ABSTRACT
The tax liability of a firm is positively linked to the firm’s profitability. The achievement of wealth maximization goal of the firm through the many ways of increasing profitability worsens the ability of the firm to pay high taxes leading to the reduction of its tax liability. It was further noted that though tax planning has positive impact on organization cash flow, it can have negative effects on the economy since the government is unable to collect enough taxes. These negative effects on the economy will translate to reduced financial performance of firms. The aim of this study was to ascertain the effect of corporate tax planning on corporate financial organization in Nigeria. The population for the study was all the 64 corporate financial organization listed in Nigeria Stock Exchange (NSE). The independent variables for the study were tax planning as measured by current income tax expense divided by profit before tax, liquidity as measured by current ratio, firm size as measured by natural logarithm of total assets and leverage as measured by long term debt divided by (shareholders equity + long term debt). corporate financial organization and financial performance were the dependent variable and was measured by Return on Assets (ROA). Secondary data was collected for a period of 5 years (January 2015 to December 2020) on an annual basis. The study employed a descriptive cross-sectional research design and a multiple linear regression model was used to analyze the relationship between the variables. Data analysis was undertaken using the statistical package for social sciences. The results of the study produced R-square value of 0.175 which means that about 17.5 percent of the variation in financial performance of listed companies in Nigeria can be explained by the four selected independent variables while 82.5 percent in the variation of financial performance was associated with other factor not covered in this research. The study also found that the independent variables had a weak correlation with financial performance (R=0.418). ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore, the model was fit to explain the relationship between the selected variables. The results further revealed that corporate tax planning and liquidity produced positive and statistically significant values for this study. Leverage produced negative but statistically significant values while firm size was found to be a statistically insignificant determinant of financial performance of listed companies in Nigeria. This study recommends adequate measures to be put in place by managers of listed firms to improve and grow their financial performance through corporate tax planning. Listed firms and all firms in general should practice corporate tax planning that will lead to an increase in financial performance because this translates to improved shareholder wealth which is the main goal of a firm.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The concept of taxation has been a concern of global significance as it affects every economy irrespective of national differences (Oboh et al., 2014).Within the context of Africa, tax, a concept as old as mankind can be described as an amount, effort, contribution or service rendered either in kind (goat, cow, farm produce, clearing of grass etc.) or monetary value contributed, into a common purse for the running of the society. Since the administration of a public held corporation is an agency relationship between the shareholders (principals) and management (agents), necessary is laid on management to act in utmost good faith and discharge their responsibilities diligently in a manner the owners (shareholders) would have done so as to enhance the market value of the firm. Hence, all material matters regarding the operations of the firm including financial performance and position should be disclosed timely and accurately by management. To this end, there is need for effective monitoring of management by shareholders in order to promote fairness, transparency, and accountability.A review of extract previous literatures, reveal, that the utmost interest of shareholders is wealth maximization, and one reliable means of achieving this, is through cost minimization. Okoye and Akenbor (2010) claimed that one of the costs of doing business and therefore constitute a serious barrier to wealth maximization is taxation in order to minimize the cost of taxation, tax planning and management becomes imperative for management of corporate organization. Tax planning is the analysis of a financial situation or plan from a tax perspective. The purpose of tax planning is to ensure tax efficiency with the elements of the financial plan, working together in the most tax efficient manner possible. Tax planning is an important part of a financial plan, as reducing tax liability and maximizing eligibility to contribute to retirement plans are both crucial for success.
1.2 STATEMENT OF THE PROBLEM
Tax reform today has been moving towards considering new legislation, such as whole new taxes or reliefs rather than patching of existing taxes by either increasing or decreasing the amount of taxation. This breaks down into the fact that there are ongoing considerations of widening the tax base. Nigeria is no exception to this and there are ongoing considerations into taking the financial sector and informal sector, the non –financial sector as well as the taxation of all informal taxpayers of small amounts
A question that appears to generate surprisingly little debate in Nigeria corporate world today is the scope for legally mitigating taxes payable by individual and corporate entities. Tax planning is bound to gain increasing significance with the ever-greater aggressiveness and sophistication of the country federal Inland Revenue service and other tax collecting bodies. The trend of increased aggressiveness and sophistication in tools and methods is occurring against a backdrop of a public policy of domestic sources being the primary sources of revenue for budgetary purposes. Investing in mutual funds, stocks and bond purchasing real estate, and saving for retirement, are all smart moves for consumers who want to minimize tax obligations over the long haul. Although previous empirical studies have established that tax planning has a significant influence on corporate governance by increasing the value of the firm, it should be noted that tax planning has its associated costs. Such costs include administrative costs for lawyers, accountants and consultants in designing the strategies; and also, the risk of legal challenge and penalty. Most prior studies related to this study failed to take into account the whole dimension of the costs-benefit analysis.
1.3 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.
1.4 RESEARCH QUESTIONS
To achieve the above stated objectives the study came up with the following research questions
i. Is there any effect of tax planning on corporate financial organization in Nigeria?
ii. Is there any outcome or result of tax management and planning on financial organization?
iii. Does tax planning on corporate financial organization helps to reduce their tax liabilities?
iv. Can tax planning and management purposes be achieved in corporate financial organizations?
1.5 SIGNIFICANCE OF THE STUDY
The result from this study will show the effect of tax planning and management on corporate financial organization. Information resulting from this research will form a basis of formation of government policies that govern taxation. The study’s findings will also be of great importance to stakeholders including the management of corporate Financial Organization who run the Company on a daily basis since it will provide an insight into Tax planning and proper Tax management to reduce Tax liabilities
1.6 SCOPE OF THE STUDY
This study investigated tax planning with a view to determining its impact on corporate financial organization. To achieve this purposes hypothesis were raised and a review of extent literature was made. It is been revealed that tax planning has a positive significantly impact or effect on corporate financial organizations, but the accruable tax savings do not significantly outweigh tax planning costs. Since tax planning gives excessive powers to management over the resources of the various banks, it was therefore recommended that audit committee of Nigeria banks should be saddled with the responsibilities of reviewing tax assessment and returns in order to minimize any form of strategic tax behavior by management.
1.7 LIMITATION OF THE STUDY
Financial constraint: This tends to impede the speed of the research student to buy materials and visit other areas of the federal government sector to get the information and other materials concerning the research topic but the researcher was able to get meaningful information concerning the research topic.
Time Constraint: This researcher still being a student must also have to be involved in other school’s departmental activities like seminar presentation, submission of assignment, attendance to lectures etc. but the researcher was able to meet up the time allocated for the completion of the research work
DEFINITION OF TERMS
TAX: A tax (from the Latin taxo) is a monetary financial charge or some other type of levy imposed upon a tax payer (an individual or other legal entity) by a governmental organization in order to fund various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law.
TAXATION: Taxation is a means by which government finance their expenditures by imposing charges on citizens and corporate entities. Governments make use of taxation to encourage or discourage certain economic decision. For example, reduction in taxable personnel (or household) income by the amount paid as interest on home Mortgage loans result in greater construction activity and generates more Jobs.
TAX PLANNING: Tax planning is the analysis of a financial situation, or plan, from a tax perspective. Tax planning is also the process of forecasting one’s tax liabilities and formulating ways to reduce it. The purpose of tax planning is to ensure tax efficiency. Through tax planning, all elements of the financial plan work together in the most tax efficient manner possible.
TAX MANAGEMENT: A tax strategy is the set of ambitions and goals related to tax over the next three to five years, having defined, the scope of tax activities. It is aimed at creating value. Once tax planning is done, the process of tax management starts which is managing the tax affairs to take care of tax compliance, timely payment of tax, filling of tax returns, helping, in completion of tax assessment.
CORPORATE ORGANIZATION: A corporate organization is a business formed by a group of people, and it has rights and liabilities separate from those of the individuals involved.
CORPORATE FINANCIAL ORGANIZATION: An institution collects funds (from the public or other institutions) and invests them in financial assets, financial institutions, financial organization, institution, establishment-an organization founded and united for a specific purpose
TAX LIABILITY: Tax liability refers to the amount legally owed to a taxing authority as the result of a taxable event. It is the total amount of tax debt owed by an individual, corporate or other entity to a taxing authority like the internal Revenue service (IRS). It is the total amount of tax you are responsible for paying to the relevant tax authority.
TAX EVASION: This is the illegal non-payment or underpayment of taxes by individuals, corporations, and trusts. Tax evasion often entails tax payers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profit or gains than the amounts actually earned, overstating deductions. It is a criminal act.
TAX AVOIDANCE: This is the legal usage of the tax regime in a single territory to one’s own advantage to reduce the amount of tax that is payable by means that are within the law. Tax sheltering is very similar, although unlike tax avoidance, tax sheltering is not necessarily legal.