Foreign Direct Investments and Tax Reforms: The Nigerian Experience (1990 – 2017)

Abstract

This study examined the impact of recent tax reforms on Nigeria’s foreign direct investment (FDI) net inflow from 1990 – 2017. Under the right policy environment, FDI encourages the transfer of economic productive technology and know-how between economies through spill over channels and linkages as is the case with China and the Asian Tigers. The drivers of FDI flow include policy factors such as taxation and non-policy factors like availability of natural resources, market openness and size. Nigeria FDI-experience presents a paradox as she has not had a fair share of the world’s FDI flow despite her huge non-policy related potentials thus raising critical question on the role policy factors such as taxation may have played over the years especially since the country recently embarked on tax reforms. Despite the reforms, Nigeria Tax System still have complexities which appear to deter the critically needed FDI. There is therefore need to carry out a diagnosis of Nigeria tax system, the impact of the reform and what ought to be done for an impactful and sustainable FDI inflow. The study also derives justification from the apparent dearth of empirical works on the Nigeria FDI-Tax Nexus particularly with the use of Effective Corporate Tax Rate as the tax (independent) variable. The ordinary least square method of multiple regression analysis, at 5% Level of Significance was used to analyze the data and hypotheses proposed. The study employed annual time series secondary data spanning the years (1990-2017) sourced from the Central Bank of Nigeria Statistical Bulletins and the World Bank/PWC Annual Ease of Doing Business Survey Reports in carrying out its statistical analysis. Diagnostic test result showed that the variables were not stationary at same levels hence the use of the Autoregressive Distributed Lag (ARDL) method of Regression Analysis since it accommodates a combination of 1(1) and 1(0) variables. The result of the various analysis tallies with the apriori expectation that Recent (1990 – 2017) Tax Reforms in Nigeria though not effective have impacted positively and significantly on her FDI (Net Inflow). The study also found a marginal FDI-Tax Rate Elasticity of 0.2% indicating that for every one percentage point change in Nigeria’s Effective Tax Rate, her FDI (Net Inflow) is affected by 0.2 per cent. This, the study ascertained as the elasticity or responsiveness of FDI to changes in Nigeria’s Effective Corporate Tax Rate. This result is consistent with Alli (2015), Okoi and Edame (2013) and similar to Hartman (1984) which found out that tax rate elasticity for retained earnings is significant while for transfers the results are insignificant. The result is also particularly significant for this study which emphasizes the effect of taxation on not just the inflow of FDI but also its retention, hence the use of FDI (Net Inflow) as proxy for FDI variable. Moreso, as affirmed by this study and a recent World Bank Survey reports, investors are now more concerned with the predictability, certainty, simplicity, and the overall integrity of a tax system rather than just the tax rate hence the positive correlation and high coefficient of regression (0.195) between EPTD Index (a measure of investors’ perception of tax systems) and FDI. This study strongly recommends that the Government of Nigeria should embark on a more drastic reform of her tax system in order to boost her FDI (Net Inflow). A continuous and concerted effort that yields the optimal balance between a tax regime that is simple, business friendly and one which can leverage enough revenue for public service is what is urgently needed.