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Archives of Business Review – Vol. 9, No.1
Publication Date: January 25, 2021
DOI: 10.14738/abr.91.9665.
Timah, B.P., & Chukwu, G. (2021). Tax Incentives Influence on Corporate Earnings: Evidence From Quoted Manufacturing Companies
In Nigeria .Archives of Business Research, 9(1). 182-194.
Tax Incentives Influence on Corporate Earnings: Evidence From
Quoted Manufacturing Companies In Nigeria
Benson P. Timah
Bursary Department, University of Port Harcourt, Nigeria
Gospel J. Chukwu
Department of Accounting, Federal University Otuoke
Bayelsa State, Nigeria
ABSTRACT
This study examines the influence of tax incentives on corporate
earnings of quoted manufacturing companies in Nigeria. The
operational dimension of tax incentives adopted are annual
allowance, investment allowance, and tax holiday; while the proxy for
corporate earnings is earnings per share (EPS), with share capital as a
moderating variable. Secondary data for this study are sourced from
financial reports of 69 manufacturing firms quoted on the Nigerian
Stock Exchange out of a population of 81 in agriculture,
conglomerates, consumer goods, healthcare, industrial goods, natural
resources, oil and gas operations. Results from data analysis using
descriptive statistics and multiple regression, showed that EPS is
influenced by the specified operational dimensions, adjusted R2 =
0.62, p < 0.05. Thus, tax incentives influence corporate earnings in
quoted manufacturing companies in Nigeria. It is, therefore,
recommended that tax incentives should be sustained by the
government to enhance corporate revenue and improve investment.
Also, investment booster agencies should do more to coordinate
activities, disseminate information on available incentives, and assist
investors towards optimum capacity utilization to efficiently drive the
Nigerian economy to higher heights.
Keywords: corporate earnings, tax incentive, manufacturing companies,
Nigerian economy.
INTRODUCTION
Taxation is a fiscal tool applied by government in the creation of wealth. It is usually levied on the
income, property, transactions and consumptions, from which government transfers back to the
public by providing social benefits, facilities, security, management and development of
infrastructure, among others. The Nigerian tax system seeks to facilitate achievement of
economic goals, as a mechanism for obtaining income for the government. The various types of
taxes obtainable in Nigeria include personal income tax, corporate income tax, value added tax,
petroleum profits tax, capital transfer tax, capital gains tax, education tax, customs duties, excise
duties, and stamp duties [1]. In spite of conscious effort to encourage the payment of taxes, the
system allows tax breaks and reductions for the benefit of manufacturing companies. Tanzi [2]
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contends that when people face high tax rates, they may opt to move to a friendlier environment,
transfer their financial assets abroad, or stay in the environment, but resort to tax avoidance or
become more tax aggressive. Under the Nigerian tax system, the tax incentives available include
tax exemptions, investment allowances, investment reliefs in rural areas, tax-free interest, tax
deductible, research and development, tax-free dividends, tax breaks, and capital allowances.
The grants relate to pioneer companies (in the form of tax exemption), export-free zone, mining
of solid minerals, hotel revenues, spare parts production, locally produced installation,
replacement of an out-dated factory, investment relief, rural investment relief, tax-free interest
relief, deductible investment relief, research and development, tax-free dividends, tax agreements
with other countries, incentives for the gas industry and rate for small businesses [3,4]. However,
it is worrisome that the Nigerian economy still attracts low investments needed to boost
employment, productive gains, improved foreign direct investment, increased private fixed
assets, etc. Tax incentives may bring mixed results, so countries and multilateral organizations
are cautious in their implementation, especially relative to capital flows [5]. This study examines
the influence of tax incentives on corporate earnings in quoted manufacturing companies in
Nigeria. It specifically seeks to:
i. Ascertain the influence of annual allowance on earnings per share of quoted
manufacturing companies in Nigeria;
ii. Determine the influence of investment allowance on earnings per share of
quoted manufacturing companies in Nigeria; and
iii. Examine the influence of tax holiday on earnings per share of quoted
manufacturing companies in Nigeria.
To address these objectives, the research hypotheses are as follows:
HO1: Annual allowance has no influence on earnings per share,
HO2: Investment allowance has no influence on earnings per share, and
HO3: Tax holiday has no influence on earnings per share.
LITERATURE REVIEW
Tax Incentives
Tax is a levy in order to create revenue for the general purpose and benefit of the society. It is a
framework for the provision of revenue, which government uses in extending social welfare,
goods and services, and infrastructure to the citizenry. Consequently, it is the desire to derive
revenue from corporate organizations, individuals, and other legitimate outlets to fulfil
constitutional obligations of government, that advances the concept and practice of taxation
[1,3,6]. Taxation, being a process of administering and receiving money, places obligation on the
government to ensure that accrued revenues are utilized for the purpose of carrying out
developmental projects. It is geared towards financing government expenditure and optimizing
the redistribution of wealth, in the process of expending public fund and financing developmental
projects. These attractions notwithstanding, investors clamour for tax incentives to enable them
mobilize more funds for capital expenditure [7,8,9]. The packages are outlined in various forms
including the following:
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Timah, B.P., & Chukwu, G. (2021). Tax Incentives Influence on Corporate Earnings: Evidence From Quoted Manufacturing Companies In Nigeria
.Archives of Business Research, 9(1). 182-194.
URL: http://dx.doi.org/10.14738/abr.91.9665. 184
(a) Direct incentives such as:
Goods and materials (e.g. seedlings, fertilizers etc.);
Specific provision of local infrastructure;
Grants;
Tax assuagement or concessions;
Differential fees and access to resources;
Subsidized loans; and
Cost-sharing arrangements and price guarantees.
Variable incentives such as:
(i) Sectorial facilities comprising:
Input and output prices
Specific taxes, and
Trade restrictions (e.g. tariffs)
(ii) Macro-economic facilities comprising:
Exchange rates,
General taxes,
Interest rates, as well as
Fiscal and monetary measures
(iii) Enabling incentives relating to:
Land tenure and resource security,
Accessibility and availability of basic infrastructure (ports, roads, electricity etc),
Producer support services,
Market development,
Credit facilities,
Political and macro-economic stability,
National security,
Research and development, and
Extension services.
Furthermore, direct incentives may entail cash payments and payments-in-kind (in form of
provision of land or any other infrastructural favour to enhance productivity, for the specific
companies granted).
(b) Indirect incentives such as:
(i)Direct tax cuts (tax holiday, expedited depreciation allowances, investment tax credits,
investment tax allowances or deduction of qualifying expenses);
(ii)Indirect tax cuts (minimization in import tariffs or value integrated tax); and
(iii)Special protection granted to specific firms against competition emanating from rival
firms, which can be increases in tariffs payable by the competing firms.
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(c) Non-fiscal incentives such as:
(i) Special arrangement arising from input prices emanating from agencies, like Electric
Power Agency, Oil & Gas Agency, Transportation Agency, etc;
(ii) Exemption for Export Processing Zones (EPZ) that offer both fiscal and non-fiscal
incentives; and
(iii)Subsidized financing from government.
(d) Financial incentives such as:
(i) Subsidized credits and credit guarantees: subsidized loans/loan guarantees/ensured
export credits; and
(ii) Government insurance at preferential rates/publicly funded venture capital participating
in investments involving high commercial jeopardies.
(e) Fiscal incentives such as:
a. Profit-predicated: minimization of the standard corporate income tax rate/profit
tax rate/tax holiday;
b. Capital-investment-predicated: expedited depreciation/investment and
reinvestment allowance;
c. Labour-predicated: reduction in social security contribution/deductions from
taxable earnings predicated on the number of employees or on other labour related
expenditure;
d. Sales-predicated: corporate income tax reductions predicated on total sales;
e. Import-predicated: duty exemptions on capital goods, equipment or raw materials,
components and inputs related to the production process; tax credits for duties
paid on imported materials or supplies;
f. Export-predicated: export tax exemptions; duty drawback; preferential tax
treatment of income from exports, income-tax reduction for special foreign
exchange earning activities or for manufactured exports; tax credits on domestic
sales in reciprocation for export performance; income-tax credits on net local
content of exports; deduction of overseas expenditures and capital allowance for
export industries;
g. Predicated on other particular expenses: corporate income tax deduction
predicated on, for example, expenditures relating to marketing and promotional
activities;
h. Value integrated-predicated: corporate income tax reductions or credits based on
the net local content of outputs; granting income tax credits based on net value
earned; and
i. Minimization of taxes for expatriates.
(f) Regulatory Incentives such as:
(i) Lowering of environmental, health, safety or labour standards;
(ii) Ephemeral or perpetual exemption from compliance with applicable standards;
and
(iii) Stabilization clauses assuring that subsisting regulations will not be amended to
the detriment of investors.
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Timah, B.P., & Chukwu, G. (2021). Tax Incentives Influence on Corporate Earnings: Evidence From Quoted Manufacturing Companies In Nigeria
.Archives of Business Research, 9(1). 182-194.
URL: http://dx.doi.org/10.14738/abr.91.9665. 186
(g) Subsidized incentives such as:
a. Subsidized dedicated infrastructure: electricity, water, telecommunication,
transport/related infrastructure at less than commercial price; and
b. Subsidized services, including assistance in identifying sources of finance,
implementing and managing projects, carrying out pre-investment studies,
information on markets, availability of raw materials and supply of infrastructure,
advice on production processes and marketing techniques, assistance with training
and retraining, technical facilities for developing know-how or ameliorating quality
control.
Other packages include market privileges (including preferential government contracts, and
closing the market to further ingression or the granting of monopoly rights; aegis from import
competition), as well as foreign exchange privileges (including special treatment with reverence
to foreign exchange, especially special exchange rates, special foreign debt-to-equity conversion
rates, elimination of exchange risks on foreign loans, concessions of foreign exchange credits for
export earnings, and special concessions on the repatriation of earnings and capital [10,11].
Nonetheless, there are grey areas associated with tax incentive practices, which border on:
(i) Discrimination, as selected few organizations with political connection, are
favoured to receive the grants. This situation does not encourage fair play and
propitious competition among companies, to drive the economy. With tax
discrimination, outsiders are differently subjected to taxation from insiders; the
insiders being the nationals while the foreign individuals are the outsiders.
(ii) Increased burden on tax administration, as the grants often lead to increased cost on
administration of taxation by the tax authority; and they could spring increase in
tax effort and establish additional burden on tax administration.
(iii) Corruption, as there is possibility of widening the scope of unwholesome practices
with the grants. The grants may backfire and cause a widening of the scope for
corruption in the system; and may empower some bureaucrats to perpetrate
corrupt tendencies. In such circumstances, tax incentives give the regulating tax
agency discretion to determine which projects qualify for incentives or not.
Corruption may be high with tax incentives, due to direct links between investors
and government authority which exercise discretion in implementing the grants.
(iv) Loss of tax revenue to government, as the grant denies government of income
required to finance major infrastructural needs of the economy. This tends to erode
the statutory tax base. Two ways in which revenue losses arise from granting of tax
incentives include daunting other investments in favour of the incentive-receiving
projects, as against the foregone projects; and loss of revenue in the event where
businesses claim incentives and, in some instances, shift income from taxable
activities to the exempted ones.
(v) Sign of firms’ inefficiency, as the grants could be a channel for intrinsic inefficiency
and non-productivity of the companies longing for such incentives.
(vi) Loophole for tax avoidance, as there is tendency to utilize legal methods to lower
the magnitude of income tax liability, generally accomplished by claiming the
permissible deductions and credits. This practice differs from tax evasion which
uses illicit methods, such as under-reporting income to evade paying taxes.
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(vii) Distortion in resource allocation, as any departure from perfect competition
interferes with economic agents towards maximizing social welfare. Small and
medium enterprises may have difficulties accessing credit and suffer from higher
interest rates because of information asymmetry, weak reputation because of their
small size, and possible differences in their obligations compared to sizably
voluminous companies with regards to passing on information to investors,
including accounting practices.
(viii) Impairs transparency and accountability, as it tends to abuse the principle of
transparency and accountability when rules are bent in the process of
implementation. The concept of accountability relates to legal and reporting
framework, organizational structure, strategy, procedures and actions that will
produce acceptable outcome for the public good. Transparency emphasizes
integrity, rectitude, decorum and leadership by example; while accountability is
linked to the concept of stewardship.
(ix) Enforcement and compliance challenges, as it comes with difficulties in terms of
administration and enforcement, which often trigger astronomical loss of revenue
to government.
These exceptions subsist especially in relation to the tax environment of developing countries
[2,12,13].
Corporate Performance
Concerning corporate performance, the focus is on a yardstick for measuring within a given
period, as a company seeks to grow in size and have competitive edge over competitors. Analysts
generally submit that a positive relationship subsists between size and performance, in line with
economies of scale; justified by efficient pooling of resources (finance, human, material,
technology, etc). One of the measures of financial performance is Earnings per Share (EPS), which
is the profit attributable to each equity share of a company predicated on the consolidated after- tax profit, after subtracting non-controlling interest and preference dividend but before
considering extra-ordinary items, relative to total number of equity shares in issue. It is an index
that facilitates strategic decisions regarding share valuation, management performance, as well
as merger and acquisition negotiations. It is a yardstick for promoting managerial efficiency in
organizations [14,15].
Financial performance of manufacturing firms in Nigeria varies widely, ranging from long term
poor performance to long term favourable financial performance. Chukwu and Wadike [16] found
this pattern and classified brewing firms in Nigeria based on the consistency of their financial
performance. It is therefore probable that a number of factors affect the financial performance of
manufacturing firms in Nigeria. The focus of this study is to determine whether tax incentives
influence the financial performance of firms drawn from different sectors of the manufacturing
industry in Nigeria. Studies conducted over the years justify the submission that higher EPS is
associated with higher market price per share, and greater level of investment in the economy.
This study, therefore, examines the influence of tax incentives on corporate earnings of quoted
manufacturing companies in Nigeria, using earnings per share as the measure of corporate
earnings.
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Timah, B.P., & Chukwu, G. (2021). Tax Incentives Influence on Corporate Earnings: Evidence From Quoted Manufacturing Companies In Nigeria
.Archives of Business Research, 9(1). 182-194.
URL: http://dx.doi.org/10.14738/abr.91.9665. 188
METHODOLOGY
This study utilizes secondary data from published the financial reports of manufacturing firms in
the period (2006-2015). The study population is 81 manufacturing firms quoted on the Nigerian
Stock Exchange (NSE); out of which an enhanced sample of 69 quoted manufacturing firms is
drawn based on the framework of Yameni [17]. The companies are listed under sub-sectors, such
as conglomerates, consumer goods, healthcare, industrial goods, as well as oil and gas. Analysis of
data involves tabulation and enumeration, beginning with descriptive statistics. This is followed
by computation of correlation, multiple regression and associated explanatory statistics
(facilitated by E-Views software package), in order to establish the influence of tax incentives on
corporate earnings (with EPS as proxy). The research model features the following functions:
EPS = f (AA, IA, TH, SC) ... (1)
... (2)
Where:
AA = Annual Allowance
IA = Investment Allowance
TH = Tax Holiday
SC = Share Capital (moderating variable)
This process is in line with the dispositions of Sekaran and Bougie [18], Kothari [19], Chinwe et al.
[20], as well as Twesige and Gasheja [13].
DATA ANALYSIS AND RESULTS
The descriptive statistics and explanatory results obtained from data analysis are presented in
Tables I and II.
Table I : Group Descriptive Statistics
AA IA TH SC EPS
Mean 4889384. 2080095. 2742618. 29660157 4.856910
Median 266642.5 52490.07 43776.46 350000.0 1.100000
Maximum 4.39E+08 1.94E+08 1.80E+08 1.86E+09 458.0000
Minimum 72.00000 5.000000 1.140000 179.3900 -432.2800
Std. Dev. 34965678 14170348 16133086 2.03E+08 33.26889
Observations 690 690 690 690 690
Source: Timah (21).