Assessing the Effects of Corporate Taxation on the Investment Policy of Manufacturing Firms in Nigeria

Abstract Research Background: The complexities of taxes in business have a tendency of endangering investment decisions at every point in time, if such complexities are not strategically managed. Purpose: This study therefore assesses the effect of corporate taxation on the investment policy of quoted manufacturing firms in Nigeria. Research Methodology: Secondary data sourced from annual reports of the selected firms were analysed using descriptive and inferential statistics. Specifically, static panel least square regression techniques were used. Result: The results of the study revealed that company income tax (CIT) is positively related to the investment decision of the quoted manufacturing firm (INV), and thus enhances the investment of the quoted manufacturing firm (INV) in Nigeria. The probability value revealed that company income tax (CIT) had a statistical significant correlation with the investment of the quoted manufacturing firm in Nigeria. This implies that higher corporate income taxes are associated with lower investment in manufacturing firms. Novelty: This study digressed from examining the effects of corporate tax on financial performance as that was the major focused area in this context. However, this study assessed its effect on investment decisions. Hence, this study was able to recommend that the Nigerian government should encourage and enhance manufacturing investment decision by designing an appropriate corporate income tax policy. An investment decision that is fostered on new capital, encourages the implementation of new production techniques and thus should be engineered for the development of manufacturing firms.


Introduction
infrastructural facilities, the level of security and the trending cost of business transactions, to mention but a few (Simmons, 2000).
It has been observed that long term planning on taxation is always very difficult in many developing countries, due to the fact in most of them, reviews of tax laws are not clearly written and are also subject to review on a frequent basis (Pogge, Mehta, 2016). According to M.O. Olaleye, G.K. Riro and F.S. Memba (2016), taxation has been used on several occasions to stimulate saving and/or income redistribution in many countries of the world. Depending on the nature of tax, taxation may have either a negative or positive effect on an individual and an organization at large. With a high marginal rate of tax, in excess of 50%, tax will be a hindrance to work; while a low marginal rate of tax will be an incentive to work (Olaleye, Riro & Memba, 2016). The value added tax (VAT) is an incentive to save, while tax levied on interest earned on bank deposits is a deceptive ploy to save. Taxation, being a tool for government economic policy, may be used to achieve some objectives such as the redistribution of wealth, to effect changes in a country's balance of payments with other countries, to effect the mobilisation of economic resources, to influence the level of economic activities and to combat inflation. 1 Despite all these benefits that are attracted by taxation, many limited liability companies do not know the effects of taxation and as such, do not consider the effects on their investment decisions. 2 Therefore, this paper seeks to assess company income taxation and the investment decisions of quoted manufacturing firms in Nigeria, with a focus on how tax expenses measured in terms of income tax and value added tax influence the prospect of future investment of the quoted firms, as represented by their retained earnings. The study was driven by the fact one of the major problems facing Nigerian manufacturing sectors is excessive taxation which can come in the form of double, high or multiple tax (Uwuigbe, Uwuigbe, Adeyemo, Anowai, 2016). Tax positively impacts on the economy because it is a source of revenue, but it can also inversely impact on manufacturing sectors, if not properly managed to spur their investment opportunities. Also, the dearth of empirical studies on the connection between taxation and investment decisions at corporate level is also evident. Previous studies on corporate taxation either examined the impact of taxation on corporate performance in terms of dividend policy or profitability, or a firm's value or other performance measures (see Abiahu, Amahalu, 2017;Kurawa, Saidu, 2018;Omodero, Ogbonnaya, 2018;Onwuka, 2019).
research method, as well as the analysis and discussion of findings. The last subsection entails the implication of findings, concluding remarks of the paper and suggestions for further research.

Conceptual Clarification
Taxation is an integral part of Public Finance; the proper role of government provides a starting point for an analysis of public finance. The expectation is that market forces distribute goods and services among individuals in a given society, in an efficient way that can guarantee that no one will be left out or resources wasted. In a condition that the market is able to attain this feat, such that distribution of income is generally accepted by stakeholders in society, intervention by a government becomes unnecessary. In most cases, market forces could not attain such level of efficiency for all classes of goods and services, especially in such a way that there will be non-rival and non-excludability in consumption. This observed deficiency of the operation of market forces calls for the need for a government to intervene, especially in the provision and distribution of public goods. In the same vein as market inefficiency called market failure, the provision of public goods by a government or voluntary association also experiences inefficiencies called government failure. The dual existence of market and government failure gave rise to the need for public goods to be provided from resources mobilised from members of society and this gave birth to the concept of taxation.

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. The tax system of an economy can influence 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 the investment. Capital allowance is often used as tax incentives to aid investment. However, in the absence of tax incentive company income tax, when it is deductible on an investment return, it tends to influence to a greater extent, the pattern and nature of investment transactions or decisions taken by investors. This is because tax often reduces the profitability of an investment to the degree of the tax rate in operation. 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. The significance of tax as one of the key determinants of investment decisions largely depends on government policies. The place of tax in the discourse of investment decisions has been analysed on empirical grounds and there is an established interconnection between corporate taxation and investment, especially when measured in terms of capital formation (see Ahiabor, Amoah, 2013). In other words, fiscal incentives respond to government failure as much as market failure.

Theoretical
It is harder and takes longer to tackle the investment impediments themselves (low skills base, regulatory and compliance cost) than to put in place a grant or tax system that can cushion the effect of such impediments. Although it is the second-best solution to provide a subsidy to counteract an existing distortion, this is what often happens in practice. Agency problems also exist between government agencies responsible for attracting investment and those responsible for the more generic business environment. Whilst investment-promotion agencies can play an important role in coordinating government activities to attract investment, they also often argue for incentives without taking account of the costs borne by the economy (Zee, Stotsky, Ley, 2002). L.T.J. Wells, N.J. Allen, J. Morisset and N. Pirnia (2001) posit that governments may legitimately feel that strict horizontal equity with government taxation and expenditure does not adequately address policy objectives and inherent market failures in certain sectors. The policy objectives might include; increasing investment to a specific region, which does not receive as much investment as it should, given the economic fundamentals because of information asymmetries.

Normative Theory
D. Chua (1995) posited that every incentive has advantages and disadvantages; and it is therefore extremely difficult to determine one set of incentives which work for different economies with different challenges and circumstances. Therefore, determining what works depends on the circumstance of the economy, the competence of the tax administration, the type of investment being courted, as well as the budgetary constraints of the government which stimulates investment in the desired sector or location, with minimal revenue leakage and provides minimal opportunities for tax planning. R.W. Boadway, D. Chua and F. Flatters (1995) argued that any benefit such as an incentive allocated by public servants or politicians is potentially open to abuse and corruption. There is therefore a strong argument that incentives should be automatically available to all investors who meet a set of open and transparent criteria.
However, an alternative argument is that firms should receive just enough incentive to induce them to invest and no more. Each potential investment therefore needs to receive an incentive.

J. Edgerton (2011) examined the effects of taxation on business investment in the United
States, using the data on the transaction prices of used aircraft, construction companies and tax incentives incidence on investment. It was found that the bonus depreciation is close to zero, thereby indicating that it had little value on investment. In the same manner, A. Onuorah and E.E. Chigbu (2013) analysed the impact of corporate taxation and retained earnings on the dividend pay-out policy in Nigeria. Specifically, the study evaluated the impact of earnings per share (EPS) on the dividend policy of firms, the effect of corporate taxation and retained earnings on the dividend policy of firms in Nigeria. Secondary data were sourced from diverse organizations, covering the period 2000-2011, as well as a CBN statistical bulletin (2009)(2010)(2011)(2012). Employing a regression analysis, the study revealed that the banking industry has the highest performance of the selected industries, followed by breweries, petroleum and marketing, conglomerates, insurance, construction and allied, as well as food and beverages. It was also discovered that there is no granger causality among the variables.
S. Mayende (2013) analysed the effects of tax incentives on the performance of Ugandan manufacturing firms. The study used secondary data collected from the World Bank under the Regional Program on Enterprises Development for ten years and Uganda Manufacturers Association Consultancy and Information Services (UMACIS). The study sampled 392 firms over the period of three years and across four sectors including agricultural, construction, manufacturing and tourism). Descriptive and inferential statistics (Regression Analysis) were employed in the study's analysis. The results of the study revealed that tax incentives perform better in terms of gross sales and value added, than their counterparts.
O. Adelegan (2006) evaluated the effect of taxes on corporate financing decisions and firm value in Nigeria. The study mainly analysed the effect of tax changes on corporate financing decisions and assessed how the differential tax treatment of dividends and debt affects both the cost of capital and the value of a firm. Data used in this study were mainly sourced from the publications of the Nigerian Stock Exchange fact books, as well as annual reports of companies.
The variables considered appropriate for the study included VCA (spread of value over cost) as the dependent variable, and the independent variables as ETA (current earnings), INTA (interest expense for a fiscal year) and DIV (dividend pay-out ratio). The Ordinary Least Square (OLS) method of data analysis was used in analysing data for the above variables. The results of the study showed that dividend is positively related to a firm's value, while debt is negatively related to a firm's value. The study also identified both earnings and investment as key determinants of a firm's value in Nigeria. (2013)  Corporate income tax and Firm Size. The results showed that corporate income tax exerts a negative impact on investment, while the firm's size exerts a positive impact on investment.

E.A. Oliech
It was also discovered that excess tax obligations in a firm's specific sector discourages the corporate investor and total sales revenue was seen to increase the level of investment in a KSE listed firm and vice versa.

Model Specification
The model of this study is in linear form and specified to express the relationship between investment decisions measured in terms of retained earnings, company income tax (CIT), as well as firm's size (FZ) as the control variable. The model is specified thus: The model was logged to reduce the unit of the data to a decimal, as they are all in huge Naira sum.
The definition of the variable is shown below: ε is the error term; it denotes a panel data where i stands for the cross sections (companies) and t represents the time period (years).

Source of Data and Method of Analysis
Data used in this study were sourced from the annual reports of twenty (20) purposively The study covered a period of ten (10) years (2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016). Data collated were analysed using descriptive statistics (mean, standard deviation, minimum and maximum), correlation analysis, pooled OLS estimation, fixed effect estimation and random effect estimation, followed by post-estimation tests for evaluating estimations for consistency and efficiency.

Results and Discussion
This section presents the results of the analysis of the data obtained from the financial statement of the selected manufacturing firms quoted on the Nigeria Stock Exchange.
The analysis of the data was done by using a descriptive statistical analysis, a panel least square which consists of a pooled, fixed and random effect model and various test and evaluation techniques, as follows.      In Table 3 In Table 4   Hausman Test that is presented below in Table 5.   In showed that cross-section dependence can be rejected. Hence, it implies that there was no crosssection dependence between company income tax, manufacturing firm size and the investment of the quoted manufacturing firms selected for this study in Nigeria. The probability value in this study revealed that company income tax (CIT) is significantly correlated with the investment of the quoted manufacturing firms in Nigeria. The adverse effect of company income tax (CIT) on some of the examined manufacturing firms confirms the results of the study conducted by S.A. Raza, S.A. Ali and Z. Abassi (2011), which revealed the negative correlation of corporate income tax with investment. This implies that higher corporate income taxes inadvertently lead to lower investment in manufacturing firms. Hence, this study recommends that the Nigerian government should encourage and enhance manufacturing investment decisions by designing an appropriate corporate income tax policy. Proper means of tax avoidance by the firms should also be approved by the government. The investment decision that fosters new capital encourages the implementation of new production techniques should be engineered for the development of manufacturing firms. Also, greater reliance on debt, as opposed to equity finance as a result of high corporate income taxes, should be discouraged to enhance and improve a manufacturing firm's investment decisions.

Suggestions for Further Research
There are three major decisions in an organisation, financing, investing and dividend decision. Most studies have examined the nexus of corporate tax on financing decisions; this study has succeeded in establishing its nexus with investment decisions. Future studies should examine the nexus of corporate tax on the dividend decisions in firms. Thus, the comparison of its effect on the three decisions can be established by carrying out further studies.