THE EFFECT OF CORPORATE TAX ON THE PROFITABILITY OF BUSINESS ORGANIZATION

By

FLORENCE MADU. U

Presented To

Department of Accountancy

TABLE OF CONTENTS

Title Page ii

Certification iii

Dedication iv

Acknowledgement v

Table Of Contents vi

Chapter One

1.0 Introduction 1

1.1 Historical Background Of Companies Income Tax In

Nigeria 4

1.2 Statement Of Problem 6

1.3 Need And Purpose Of The Study 7

1.4 Limitation Of Study 7

1.5 Scope Of The Study 9

1.6 Definition Of Terms 10

Chapter Two

2.0 Review Of Related Literature 12

2.1 What Is Corporate Tax 12

2.2 General Features Of Company Income Tax In Nigeria 12

2.3 Forms Of Company Tax 15

2.4 Some Relevant Excepts Of Companies

Income Tax Act And Amendments 16

2.5 The Incidence Of corporate Tax 19

2.6 Basic Of Assessment And Procedure 20

2.7 Tests Of Profitability 21

2.8 Tax Evasion And Tax Avoidance 24

2.9 Opportunities For Tax Evasion 25

Chapter Three

3.0 Recommendation And Conclusion 26

3.1 Findings 27

Reference 29

CHAPTER ONE

1.0 INTRODUCTION

Corporate tax is the most productive revenue source of income to the government than taxes from other sources.

Although people generally do not like paying income tax, in remains a duty no citizen can legally run away from. It is therefore the practice for tax authorities to endeavor to make people pay income tax without tears since it is not possible to pay with cheers.

Taxes can be one of the largest cash out flow that a company experience. The introduction of corporate tax on any business has gone a long way affecting the performance of the businesses. Many business frown at it because it is responsible for cutting into their overall yield. With the exception of industries which enjoy tax holdings to enable them complete effectively, other firms are required by the laws of the federal republic of Nigeria to pay their corporate taxes, when due. It is known that under the condition of economic stress and hardship, coupled with a functions effect of inflation, unemployment, price instability decreasing standard of living, it is only firm that can turn those threats and challenges into opportunities that can survive. This country has been a victim of these economic problems for some years now. It is established that this condition effect every one's life, including the persons attitude and moral values every one seeks for a method whereby he could succeed at least in keeping soul and body together. A situation whereby daily with the increase in the cost of living, has made people to resort to both avoidance and evasion of taxes.

The business sector is not left out. The prevalent economic conditions in the country have continually affected their values and standards. Both the input and output of production are affected. Amongst other several problems associated with these since the business organization is an economic unit of the economy, any problem encountered by it will likely to affect the economy as a whole. Thus, disruptions in the business do not affect it alone but entire economy.

Note

The sources of data for this work will be both primary and secondary sources. The related literature review will contribute mainly the secondary data.

It should be realized that the goal of any business is to make profit. Therefore is should also be realized that profit is said tobe made when total sales revenue exceed total operating costs. Considering the above, there arises the need for firms to strive and adopt all measures and techniques necessary and available to produce profitability. A reasonable care should be taken to cut cost and improve the product quality so as to receive the acceptance of the customers (market). But with the high corporate tax imposed on business organizations one aboud to ask whether these measures advance the profitability of the firms.

Therefore, it is true to say that most of the problems facing these businessmen can be reduced if the high and cut-throat corporate taxation is reduced. In this research work, it will be revealed that corporate tax reduces the level of foreign investment and participation in Nigeria, in spite of investment opportunities that abound includes, the dis-incentive to investment and the discouragement of savings. Generally high rate of tax deeply affects the capital structure of the firm.

In other to free them from the burden of high rate, they might declare inaccurate financial figures as profits. This reduces the tax accruable to the government because of these practices.

1.1 HISTORICAL BACKGROUND OF COMPANIES INCOME TAX NIGERIA

Good evidence proves that there was nothing like corporate tax anywhere in Nigeria as far back as 1929. Prevalent then was individual (not corporate) income tax with the then Lagos colony, but this did not apply to those resident in the protectorates, whose the native administration bear the responsibility of taxing the people in the protectorates. This was by way of toll tax, Jangali, and social taxes levied on particular trade, eg cocoa farmers, butchers etc.

Tax on individuals was levied by the colonial office in Lagos. In 1929 income tax was levied at a flat of 2 percent of wages and salaries or other remunerations of all individuals resident in the coloby. The tax returns stipulated that those who engage in business, trade, or any activity yeilding profit should pay 2 percent tax of the project drawn on suhc business.

Towards the end of 1938 and beginning of 1939 however with war in Europe, governments, which Nigeria became incresingly, tax conscious of then for the first time it occurred to the out horrifies that companies were in existence. It was at this time that the first real taxes legislation was enacted in 1939 entitled "companies income tax ordinance (CITO) and Mr. Franklin G. Iloud administered the "tax office". It was not until 1940 that an accountant in the company found loophole in the (CITO) and it is on record that in this year (1940), the first tax case appeared in the court of law on appeal. In 1940 the Nigerian income tax ordinance was enacted. It was this legislation that brought both the company and the individual unto the net.

In 1960, when different legislation were enacted, companies as well as individuals were taxed separately, companies came under company income tax Act, 1961 and individuals under personal income tax act. Since personal income tax administration falls in this the region of the individuals each region enacted its own legislation to tax individual resident in their tax authority area.

The company's income tax act 1968 was suspended by the company's income tax decree, in 1979. Prior to the act or decree, the companies income tax has changed over the years. Under this amendment, the tax rate for companies was reduced from 45% to 40% of chargeable profit.

1.2 STATEMENT OF PROBLEM

It should be realized that the goal of the business is to make profit. Equally included are reduction of production cost, increase in the share of the markets. It should also be realized that profit is said to be made when total sales revenue exceeds total operating costs. That is, total sales revenue - total operating cost = profit. Loss, on the other hand is said to be incurred when the reverse is the case.

Considering the above, there arises the need for firms to strive and adopt all measures and techniques necessary and available to produce profitably. A reasonable care should be taken to cut cost and improve the product quality so as to receive the acceptance of the consumer (market). But with the high rate of tax imposed on business organization is bound to ask whether thee measure enhance profitability of the firm.

Therefore, it is true to say that most of the problems facing these businesses can be reduced if the high and cut throat corporation taxation is reduced.

1.3 NEED AND PURPOSE OF THE STUDY

The need for research work on the effect of corporate tax on the profitability of business organized can be established on the following points.

Reduction or abolition of corporate tax can enhance the performance of a business organization. Secondly, it will help to improve the workers performance because not mud earning's should be paid as tax. Thirdly, it increases the incentive to invest by shareholders since they will be sure of the adopted return on the invested capital. According to coaster, coaster costs must be cut. Costs must be controlled, profitability must be improved.

should be aware of the manner in which tax affects the profitability.

The management of business organization should in the light of this employ tax planning techniques, which should enable them, avoid tax. Having said this much, it is the researchers purpose to try to discover how corporate taxes affects both pre-tax and after tax profitability. This also the intention of the researcher to find out how tax rules affecte certain specified and imported aspects of business organization decision.

1.4 LIMITATION OF STUDY

The basis and objective of tax planning as a prelude to management and profitability is to discover the loopholes in the tax laws so as to reduce tax liability. It is as result of this that taxes have are always changing. To overcome some of these loopholes and to keep abreast with current national economic objectives,. The changing nature of these tax laws has continued to invalidate taxation textbooks based on then. As a result, it has made it impossible to obtain standard texts that contain current information on matter relevant to corporation taxation.

Another limitation is time. Part of the time is allocated to classroom work and other extra-curricular activities. The respondent also might not fully corporate with the researchers, as they may not be willing to disclose all relevant financial information. With these limitations and others notwithstanding the validity of the research findings is not in any way jeopardized.

1.5 SCOPE OF THE STUDY

A close look at the topic of this study, the effect of corporate tax on the profitability of business organization will reveal that it is a diverse research work requiring the researcher to conduct a thorough study into it.

Therefore, visiting a number of study centers library, pres centers, the office of national chamber of commerce mines and industry etc will help to collect some information from textbooks, journals, magazines, newspapers, articles, past research works for the study.

1.6 DEFINITION OF TERMS

It is very necessary to define the following terms for easy understanding of the words.

- Corporate: an incorporated limited company under the relevant laws of Nigeria

- Corporate taxation: range of taxes levied upon the corporate body on its business operation. The range includes corporate income tax, capital gains, capital transfer, sales tax, custom and excise duties.

- Custom duties: the tax on goods imported and exported from the country.

- Profits: in this context, it refers to the excess of income over expenditure

- Tax: a compulsory contribution levied on persons property or business to made the expenditure of government or other public services.

- Tax base: the value or unit on which the tax rate is applied to determine the tax due. In income taxes, the base is the net taxable income.

- Tax impact: the immediate effect of tax.

- Tax rate: the rate to be applied to the assessed value to determine the amount of tax.