The Impact of Taxation on Investment Decisions of Limited Liability Companies
Chapter One
Objective of the study
The objectives of the study are to find out the following:
- i) To examine the impact of taxation on investment decisions on limited liability companies.
- ii) To determine the variables that impact on the burden of effective tax investment decisions of a Limited Liability Company in Nigeria.
- To examine the effects which tax influences investment decision in Nigerian Bottling Plc, lagos.
- To find out the problems associated with tax on investment decision of Limited Liability Company.
- To make useful recommendations and suggestions based on research findings
CHAPTER TWO
REVIEW OF RELATED LITERATURE
TAX
Tax constitutes a major source of revenue to both developed and developing countries.Tax has been defined as a compulsory levy imposed on the citizens of a country by the government, in order to generate revenue that will be used in general administration (Anyanwu, 1997). Tax is also defined as the process of or machinery by which communities of group of persons are made to contribute in some agreed quantum and method for the purpose of administration and development of the society. Tax generated revenues are used to finance public utilities, perform social responsibilities and grease the administrative wheel of the government. The Chartered Institute of Taxation of Nigeria (2002) define tax as an enforced contribution of money to government pursuant to a defined authorized legislation. Tax is a compulsory levy imposed on individuals and corporate identities regardless of the status (Nightingale, 2002; Soyode & Kajola, 2006).
Investment Decision
Investment decision is defined as the company decision to invest its current funds most efficiently in the long term assets in anticipation of an expected flow of benefits over a series of years. In finance, investment is the purchase of an asset or item with the hope that it will generate income or appreciate in the future and be sold at the higher price. It generally does not include deposits with a bank or similar institution. The term investment is usually used when referring to a long-term outlook. This is the opposite of trading or speculation, which are short-term practices involving a much higher degree of risk. Financial assets take many forms and can range from the ultrasafe low return government bonds to much higher risk higher reward international stocks (Verdugo, 2005). A good investment strategy will diversify the portfolio according to the specified needs. The most famous and successful investor of all time is (Warren, 2013).
Tax and Investment Decisions
The cost of capital is the required rate of return that an investment project must earn, at least, for the project to break even and to be accepted by the firm. The cost of capital depends upon two components: the cost of finance for the project or economic depreciation (Channels, 1996) The tax system may affect the cost of capital in several ways: it may lower the rate of return of the project; change the cost of different forms of finance and change the cost of different forms of investment. In most countries, capital allowance, a type of tax incentive, is used in lieu of depreciation (wear and tear due to economic usage of assets). The company income tax is applied on taxable returns. In investment, capital allowance is an allowable tax deduction. Investment may be discouraged because the net present value [NPV] of the investment may be negative. The NPV is the discounted cash flow during asset/investment useful life. For an investment project to be worth carrying out, it must be expected to earn a rate of return which is at least as high as the cost of capital. As Channels (1996) argued it, the cost of capital is the cost of finance plus the cost of economic depreciation, i.e. p+d– g; where p is cost of finance and d – g is the rate of economic depreciation. The expected gross rate of return, R will be viable if and only if R≥ p+d–g. The significance of tax as a determining factor in investment decision may depend on government financial economic policy. Government may want to use the CIT as a policy tool, in order to encourage some firms and discouraged others. From the ongoing discourse, it is clear that the mechanics of the tax system would be very important. Excessive tax rate implication in the U.S., according to Kotlikoff (2011), encourages U.S. companies to invest overseas, and discourages foreigners from investing on the United States. In his conclusion, he summarized that the tax system is regressive and that if the United States cut its corporate income tax rate dramatically, the country would likely experience a huge rise in net domestic investment.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought the impact of taxation on investment decision of limited liability companies
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
(ii)Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information the impact of taxation on investment decision of limited liability companies. 200 staff of Nigeria bottling company, Lago was selected randomly by the researcher as the population of the study.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was on the impact of taxation on investment decision of limited liability companies. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of taxation on investment decision making
Summary
This study was on the impact of taxation on investment decision of limited liability companies. Five objectives were raised which included: To examine the impact of taxation on investment decision on limited liability company, to examine the impact of taxation on investment decision on limited liability company, to determine the variables that impact on the burden of effective tax investment decisions of Limited Liability Company in Nigeria, to examine the effects which tax influences investment decision in Nigerian Bottling Plc, lagos, to find out the problems associated with tax on investment decision of Limited Liability Company and to make useful recommendations and suggestions based on research finding so determine the variables that impact on the burden of effective tax investment decisions of Limited Liability Company in Nigeria. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of Nigeria bottling company, Lagos. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up production managers, marketer, senior staff and junior staff was used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
The study concluded that that company income tax and withholding tax for the manufacturing firm positively related to the investment of the quoted manufacturing firm and thus enhanced the investment of the quoted manufacturing firm. Also, it was further concluded that education tax for the manufacturing firm had a negative relation with the investment of the quoted manufacturing firm. Thus, according to Everlyne (2013), corporate tax affected the investment decisions of the firms and as such a reduced corporate tax would increase the investment of the manufacturing firms. Also, Djankov, et al (2010) study revealed that effective corporate tax rate had an adverse impact on aggregate investment of the manufacturing but not services, as well as with the size of the informal economy. Thus, it can be emphasized that company income tax and education tax had a statistical significance impact on the investment of the quoted manufacturing firm in Nigeria
Recommendation
The company managers should be aware of the benefits of debt financing. So that when they want to invest on projects just need large sums of money, they fund it using loan from financial institutions so that they can take advantage of depreciation tax shield to reduce the tax liability at the end of the year. Companies that buy very large assets for example the manufacturing companies should take advantage of depreciation tax shield as the depreciation amount calculated each year is used to reduce the amount of tax liability at the end of the year thus making funds available for further investment. Small companies that are not qualified to take loan from financial institutions or do not have huge amounts invested on assets to take advantage of depreciation should use after tax cash flow to fund their investments or Equity as other sources’ of financing will be too expensive to them which can lead to financial distress and eventually bank crafty. It’s there for upon the CEO to establish the relevant method of financing investments of the companies depending on the company industry to reduces corporate tax liability and increase investments of the company.
References
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- Adebayo, T. (2015) Examined the impact of taxation in assisting organizations in making sound and effective investment decision. International Journal of Business and Management, 2(4),23-29.
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- Everlyne. (2013). “The Effects of Corporate Taxes on investment decision of companies listed at the Nairobi securities exchange. International Journal of Finance 3(10), 57 – 67
- Kipngetich R. M. (2011). The relationship between tax paid and level of investment for the quoted companies in Kenya. MBA Project, University of Nairobi.
- Kotlikoff, L. (2011). is the Corporate Income Tax Regressive? National Centre for Policy Analysis. Policy Report No 336, USA
- Machel, A. (2016). Critical investigation of the degree of reliance of the tax paid in investment Decision.
- Oloidi, (2014). The effect of Company Income Tax on investment decisions of companies liable under the CIT Act, International Journal of Taxation and Management, 2(4), 21-25
- Warren, B. (2013) Forbes Magazine. Evidence from firms, International Tax and Public Finance.