisrepatriatedtoNigeriathroughgovernmentapprovedchannels.
Whenafirminvestsitssurplusfund,itisadvisabletoplansuchinvestmentsinareaswheretaxiseitheratitsminimumortheinvestmentsproceedistaxexempt.InvestmentincomeexemptedfromcompaniesincometaxasreportedbyKiabelandNwikpasi(2001)include:
Dividend,interest,rentorroyaltyderivedbyacompanyfromacompanyoutsideNigeriaandbroughtintoNigeriathroughgovernmentapprovedchannels
Theinterestondepositaccountsofaforeignnonresidentcompany,providedthatthedepositsintotheaccountsaretransferredwhollyinforeigncurrenciestoNigeriaonorafter1stJanuary,1990throughgovernmentapprovedchannels.Dividendsreceivedfromsmallcompaniesinthemanufacturingsector,inthefirstfiveyearsofoperations
Dividends received from investments in wholly export oriented business
CHAPTER THREE
RESERCH METHODOLOGY
Introduction
Thischapterentailstheresearchmethodologyselectedandpreferredforresearch.Itfurtherlooksintotheresearchdesignpreferredandthetargetpopulation.Theappropriatedatacollectiontoolwasestablishedandthesectionfurtherstatedhowdatawillbeanalyzed.
Research Design
Theresearchdesigndescribestheprocedurestobeusedbyaresearcherforestablishingtheassociationsbetweendependentvariablesandindependentvariables(Khan,2008).Descriptive cross sectional design was adopted for the study. A descriptive studyinvolvesadescriptionofalltheelementsofthepopulation.Itallowsestimatesofapartofapopulationthathastheseattributes.Identifyingrelationshipsamongvariousvariablesis possible,to establishwhether the variables are independent or dependent.Cross-sectionalstudymethodsaredoneonceandtheyrepresentsummaryatagiventimeframe(Cooper&Schindler,2008).
Target Population
Populationreferstoallobservationsofinterestinanentirecollectionlikepeopleoreventsasdefinedbyaresearcher(Burns&Burns,2008).Thetargetpopulationwasthecorporate Financial Organization i.e. banking institution, the state of Nigeria banking sector in relation to tax planning and management.
CHAPTER FOUR
DATAANALYSIS,FINDINGSANDINTERPRETATION
INTRODUCTION
This chapter focused on the analysis of the data collected and gathered through the independently administered questionnaire to establish the effectiveness of tax planning and management on corporate financial Organization. The questionnaires were administered on the staff of Guaranty Trust Bank, Agbara.
The research work produced 20 questionnaires for 20 staff in the bank.Using regression analysis (chi-square method),the results of thestudy will bepresented in table forms as shown in the following sections.
CHAPTER FIVE
SUMMARY,CONCLUSIONANDRECOMMENDATIONS
Introduction
Thischaptersummarizesthefindingsofthepreviouschapter,conclusion,limitationsencounteredduringthestudy.Thischapteralsoelucidatesthepolicyrecommendationsthatpolicymakerscanimplementtoachievetheexpectedeffect of tax planning.Lastlythechapterpresentssuggestionsforfurtherresearchwhichcanbeusefulbyfutureresearchers.
Summary of Findings
Thestudysoughttoinvestigatetheeffectoftaxplanning and managementon corporate financial organization.Thedependentvariablesforthestudyweretaxplanning,management,firmsize,liquidityandleverage.Thestudyadoptedadescriptivecross-sectionalresearchdesign.Secondarydatawasobtainedfromdifferent sources, e.g.CMA,CBKandKNBSandwasanalyzedusingSPSSsoftwareversion21.Thestudyusedannualdataforthefinancial Organizations, i.e. Nigerian bankscoveringaperiodoffiveyearsfromJanuary2012toDecember2016.
Fromtheresultsofregressionanalysis,we discover that taxplanning influencescorporate financialorganization.Therelationshipbetweenliquidityandfinancialperformancewasfoundtobeweakandpositive.
Itisalsonotedthataunitincreaseintaxplanningwouldleadtoincreaseinfinancialperformanceby0.053.Aunitincreaseinliquiditywouldleadtoanincreaseinfinancialperformanceby0.014whileaunitincreaseinfirmsizeandleveragewouldleadtoadecreaseinfinancialperformanceby-0.006and-0.038respectively.
Conclusion
From the study findings, the study concludes that corporatefinancialorganizationissignificantlyaffectedbytaxplanning,liquidityandleverageofthecompanies.Thestudyfoundthattaxplanninghadapositiveandsignificanteffectonfinancial performance of organization.The studytherefore concludesthat taxplanningbylistedfirmsleadstoanincreaseinfinancialperformance.Thestudyfoundthatliquidityhadapositiveandsignificanteffectonfinancialperformanceandthereforeit isconcludedthathigherlevelsofliquidityleadstoanincreaseinfinancialperformance.Leverage was found to haveanegativebutstatisticallysignificant relationshipwithfinancialperformanceandthismeansanincreaseinleverageleadstoadecreaseinfinancialperformance.
Taxplanningisindispensableifmanagementhopestominimizethetaxcostofoperatingabusiness.Itforcesmanagementtoutilizeandexploittheavailableresourcesasbestaspossible.Corporatetaxplanningfocusesontheform,natureandsizeofbusiness;capitalmix,choiceofaccountingperiod,marketstructure,investmentpolicyanddividendpolicy.
TheresultofthisstudyindicatesthattaxplanninghasapositivesignificantimpactoncorporategovernanceinNigerianBanks,buttheaccruabletaxsavingsdonotsignificantlyoutweighthecostsoftaxplanning.Thisisbecausewhenbankmanagementengagesintransactionsdesignedsolelytominimizetaxliability,theymaymischaracterizesuchtransactionsbymanipulatingfinancialandoperationalresults.Suchmischaracterizationincreasesthegapbetweeninformationavailabletomanagersandshareholders.Thisincreasedinformationasymmetryforcestheshareholderstodivertmoreresourcesinmonitoringmanagement,thusincreasingagencycosts.Moreso,majorconsultantsareinsomecaseshiredbybankstohelpindesigningandimplementingthetaxplans.Taxplanninggivesmanagementexcessivepowersovertheresourcesifbanksandactsopportunisticallybydivertingincometoshareholders’detriment.Itequallyviolatestherulesofcorporategovernancethoughitincreasesbanks’marketvalue.
Thereisuncertaintyinthedecisionofabanktodeclareitstaxliability.Thisisbecausefailuretoreportfullincometotaxauthoritiesdoesnotautomaticallyleadtolegalchallengeandpenalty.Managementhasthechoicetodeclareactualincomeordeclarelessthantheactualincometotaxauthorities.Ifmanagementchoosestodeclarelessincome,thepayoffwilldependonwhethertherewastaxauditonthebank.Ifnotaxauditwasconducted,managementwillbebetteroff,butwheretaxauditwasconducted,managementwillbeworseoff.
Recommendations
Thestudyestablishedthattherewasapositiveinfluenceoftaxplanningoncorporate financialorganization.Thisstudyrecommendsadequatemeasuresshouldbeputinplacebymanagersofthesefirmstoimproveandgrowtheirfinancialperformancethroughcorporatetaxplanning.Listedfirmsandallfirmsingeneralshouldpracticetaxplanningthatwillleadtoanincreaseinfinancialperformancebecausethistranslatestoimprovedshareholderwealthwhichisthemaingoalofafirm.
Thestudyfoundoutthatapositiverelationshipexistsbetweenfinancialpositionandliquidityposition.Thisstudyrecommendsthatacomprehensiveassessmentoflistedfirm’simmediateliquiditypositionshouldbeundertakentoensurethecompanyisoperatingatsufficientlevelsofliquiditythatwillleadtoimprovedfinancialperformanceoffirms.Thisisbecausea firm’s liquidityposition is of high importance since itinfluencesthefirm’scurrentoperations.
Leveragewasalsofoundtohaveasignificantnegativeeffectonfinancialperformanceoflistedfirms.Thestudyrecommendsthatwhenfirmsaresettingtheircapitalstructuretheyshouldstrikeabalancebetweenthetaxsavingsbenefitofdebtandbankruptcycostsassociated with borrowing.Highlevels ofdebthavebeenfoundtoreduce financialperformanceoflistedfirmsfromthefindingsofthisstudyandsofirmmanagersshouldmaintaindebtinlevelsthatdonotimpactnegativelyonfinancialperformancetoensurethegoalofmaximizingshareholders’wealthisattained.
Limitations of the Study
Thescopeofthisresearchwasforfiveyears20122016.Ithasnotbeendeterminediftheresultswouldholdforalongerstudyperiod.Furthermore,itisuncertainwhethersimilarfindingswouldresultbeyond2016.Alongerstudyperiodismorereliableasitwillconsidermajorhappeningsnotaccountedforinthisstudy.
Oneofthelimitationsofthestudyisthequalityofthedata.Itisdifficulttoconcludefromthisresearchwhetherthefindingspresentthetruefactsaboutthesituation.Thedatathathasbeenusedisonlyassumedtobeaccurate.Themeasuresusedmaykeeponvaryingfromoneyeartoanothersubjecttoprevailingcondition.Thestudyutilizedsecondarydata,whichhadalreadybeenobtainedandwasinthepublicdomain,unliketheprimarydatawhichisfirst-handinformation.Thestudyalsoconsideredselecteddeterminantsandnotallthefactorsaffectingfinancialperformanceoflistedfirmsmainlyduetolimitationofdataavailability.
Fordataanalysispurposes,theresearcherappliedamultiplelinearregressionmodel.Duetotheshortcomingsinvolvedwhenusingregressionmodelssuchaserroneousandmisleadingresultswhenthevariablevalueschange,theresearchercannotbeabletogeneralizethefindingswithcertainty.Ifmoreandmoredataisaddedtothefunctionalregressionmodel,thehypothesizedrelationshipbetweentwoormorevariablesmaynothold.
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