IMPACT OF INCENTIVE MEASURES ON THE FLOW OF FOREIGN PRIVATE INVESTMENTS THE STUDY OF NIGERIA’S TAX INCENTIVE POLICY MEASURES (2000 – 2009)

ABSTRACT

Attempts at attracting foreign direct investment in Nigeria have been based on  the need  to maximise  the  potential  benefits  derived  from  them,  and  to  minimise  the negative effects their operations could impose on the country.   To  this effect, the federal government of Nigeria has over the years, been employing different incentive measures, both fiscal and monetary, for the purposes of attracting investors to develop the economy. How successful have these incentives been?

In  this  study,  “Impact  Of  Incentive  Measures  On  The  Flow  Of  Foreign  Private Investments: The Study Of Nigeria’s Tax Incentive Policy Measures (2000– 2009)” the researcher set out achieve four objectives to assess the Nigerian tax environment; to examine the incentive regimes of the federal government of Nigeria; to study the trend of foreign private investment in the country, with the objective of ascertaining its economic impact; and finally, to appraise the effect of the various incentives on foreign private investment in Nigeria.

The research found that there are several built-in incentives to attract foreign private investments into Nigeria; that the manufacturing and agricultural sectors were more favoured in the incentive measures; that the incentive measures were able to boost the inflow of foreign direct investments; that this increased inflow  however, could nottranslate   to   visible   improved   living   standards,   nor   reduce   inflation   and   the unemployment status of the nation.

CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF STUDY

According to Medupim (2002:1), foreign private investment accounted for 70% of the total industrial investment, in Nigeria, at independence.   This also  constituted  over

90%  of  investment  in  such  basic  industries  as  chemical  production,  and  vehicle assembly plants and no less than 90% of other manufacturing sub-sectors.   Foreign Private Direct Investment (FPDI) dominated banking,  insurance and mining before the indigenization programme (Ukeje, 2003:285).

However, the indigenization programme of 1972 and 1977 drastically reduced foreign private investment in Nigeria.  Ever since then, there have been concerted efforts by the  Federal  Government  of  Nigeria  to  industrialise  and  attract  Foreign  Direct Investment, over the years.   This is because, according to  Okafor (1983:53), direct foreign investment often means much more than capital inflow.  It also constitutes a source of new product ideas, technology,  professional expertise, etc.   These efforts take the form of incentive schemes, which come in different forms.  But common in African and the company  income tadx relief, import duty relief, and all other tax incentives (ibid).

Howbeit, in order to attract enough foreign private investment, the macro economic environment  must  be  attractive  to  foreign  investors  also.    Issues  like  industrial infrastructure, sizeable internal market, and political stability together with a friendly tax  environment,  all  culminate  to  influence  foreign  private  investment  into  any country.

The  Nigerian  scenario  is  such  that,  since  after  the  indigenisation  programmes, successive governments have been trying very hard to woo foreign investments into the country.  This was crystallised by the Federal Government repealing the Nigerian Enterprises  Promotion Decree (NEPD) of 1977, in the  year 1995, and in its place promulgated the Nigerian Investment Promotion Decree (NIPD) No 16 of 1995, and the Foreign Exchange Decree No 17 of the same 1995.

All with the intention of liberating the economy, as to open it up to foreign  direct investments.

Added to the above were the carving out of Industrial Zones, and Export Promotion Zones.  Various tax incentives have also been put in place, coupled with the relaxation of fund repatriation.   The deregulation of the economy, and the privatisation of the non-performing public corporations, has also been embarked upon.

To what extent then, has all these moves been fruitful? The aim of this research is to investigate  how incentive  measures are used by government  for attracting  Foreign Private Investment in Nigeria and the extent of its success.  To accomplish this, this project paper is presented in five chapters – chapter one  introduces it, chapter two deals on the review of related literature, while the  methodology  of the research is presented in chapter three.  Chapter four handles the data presentation, analysis and the testing  of hypotheses.    Chapter  five  summarises  the findings  of the research, draws conclusions and makes recommendation.

1.2      STATEMENT OF PROBLEM

Attempt at attracting foreign direct investment into Nigeria have been based on the need  to maximise  the  potential  benefits  derived  from  them,  and  to  minimise  the negative effect their operations could impose on the country (Aremu, 2003:44).  The ways of attracting this FDI, especially by the developing countries, like Nigeria, is tax incentives (Anyafo, 1996:53).  This taxation is defined as a compulsory levy payable by an economic unit to the government,  without any corresponding entitlements to receive a definite and direct quid pro quo from the government (Bhatia, 2001:37).

To this end of attracting FDI, the Federal Government of Nigeria has negotiated and signed  tax  treaties  with  a  few  Foreign  Governments,  pursuant  to section  38 and schedule 7 of Personal Income Tax Act (PITA) and section 34 of Company Income Tax Act (CITA). These statutes feature a wide array of tax holdings and exemptions which are intended  to boost investment.  For instance,  the Industrial  Development (Income  Tax  Relief)  Act  makes  provision  for  the  granting  of  relief  to  pioneer companies (Abdulrazaq, 2002:5).   Other tax incentives to encourage Foregin Direct Investment are also in place.

With all the tax incentives  lavishly  given  by the government,  what  has been  the response  to  foreign  direct  investment?   How  has  the  implementation   of   these incentives  affected  the  net  flow  of  foreign  capital?    How  has  the  net  effect  of attracting foreign direct investment been favourable to the economy? Are there some other measures required by the government, so as to have the desired net effect?

In recognition of the above, the researcher intends to study the present tax incentive regime in Nigeria, with the aim of ascertaining how far they have encouraged foreign direct investment in the country.

1.3      OBJECTIVES OF THE STUDY

The benefits  of direct  foreign  investment  can impact  positively  on both  domestic private and public investment (Ukeje, 2003:284).  The other benefits are: increase in national real income; increase in labour employment and labour productivity; increase in innovation – managerial ability, technical manpower and technological know how; increase in quality of goods and services produced  (ibid), amongst  other benefits. However,  the  ways  of  attracting  this  foreign   direct  investment,  especially  by developing countries like Nigeria is tax incentives according to Anyafo (1996:53).

To what extent, therefore, are these benefits accruing to Nigeria, with her present tax incentive regime? To ascertain this fact, the researcher therefore, is saddled with the following objectives:

1)  To assess the Nigerian tax environment;

2)  To examine the incentive regimes of the federal government of Nigeria;

3)  To  study  the  trend  of  foreign  private  investment  in the country,  with  the objective of ascertaining its economic impact;

4)  To appraise the effect of the various incentives on foreign private investment in Nigeria;

5)  Finally, to make recommendations on areas that might need a further review based on the findings of the study.

1.4      HYPOTHESES FORMULATION

In furtherance of the above study, and in a bid to achieve the afore-stated objectives, the following hypotheses will be postulated and appropriately tested for their validity.

Hypothesis I

Ho: Incentive measures have not encouraged foreign direct investment in Nigeria

Hypothesis II

Ho: Foreign private investment has not encouraged economic development

1.5      SCOPE OF STUDY

Over the years, the Federal Government of Nigeria has rolled out different incentives, both fiscal and monetary, to attract foreign direct investment in the country.  Different sectors of the economy have different incentive packages, mapped out for them.  In recognition of the vastness of the topic under study, the researcher therefore will be restricted to the present tax incentive regime and will cover the period 2000 – 2009.

Furthermore,  the  sector  of  the  economy  that  will  be  considered  of  interest,  with regards  to  attracting  foreign  direct  investment  in  Nigeria  will  be   mainly  the manufacturing industry.

1.6      LIMITATION OF THE STUDY

Tax incentive as a fiscal policy measure for attracting Foreign Direct Investment in Nigeria: An Evaluation (2000 – 2009); is a topic that needs a wide range of official secondary data.  This demands time, human and financial resources, which were not in abundant supply to the researcher.

Thus, this study had for its limiting factors, the following:

Time: This has always been a limiting factor for a research of this kind, because the researcher will always strive to complete his work within the time frame of his work. Finance: Researcher has always been a cost intensive venture, as the researcher will have to travel to gather materials, spend money to photocopy materials and to produce the final work, whereas the supply of it is limited.

Dearth  of  Data:  The  major  limitation  of  this  study  is  the  dearth  of  data  and information as to the present tax incentives and their effects on one side, and the non availability of data on the foreign direct investment into the country.

1.7      SIGNIFICANCE OF THE STUDY

The attraction of foreign private investment into the country has been a big concern to successive governments.  To this effect, various fiscal policy measures have been put in place to achieve the aim of attracting foreign direct investment. It is believe that when  foreign  direct  investment  is attracted  into  the  country,  other  benefits  aside capital inflow will accrue to the country.

i)         This study therefore will help in determining  the impact of the present  tax incentive regime, with the aim of finding ways to improve them.

ii)        It will  also  help  enlighten  the  readers  on  the  various  forms  of  incentive, thereby dispelling ignorance as to the intentions of the Federal Government on the present incentive regime.

iii)       This  study  is  also  significant,  in  that  it  will  throw  more  light  to   the industrialists, who will be equipped to make full use of the present incentives, to achieve growth.

iv)       This study will also provide information to the policy moulders of the country, on how best to pursue the attraction of foreign private investment.

v)        Finally, the research will be a useful addition to the existing literature on tax incentives, and attraction of foreign private investment.  Thereby serving as a resource material to all who may wish to further the study on the subject or its related area.

1.8      DEFINITION OF TERMS

Foreign   Direct   Investment   (FDI),   and  Foreign   Private   Investment   (FPI): According to Oyeranti (2003:1), it is common in the literature to observe that FDI and FPI are used interchangeably.  This perhaps explains why the International Monetary Fund defines Foreign Direct Investment  as, “investment  made to acquire a lasting interest in a foreign enterprise, with the purpose of  having an effective voice in its management”.

This definition is also adopted by the researcher, for the purposes of this work.

Tax: Tax is a compulsory levy payable by individuals and organisations for no direct service rendered to the payer.

Tax Incentives: These are measures geared towards reducing the impact of taxation on the payer, whether temporarily or permanently.

Fiscal Policy: Fiscal Policy is the influence of economic activities, through variation in taxation and government expenditure.

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