NIGERIAN

TAXATION ISSN 1118-6917 Volume 12 Number 2. 2014

TRANSFER PRICING REGULATIONS IN NIGERIA: A CHALLENGE FOR THE FEDERAL INLAND REVENUE SERVICE (FIRS) Bassey, Offiong Udo

GOVERNMENT SIZE, TAXATION AND ECONOMIC GROWTH: EVIDENCE FROM NIGERIA Ilaboya, Ofuan James & Omoye, Alade Sule

THE DYNAMIC INTERACTIONS BETWEEN FISCAL AND MONETARY POLICIES IN NIGERIA Omojolaibi, Joseph Ayoola

PUBLIC GOVERNANCE QUALITY AND TAX COMPLIANCE IN AFRICA Masud, Abdulsalam & Dandago, Kabiru Isa

LOCAL GOVERNMENT FINANCING AND COMMUNITY DEVELOPMENT IN NIGERIA Nwidobie, Barine Michael

TAXATION AND INFRASTRUCTURAL DEVELOPMENT IN NIGERIA Asasu, Obaretin & Anyanduba, John Obi

Vision To be one of the foremost professional associations in Africa and beyond Mission To build an Institute which will be a citadel for the advancement of taxation in all its ramifications Motto Integrity and Service

2013/2014 Council Members President Dike, M.A.C., FCTI Vice President (VP)

Representing the NUC Mainoma, M.A. (Prof.), ACTI Reprsenting the Chairman of FIRS Chuke, O., ACTI

Somorin, O.A.,(Dr.)Mrs., FCTI Deputy Vice President Ede, C.I., (Chief), FCTI Honorary Treasurer (HT) Adedayo, A. I., FCTI Immediate Past President Jegede, J.F.S., FCTI Past President Quadri, R.A. (Prince), FCTI Members Simplice, G.O., (Ms.), FCTI Otitoju, A.O.(Chief), FCTI

Representing Joint Tax Board Zakariyau, I., FCTI Mu’azu, U., ACTI Representing Tertiary Institutions (Polytechnics) Udochukwu, R. (Mrs.) Past Presidents Olorunleke, D. A., (Chief), FCTI Naiyeju, J. K., FCTI Okele, J. B., FCTI Aiyewumi, T. O., FCTI Balogun, A. A., (Mrs.), FCTI Osemene, E. N., FCTI (Late) Fasoto, G. F., FCTI Adigun, K. A., FCTI Quadri, R. A., (Prince), FCTI Jegede, J.F.S., FCTI

Da-Silva, G.A., FCTI Adeola, A.A., FCTI Olumegbon, R. A. (Mrs.) FCTI Disu, O.R., (Mrs.) FCTI Eze, C., FCTI Agbeluyi, S.O., FCTI

Legal Advisers: Sanni, A.O., (Dr.) FCTI Sofola, K. S., (SAN), ACTI Kotoye, A.M., FCTI Ag. Registrar/Chief Executive Adefisayo Awogbade, FCTI

Okoror, J., (Mrs.), FCTI Arome, W.E., FCTI Ohagwa, I.C., FCTI Bello, A.A., FCTI Gwaram, A.M., FCTI Ebilah, E. (Mrs.), FCTI Mikailu, A.S., (Prof) FCTI Bako, D.A., (Maj. Gen.) Rtd., FCTI Dakwambo, I., FCTI Habibu, Y., ACTI

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1985 1995 1997 1999 2001 2003 2005 2007 2009 2011

- 1995 - 1997 - 1999 - 2001 - 2003 - 2005 - 2007 - 2009 - 2011 - 2013

Published by The Chartered Institute Of Taxation Of Nigeria 4th Floor, Lagos Chamber of Commerce & Industry Building Plot 10, Nurudeen Olowopopo Drive, Beside M.K.O. Abiola Garden, Central Business District, Alausa-Ikeja. P. O. Box 1087, Ebute-Metta, Lagos State, Nigeria. Tel: +(234)01-7741273 Website: www.citn.org, Email- [email protected] Abuja Liaison Office: 1, Bechar St., Off Mambolo St, Wuse Zone 2, Abuja Tel: 09-6705066, 08060656493

Copyright @ The Chartered Institute of Taxation of Nigeria All right reserved. Reproduction of the Nigerian Taxation Journal in any form without prior permission of the Editorial Board is prohibited. Views expressed by the authors do not necessarily represent the opinion of the Institute.

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Editorial Advisers

i. Professor Mohammed Taofeeq, Abdulrazaq Faculty of Law, Lagos State University

ii. Dr. Oyesola Rafiu, Salawu Department of Management and Accounting Faculty of Administration, Obafemi Awolowo University, Ile-Ife iii. Professor Wole, Adewunmi Department of Economics, Banking & Finance Babcock University iv. Professor Amari, Omaka Faculty of Law Ebonyi State University v. Professor Prince Famous, Izedonmi Department of Accounting Faculty of Management Sciences University of Benin vi. Jude Jirinwayo, Odinkonigbo Faculty of Law University of Nigeria, Enugu State.

Editor-in-Chief Professor Aminu Salihu, Mikailu

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NOTES ON CONTRIBUTORS 1) Masud, Abdulsalam, CNA, CFA, is a PhD Research Fellow at the School of Accountancy, College of Business, Universiti Utara Malaysia 2) Dandago, Kabiru Isa, PhD, FCA, FNIM, MNES, ACTI is a Visiting Professor of Accounting at the School of Accountancy, College of Business, Universiti Utara Malaysia 3) Ilaboya, Ofuan.James, PhD, FCA, FCTI, is in the Department of Accounting, Faculty of Management Sciences, University of Benin, Benin City 4) Omoye, Alade Sule, PhD, FCA, is in the Department of Accounting, Faculty of Management Sciences, University of Benin, Benin City 5) Asasu, Obaretin, M.sc, ACA, ACTI, is in the Department of Accounting, Faculty of Management Sciences, University of Benin, Benin City 6) Anyanduba, John Obi, PhD, is in the Department of Accounting, Faculty of Management Sciences, University of Benin, Benin City 7) Omojolaibi, Joseph Ayoola, is in the Department of Economics, University of Lagos, Akoka-Lagos 8) Nwidobie, Barine Michael, FCTI, ACA, is in the Department of Accounting and Finance, Caleb University, Lagos 9) Bassey, Offiong Udo, PhD, FCA, FCTI, MNIM, is in the Central Bank of Nigeria

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Contents 2013/2014 COUNCIL MEMBERS....................................................i PUBLISHER’S AND COPYRIGHT’S INFORMATION..............ii EDITORIAL ADVISERS..................................................................iii NOTES ON CONTRIBUTORS........................................................iv CONTENTS PAGE.............................................................................v TRANSFER PRICING REGULATIONS IN NIGERIA:.. A CHALLENGE FOR THE FEDERAL INLAND REVENUE SERVICE (FIRS) Bassey, Offiong Udo.....................................................................................................................1-9

GOVERNMENT SIZE, TAXATION AND ECONOMIC GROWTH: EVIDENCE FROM NIGERIA Ilaboya, Ofuan James & Omoye, Alade Sule...............................................................................10-19

THE DYNAMIC INTERACTIONS BETWEEN FISCAL AND MONETARY POLICIES IN NIGERIA Omojolaibi, Joseph Ayoola.........................................................................................................20-27

PUBLIC GOVERNANCE QUALITY AND TAX COMPLIANCE IN AFRICA Masud, Abdulsalam & Dandago, Kabiru Isa..............................................................................28-41

LOCAL GOVERNMENT FINANCING AND COMMUNITY DEVELOPMENT IN NIGERIA Nwidobie, Barine Michael.........................................................................................................42-53

TAXATION AND INFRASTRUCTURAL DEVELOPMENT IN NIGERIA Asasu, Obaretin & Anyanduba, John Obi.................................................................................54-68

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TRANSFER PRICING REGULATIONS IN NIGERIA: A CHALLENGE FOR THE FEDERAL INLAND REVENUE SERVICE (FIRS) By Bassey, Offiong Udo

ABSTRACT Transfer pricing (TP) abuse by multinational companies has been identified as a major contributor to loss of tax revenue by developing countries. To protect the Nigerian tax base, the Board of the Federal Inland Revenue Service (FIRS) issued the Income Tax (Transfer Pricing) Regulations, 2012 which took effect from 2nd August, 2012. The challenges likely to be faced by the FIRS in implementing these regulations include information gap, knowledge or skill gap and lack of local comparable. To meet the challenges, the FIRS needs to employ TP specialists, train some staff to acquire TP skills and knowledge, develop detailed TP manuals, develop a database of local comparables, seek technical support/assistance from relevant international organisations and tax authorities in other countries that are more experienced in TP, cooperate with tax authorities in other jurisdictions on exchange of information, automate TP processes and adopt risk-based TP audit procedures. Key Words: FIRS, transfer pricing, multinational companies, transfer pricing regulations

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1. INTRODUCTION In order to accelerate the economic development of Nigeria, generate employment opportunities, technology transfer, improve the country's balance of payments situation, generate revenue through taxation, etc., the Nigerian government has given invitation and even offered incentives to foreign companies to encourage them to invest in the economy. Consequently, Nigeria has received the largest amount of foreign direct investment (FDI) in Africa (Corporate Guides International Ltd, 2010/2011). Some sectors of the Nigerian economy are dominated by multinational companies. While these multinational companies are in Nigeria with the ultimate aim of making profits, Nigeria is also interested in sharing in their profits through taxation. Yet if the Nigerian government is to obtain commensurate tax revenue from multinational companies operating in the country, the Federal Inland Revenue Service (FIRS) must keep a watchful eye over the practice referred to as transfer pricing. According to Silberztein (2013), a large proportion of world trade is accounted for by cross-border trade taking place within multinational enterprises, where branches or subsidiaries of the same multinational enterprise exchange goods or services. These transactions within the group are not exposed to the same market forces as transactions between independent enterprises. If the prices of these transactions are artificially lowered or increased they may lead to taxable profits being shifted from one country to another. As noted by the International Tax Compact (2011), many developing countries are able to capture only 40% of their tax potential. Transfer pricing abuse within multinational groups has been identified as the major contributor to this loss of tax revenue. Some multinationals may manipulate the transfer price of their transactions with related companies in Nigeria in order to minimise their Nigerian tax liability and enhance group profits. It is against this background that the Board of the FIRS issued the Income (Transfer Pricing) Regulations, 2012 with commencement date of 2nd August, 2012. This article examines the tax implications of transfer pricing and the challenges likely to be faced by the FIRS in implementing the provisions of the Income Tax (Transfer Pricing) Regulations, 2012. The article also discusses ways of overcoming these challenges. 2. DEFINITION OF TRANSFER PRICING The price charged for goods or services supplied or transferred by one subunit of an organisation to another subunit or one member of a group to another can be referred to as a transfer price. It is the price at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises (CITN, 2004, p. 34). According to Deloitte (2012, p. 1), “Transfer pricing describes the process of setting the prices at which related entities transfer physical goods, intangible property or services between each other.” As explained by Pedabo (2012, p. 1): Transfer pricing is the concept of determining the values at which goods (tangible or intangible) and services are exchanged between divisions of the same entity or between different entities that are under common control. Sometimes the entities are within the same tax territory, but the importance for taxation becomes greater when they are located in different tax territories. With particular reference to multinational companies, CITN (2008, p. 32) states that “transfer pricing is a mechanism used by the multinationals to transfer goods and services between their related or associated companies worldwide.” 2

3. TAX IMPLICATIONS OF MULTINATIONAL TRANSFER PRICING Transfer prices are significant for both taxpayers and tax authorities because they impact on the income and expenses and, therefore, taxable profits of associated enterprises in different tax jurisdictions in which the multinationals operate. Multinational transfer pricing can provide an avenue for tax fraud. Companies within the same group which are under different tax jurisdictions may decide to overprice or underprice intra-group transactions depending on what they want to achieve. As noted by Clausing (2000), multinational companies may employ transfer pricing techniques that allow them to shift profits to low tax locations, thus lowering their overall tax burdens. Transfer pricing affects the profits on which the affected enterprises are subjected to tax. Since associated enterprises transact businesses between themselves, considerations other than market conditions sometimes dictate the prices at which goods and services are transferred within the group. This could result in the shifting of profit from the tax jurisdictions in which they arise to jurisdictions which are more convenient to the multinationals (CITN, 2004, p. 34). Transfer prices will also affect customs duties paid on imports and exports. For example, if the transfer prices on imports into a country are lowered, the import duties and other tariffs based on the value of the imports will equally be reduced. The parent company can also impose excessive charges on its foreign subsidiaries, associates, etc in respect of the provision of intangibles such as patents, licenses, trademark, etc and use these avenues to siphon funds to tax heavens or jurisdictions with favourable tax requirement. For example, a Nigerian subsidiary pays royalties to its parent company based in another country for the right to manufacture the company's products in Nigeria. The taxable profits of the Nigerian subsidiary will be affected by the amount of royalties paid to the parent company. If the royalties paid by the Nigerian subsidiary are too high, the taxable profits and tax liabilities in Nigeria would be reduced. Another problematic area is where the head office of the multinational or a member of the group incurs expenses which are for the benefits of all or many members of the group. The allocation of the joint costs to members of the group will certainly affect their profits and taxes. Management fees are one of the many ways that multinational enterprises are using to reduce taxable profits in African countries. Usually these fees have no relationship with the actual cost of providing any management services ... Often management fees are charged where the local company has competent and capable management of its own (OECD, 2012, p. 72). From the few examples given above, we can see why the FIRS and the Nigerian government should pay close attention to taxes paid by subsidiaries, associates, etc of foreign companies operating in Nigeria. In a global economy where multinational enterprises (MNEs) play a prominent role, governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein. For taxpayers, it is essential to limit the risks of economic double taxation that may result from a dispute between two countries on the determination of the arm's length remuneration for their cross-border transactions with associated enterprises (OECD, 2012). 3

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NIGERIAN TRANSFER PRICING REGULATIONS

The general anti-tax avoidance provisions in sections 17(1) of the Personal Income Tax Act, Cap. P8, LFN 2004, 22(1) of the Companies Income Tax Act, Cap. C21, LFN 2004 and 15(1) of the Petroleum Profits Tax Act, Cap. P13, LFN 2004 empower the relevant tax authority in Nigeria to make appropriate adjustment to counteract the reduction or would be reduction in tax liability where related party transactions are not made at arm's length and the tax authority feels that such transactions are made to reduce the tax liability. In exercise of the powers conferred on it by the Federal Inland Revenue Service (Establishment) Act, 2007, the Board of the Federal Inland Revenue Service in 2012 published for the first time specific rules to give effect to the provisions of the principal Acts on related party transactions. These specific rules are contained in the Income Tax (Transfer Pricing) Regulations No. 1, 2012 which took effect from 2nd August, 2012. This section examines the provisions of the TP Regulations. 4.1 Objectives of the TP Regulations The objectives of the Regulations are to: (a) ensure that Nigeria is able to tax on an appropriate taxable basis corresponding to the economic activities deployed by taxable persons in Nigeria, including in their transactions and dealings with associated enterprises; (b) provide the Nigerian authorities the tools to fight tax evasion through over or under-pricing of related party transactions; (c) reduce the risk of economic double taxation; (d) provide a level playing field between MNEs and independent enterprises doing business within Nigeria; and (e) provide taxable persons with certainty of transfer pricing treatment in Nigeria. 4.2 Scope of the TP Regulations The Regulations apply to related party transactions carried on in a manner not consistent with the arm's length principle. The Regulations empower the FIRS to make adjustments where necessary if it considers that a transaction between related parties is not in accordance or consistent with the arm's length principle. 4.3 Transfer Pricing Methods The TP Regulations permit the use of any of the following methods in determining whether transactions between related parties are consistent with the arm's length principle: (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) transactional net margin method; (e) transactional profit split method; and (f) any other method which may be prescribed by regulations made by the FIRS from time to time. 4.3.1 Comparable Uncontrolled Price Method (CUPM) The comparable uncontrolled price method compares the price charged for transactions between associated enterprises (related parties) with prices charged for similar transactions between independent enterprises (unrelated parties) in comparable circumstances. If there is any difference between the two prices, this might be an indication that the transactions between the associated enterprises are not made at arm's length. For example, X Ltd and Y Ltd are members of the same group. If X Ltd sells a particular product to independent parties as well as to Y Ltd under similar circumstances, the prices charged for X Ltd's sales to independent parties can be compared with prices charged for X 4

Ltd's sales to Y Ltd (internal comparable). Similarly, if an independent party (ABC Ltd) sells to another independent party (XYZ Ltd) the same product sold by A Ltd, the prices charged by ABC Ltd can also be used as the basis for comparison (external comparable). For tax purposes, the tax authority may reject the prices for transactions between X Ltd and Y Ltd (associated enterprises) and adopt the prices for transactions between independent enterprises. The method is appropriate where there are no material differences between the transactions being compared or where such differences exist, reasonably accurate adjustments can be made to eliminate the effects of such material differences. There is need to consider other methods if material differences cannot be adjusted to give a reliable measure of an arm's length price. In determining whether two or more transactions are comparable, the following factors should be considered: (a) the characteristics of the goods, property or services transferred or supplied; (b) the functions undertaken by the person entering into the transaction taking into account the assets used and risks assumed; (c) the contractual terms of the transactions; (d) the economic circumstances under which the transactions were undertaken; and (e) the business strategies pursued by the connected taxable persons to the controlled transaction (FIRS, 2012, p. 10). 4.3.2 Cost Plus Method (CPM) Under this approach, the costs incurred by the supplier in making the product transferred or services provided to an associated enterprise are ascertained and a mark-up is then added to those costs. An appropriate mark-up may be determined by reference to the mark-up that the same supplier earns in comparable transactions with independent enterprises (internal comparable), or by reference to the mark-up earned in comparable transactions by independent enterprises (external comparable). As noted by Deloitte (2012), the method is suitable in comparable transactions and comparable cost bases but unreliable when it offers a strong incentive to inflate an entity's cost base. 4.3.3 Resale Price Method (RPM) The resale price method begins with the resale price to an independent enterprise of a product purchased from an associated enterprise and a gross margin is then deducted from this resale price. For example, OB Ltd and BY Ltd are related companies. OB Ltd usually transfers goods to BY Ltd which BY Ltd sells to independent parties. Under the resale price method, the arm's length price of the product acquired by BY Ltd in a non-arm's length transaction is determined by reducing the price realized on the resale of the product by BY Ltd to independent parties by an appropriate gross margin (resale price margin). BY Ltd's gross margin may be determined by reference to the gross margin that BY Ltd usually earns in comparable transactions with independent parties (internal comparable), or by reference to the gross margin earned by independent enterprises in comparable transactions (external comparable). 4.3.4 Profit Split Method (PSM) The first step is to determine the combined profit that arises from a business transaction in which the associated enterprises are engaged. This profit is then split between the associated enterprises in a manner that reflects the division of profit that would have been expected between independent enterprises. The combined profit or loss attributable to the transactions in which the associated enterprises participated is allocated to the associated enterprises in proportion to their respective contributions to that combined profit or loss, which should reflect the functions performed, risk assumed and assets employed by each enterprise in the related party transactions. 5

4.3.5 Transactional Net Margin Method (TNMM) Under this method, the net profit margin that an enterprise earns from transactions with an associated enterprise is compared with the net profit margin earned in comparable transactions with an independent enterprise. An appropriate net margin may be determined by reference to the net margin that the enterprise earns in comparable transactions with independent enterprises (internal comparable), or by reference to the net margin earned in comparable transactions by independent enterprises (external comparable). The transactional net margin method operates in a manner similar to the cost plus and resale price methods. However, the transactional net margin examines the net profits in relation to an appropriate base such as costs, sales or assets. 5. THE CHALLENGES OF TRANSFER PRICING While Nigeria is interested in protecting its tax base, it should also ensure that it does not hamper foreign direct investment and cross-border trade. The challenges likely to be faced by the FIRS in implementing the TP Regulations include the following: (a) Difficulty in understanding the types of multinational companies operating in the country and the transfer pricing risk likely to arise from their operations. (b) Lack of transfer pricing skills and experience. The FIRS may be overwhelmed by the complexity and volume of cases it has to handle. It may not have enough staff with relevant industry knowledge, skills and experience to tackle transfer pricing cases as rapidly as it would like. As noted by PWC (2012, p 9): The tax authorities of many African nations lack auditors, economists, and lawyers experienced in transfer pricing, financial databases used in transfer pricing analyses, and sufficient staff to process transfer pricing compliance and disputes.

(c)

The FIRS may face the constant challenge of having to train some of its staff to become TP specialists only to lose them as a result of the normal labour turnover or movement to the private sector for better conditions of service. Difficulty in obtaining relevant information. Although the Nigerian tax legislation and the TP Regulations have made it mandatory for MNEs to provide the information required by the FIRS, there is still possibility that some MNEs may withhold some relevant data, information and documents from the FIRS in order to reduce their potential tax liabilities. There might be difficulty or long delay in obtaining vital information needed in a transfer pricing case from some countries especially if there are no double taxation agreements (DTAs) between Nigeria and such countries. According to EuropeAid (2012, p. 10): Developing countries still lag behind in DTAs containing a clause on the exchange of information or specific tax information exchange agreements ('TIEAs'), which represent a relatively new tool to improve cooperation between tax authorities in TP matters. Generally, bilateral or multilateral exchange of information with developing countries is nonetheless negatively impacted by the information 'gaps.'

(d)

Lack of local comparables. In applying certain TP methods, it is necessary to compare transactions between related enterprises within a multinational group with similar transactions carried out by independent enterprises to see whether 6

arm's length principle is observed in related party transactions. In a developing country such as Nigeria, the FIRS may find it difficult to get a reasonable number of local comparable, open market transactions on which to draw conclusions. Thus, it may be compelled to use non-domestic comparables and then make adjustment for differences between the domestic market and the foreign market. According to the EuropeAid (2011, p. 9), it is often extremely difficult, especially in developing countries, to obtain adequate information on comparables, for the following reasons: ? ?

?

There tend to be fewer organised companies in any given sector than in developed countries. Existing databases for TP analysis focus on data from developed countries. This data may not be comparable or useful in performing benchmarking studies for companies operating in developing countries (at least without resource and information-intensive adjustments) and, in any event, are usually costly to access. The economies of developing countries may just have opened up or be in the process of opening up. There are many 'first movers' who have come into existence in many sectors and areas hitherto unexploited or unexplored; in such cases, there is an inevitable lack of comparables.

6. CONCLUSION It is estimated that two thirds of all business transactions worldwide take place within multinational groups (World Bank, 2011). Profits could be suppressed or undervalued as a result of intentional manipulation of transfer prices. The Income Tax (Transfer Pricing) Regulations, 2012 was issued by the Board of the FIRS to ensure that Nigeria is able to tax on an appropriate taxable basis corresponding to the economic activities deployed in Nigeria, fight tax evasion through over or under-pricing of related party transactions, reduce the risk of economic double taxation, etc. The Nigerian TP Regulations are consistent with the arm's length principle (ALP). In evaluating whether related party transactions are in accordance with ALP, the Regulations specifically mentioned five acceptable methods, namely: comparable uncontrolled price method, resale price method, cost plus method, transactional net margin method or the transactional profit split method. The FIRS has power to make adjustments if a related party transaction is not consistent with the arm's length principle. The challenges likely to be faced by the FIRS in implementing the TP Regulations include, inter alia, limited knowledge of the transfer pricing risk of multinational companies operating in the country, limited number of staff with industry knowledge, TP skills and experience, difficulty in obtaining relevant information from some MNCs, difficulty or long delay in obtaining vital information needed in a transfer pricing case from some countries, lack of local comparable, open market transactions on which to draw conclusions. 7. RECOMMENDATIONS The following are some recommendations towards meeting the challenges of implementing the TP Regulations in Nigeria by the FIRS: (a) Employment of TP specialists. The TP department of the FIRS should be staffed with well-qualified, experienced and motivated TP personnel. The human resources policies should be designed to attract and maintain TP specialists by offering attractive conditions of service. (b) Training of tax officials. A significant number of FIRS officials should be trained within and outside Nigeria to acquire TP skills and techniques. The FIRS can 7

(c) (d)

(e) (f)

(g) (h)

(i)

obtain technical assistance from tax authorities in other countries that are more experienced in TP and are willing to offer such assistance. Some tax officials in the FIRS could be seconded to such tax authorities for a certain number of years or months for on-the-job training on TP. On the other hand, TP experts could be seconded from more experienced tax authorities to the FIRS to train some staff of the FIRS and to provide on-the-ground additional support. Besides the TP Regulations, the FIRS needs to develop detailed TP manual. This will serve as a reference material and will be very useful in the training of staff of the TP department. Exchange of information mechanism. There should be bilateral/multilateral cooperation between FIRS and tax authorities in other jurisdictions. Nigeria should enter into double taxation agreements with her main trading partners with effective exchange of information provisions that will enable the FIRS to secure necessary information from the counterparties of local companies involved in related party transactions. Identification and pooling of local comparables. The FIRS should make concerted efforts to develop a database containing information on comparables on a local or pan-regional level. Support or assistance from international organisations. The FIRS can seek for support or assistance from more developed countries as well as international organisations such as World Bank, International Finance Corporation, International Monetary Fund, etc. Automation of TP processes. Developing and applying software to process TP related information. Once implemented, the FIRS should carry out a performance assessment of the effectiveness of the TP Regulations and, if necessary, make amendments to the Regulations. There may be need to introduce additional documentation and disclosure requirements for multinational companies. Adopting risk-based TP audit procedures. Given the fact that the FIRS operates with limited resources at its disposal, it is impracticable to subject all the multinational companies operating in the country to a thorough transfer pricing audit every year. By properly conducting a transfer pricing risk assessment, the FIRS should be able to identify multinationals and transactions that carry a high level of transfer pricing risk. Such companies and transactions should be subject to a thorough TP audit. In evaluating transfer pricing risk, the following are strong indicators of higher transfer pricing risk: (i) significant amount of transactions with related parties; (ii) persistent losses, lower or fluctuating profits; (iii) transactions with related parties registered or located in tax havens; (iv) excessive payments to related party in respect of royalties, management fees and/or shared service costs; (v) lower profit level than the industry level or companies in the same industry or group; (vi) failure to make a declaration of related party transactions or prepare documentation as required by the TP Regulations or FIRS; (vii) excessive debt and/or interest expense than what would have been agreed upon between unrelated parties in an arm's length transaction; and (viii) business restructurings.

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REFERENCES Clausing, K A (2000) The impact of transfer pricing on intrafirm trade, in Hines, J R (ed), International Taxation and Multinational Activity, University of Chicago Press, pp. 173-200 [online] (accessed 28 July 2013). Available from: http://www.nber.org/ chapters/c10724. EuropeAid (2011) Transfer pricing and developing countries, final report of a project commissioned by the European Commission and implemented by PWC [online] (accessed 28 July 2013). Available from: . FIRS (2012) The Income Tax (Transfer Pricing) Regulations No. 1, 2012, FIRS, Abuja [online] (accessed 28 July 2013). Available from: Gbonjubola, M O (2013) Transfer pricing and thin capitalisation, paper presented at the 15th annual tax conference of the Chartered Institute of Taxation of Nigeria, 7-11 May, Calabar [online] (accessed 18 September 2013). Available from: h t t p : / / p w c n i g e r i a . t y p e p a d . c o m / f i l e s / t r a n s f e r- p r i c i n g - a n d - t h i n capitalisation.pdf. International Tax Compact (2011) Benefits of a computerized integrated system for taxation, iTax Case Study, February [online] (accessed 18 September 2013). Available from: http://www.taxcompact.net/ documents/ITC_iTax-casestudy.pdf. OECD (2012) Dealing Effectively with the Challenges of Transfer Pricing, OECD Publishing [online] (accessed 18 September 2013). Available from: http://dx.doi.org/10.1787/ 10.1787/9789264169463-en. Pedabo (2012) The Nigeria transfer pricing regulations - A new challenge for multinational/associated enterprises in Nigeria, 31 January [online] accessed 18 S e p t e m b e r 2 0 1 3 ) . Av a i l a b l e f r o m : h t t p : / / w w w. p e d a b o . c o m / newsdetails.php?id=102 PWC (2012) Spotlight on Africa's transfer pricing landscape, Transfer Pricing perspectives: Special Edition [online] (accessed 18 September 2013). Available from: http://www.pwc.com/transferpricingperspectives. Silberztein, C (2013) Transfer pricing: a challenge for developing countries, OECD Observer [online] (accessed 18 September 2013). Available from: file:///F:/Transfer pricing A challenge for developing countries–OECD Observer.htm. The Chartered Institute of Taxation of Nigeria (2004) Model Questions and Solutions for Professional 1 Examinations February 2004, CITN, Lagos. The Chartered Institute of Taxation of Nigeria (2008) Students' Companion October 2008 Examination Professional 1 Questions and Suggested Solutions, CITN, Lagos. World Bank (2011) Transfer pricing technical assistance global tax simplification program, presentation given by Rajul Awasthi in Brussels, 24 February [online] ( a c c e s s e d 1 8 S e p t e m b e r 2 0 1 3 ) . Av a i l a b l e f r o m : http://www.taxcompact.net/documents/WB-IFC-TP-RA-ITC-EU-event_ Feb2011.pdf.

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GOVERNMENT SIZE, TAXATION AND ECONOMIC GROWTH: EVIDENCE FROM NIGERIA

By Ilaboya, Ofuan James And Omoye, Alade Sule

ABSTRACT The study examines government size, taxation and growth dynamics by incorporating two variables (tax to GDP ratio and expenditure to GDP ratio) on the conventional neoclassical growth theory. Annual time series data were sourced from the Central Bank of Nigeria Statistical Bulletin (labour force participation, expenditure to GDP ratio, investment income ratio and real GDP per capita). The tax variable was sourced from the Federal Inland Revenue Service. We estimated the data using co-integration and error correction mechanism approach. We also carried out initial diagnostics to ensure the congruency of the general model. The study finds a negative relationship between government size and economic growth in Nigeria. The parameter of taxation is positive and statistically significant. The implication of these findings is a reduction in the intervention of government to give room for public private partnership initiative against the backdrop of the global financial crisis and economic liberalisation. Keywords: Economic growth, government expenditure, taxation, co-integration, government size.

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1. INTRODUCTION What is the relationship between government size, taxation and economic growth? This fundamental question has remained unresolved over several decades largely due to diverse theoretic (neoclassical growth theory, propounded by Solow, 1956; endogenous growth theory, popularised by Barro 1990; new growth theory popularised by Romer, 1994 and unified growth theory developed by Galor, 2005) and conflicting empirical expositions. The relationship between government size, taxation and economic growth has received robust empirical consideration with findings polarised between studies which found positive relationship between taxation (Abizadeh, 1979; Ariyo, 1997; Mamatzakis, 2005; Barry & Jules, 2008), government size (Ram, 1986; Donald & Shuanghin, 1993; Fajingbesi & Odusola 1999; Al-Yousif, 2000; Ranjan & Sharma, 2008) and economic growth, and researches which established negative relationship between taxation (Bauer & Yameh, 1957; Masden, 1983; King & Robelo, 1990; Easterly & Robelo, 1993 and Engen & Skinner, 1996), government size (Laudan, 1993; Peter, 2003 and Mitchell, 2005) and economic growth. The inconsistency in the above researches is as a result of a multiplicity of factors ranging from methodological issues (possibility of endogeneity challenges), mismatch of regression variables (possibly of model specification error), differences in the operationalisation of the dependent and independent variables and the paucity of quality data. While this current contribution may not have completely addressed this plethora of limitations, we have considered some fundamentals that may not cast doubt on the robustness of our research results. Instead of the usual GDP growth rate (Kormendi & Meguire, 1985), real per capita GNP (Ram, 1986), growth rate of real per capita GDP (Landau, 1986), as proxy for economic growth, we employed real GDP per capita as it captures the overall development of the economy and sophistication of the economic structure. We utilised ratios instead of levels in capturing our regression variables. The choice of ratio was informed by the Granger and Newbold (1974); Loizides and Vamvoukas (2005) argument that: regression equations specified in levels of time series often result to erroneous conclusions if the variables are non stationary. To address model specification error, we carried out preliminary regressions and relied on Easterly and Robelo (1993) and Barro and Sala-Martin (2003) preference for few variables. And finally, against the backdrop of the limitations of panel data regression approach as espoused in (Ghali, 1994); Hsieli & Loi, 1994); Hicks, 1994 and Ibrahim, 2002), we adopted the country- specific approach. Majorly, we found a positive and significant relationship between taxation and economic growth, which means more tax revenue, would increase the growth of Nigeria economy. Hence, taxation is considered an alternative to Nigerian oil. Government expenditure and investment income rate were both negative. This means larger government presence may retard economic progresss. The ECM is correctly signed with a value of 0.72 signifying adjustment speed of 72%. This study contributes to the debate on the impact of taxation and government size on economic growth. First, to the best of our knowledge, it forms part of the very few studies to correct for the limitations of expressing regression variables at levels. The country11

specific approach is also a notable deviation from the usual norm of panel data. The choice of real GDP per capita as a dependent variable is considered novel. The inclusion of tax to GDP variable is a notable expansion of the usual regression variables. The rest of the paper proceeds as follows: In section II, we briefly reviewed extant empirical literature on the relationship between taxation, government size and economic growth against the line of positive and negative relationship. Section III focuses on the analytical framework with emphasis on modeling and estimation technique. Section IV provides the estimation result and discussion of finding while section V concludes the paper. II. REVIEW OF EMPIRICAL LITERATURE Taxation and Economic Growth Extant empirical literature on taxation – growth dynamics are divided along two opposing extremes. On the one hand are studies which found a negative relationship between taxation and economic growth and on the other extreme are studies which established positive relationship between taxation and economic growth. The earliest study on the taxation economic growth nexus is Roman and Sabrahmanya (1979) who discovered that high taxes drive both the business and the business owners. In the same vein, Masden (1983) focused on 21 countries across America, Asia, Africa and Europe discovered that high taxes stifle economic growth. Easterly and Rebelo (1993) found some measures of tax distortion (such as imputed measures of marginal tax rates) to be negatively correlated with output growth. Padda and Akram (2009) Using data from seven Asian economies from 1971 to 2007 concluded that the tax policies adopted by developing countries have no evidence that taxes permanently affect economic growth rate but that government policies, can affect the per capital income on a transitory basis. While the finding is inconsistent with the endogenous growth theory, it can best be described as further information on the neoclassical theory Engen and Skinner (1996) put forward a disaggregated study on the effect of taxes on economic growth. They argued that higher taxes can discourage investment, attenuate labour supply growth by discouraging labour force participation, discourage productivity growth, shift investment from areas of heavy tax to lightly taxed sector of the economy and finally they asserted that heavy taxation on labour supply can distort the efficient use of human capital. The result of the analysis revealed a negative relationship between taxes and economic growth in the United States. Government Size and Economic Growth The literature on government size and economic growth is divided between studies which found positive impact and those which reported negative relationship between government size and economic growth. Conventional wisdom of the neoclassical school and the law of expanding state expenditure posit a negative relationship between government size and economic growth. Fuceri (2007) focused on a panel of 99 countries from 1970 to 2000 and discovered that 1% increase in government expenditure business cycle volatility resulted in 0.78% reduction in economic growth. In the same vein, Antonio, Alonso and Furceri (2008) analysed the effect of government size, revenue and spending on economic growth using OECD and EU countries. It was discovered that government size, revenue and spending were both negatively related to economic growth. From productive and unproductive expenditure perspective as classified by Kamayandi and Lin (1994); Kormendi and Meguire (1985) concluded that unproductive government spending has statistically insignificant relationship with economic growth. Folster and Henrekson (1999) focusing on 23 OECD 11

countries over 1970 to 1995 found a negative relationship between government size and economic growth same also for (Barro, 1991; Landau, 1983; Alexander, 1990). Their argument was hinged on the inefficiency of government even though Easterly and Rebelo (1993), Levine and Renelt (1992) attacked the negative relationship which he adduced to inclusion of uncorrelated variables. Even though there seem to be a consistent negative relationship between government size and economic growth, some studies however reported positive relationship. Lucas (1988) viewed government expenditure from the perspective of education and found that investment on education increases the level of human capital which in turn increases the growth of the national economy. Chih-Hi, Co, Hsu and Younds (2008) studied the relationship between government expenditure and GDP using the American economy from 1947 to 2002. The result of the study found a positive and unidirectional relationship between expenditure and GDP. Samini and Habiban (2011) focused on a sample of 18 emerging economies from 1990 to 2007 using a composite expenditure index which was constructed for the purpose of the study. They found a positive relationship between construction expenditure and economic growth. Mba and Olugu (2011) focusing on the economy of Nigeria from 1962 to 2011, found a statistically significant positive relationship between public expenditure and economic growth. To them, a unit increase in public expenditure increases growth by 16%. III. METHODOLOGY Analytical Framework and Model Specification The framework for the analysis of government size, taxation and economic growth dynamics is the conventional neoclassical Cobb Douglas production function and following Guseh (1997) approach, economic growth(Y) is assumed to have a linear relationship with capital stock (K) and labour force (L). Thus:

Y= f ( K , L) Where Y = economic output; K = stock of capital; and L = labour; Dividing equation i by population, we have:

Yˆ = f ( Kˆ , Lˆ ) Where Yˆ = per capita GDP; Kˆ = investment income ratio; and Lˆ = labour force participation Expanding equation ii to include taxation and government expenditure: (iii) From equation iii, the econometric model is estimated as: I GDPPCt = a a + aa a e 0 + 1 2 LFPt + 3TAX t + 4GOVTEXPt + t Yt I Where GDPPC = real GDP per capita; Y = investment-income ratio; LFP = labour force participation; TAX = total tax revenue to GDP ratio; GOVTEXP = federal expenditure to GDP ratio; and e = error term. = unknown coefficient of the variables. t = time period covered (1980-2012) a ,..., a 1 4 Presumptively, it is expected that government size (a 4) will negatively impact on economic growth in Nigeria considering the fiscal recklessness. Taxation is expected to also have insignificant impact on economic growth in Nigeria considering the small tax nature of our economy with a relatively small ratio of total tax revenue to GDP. The other ratios are expected to impact positively and significantly on economic growth. Data Source Annual time series tax data were sourced from the Federal Inland Revenue Service. While 12

macro economic data of investment-income ratio, government expenditure, labour force participation and real GDP per capita were sourced from the Central Bank of Nigeria Statistical Bulletin of the relevant years. The study covers a period of 33 years from 1980 to 2012. The time frame is considered long enough to capture the variation in GDPPC caused by the explanatory variables. Estimation Technique We employed error correction model (ECM) having established co-integrating relationship among the variables using the Engle-Granger (1987) two-steps procedure. The choice of co-integration analysis is premised on its potency for testing and estimating relationships between regression variables and the ECM helps to clear the issues of spurious regression results. IV. ESTIMATION OF RESULTS AND DISCUSSION Regression Diagnostics Table 1: Descriptive Statistics

GOVTEXP Mean 35.5675 Median 39.46 Maximum 53.98 Minimum 13.61 Jarque-Bera 3.117025 Probability 0.210449 Observations 33 Researchers Computation 2014

TAX 16.59375 15 38 8 11.31838 0.003485 33

INVEST 22.88031 22.825 30.6 14.41 0.201513 0.904153 33

LFP 50.93438 55.2 56.8 39.7 5.727185 0.057063 33

GDPPC 384.4409 3666.8 540.34 296.27 4.454597 0.107819 33

The Jarque-Bera statistics and their probability values revealed normality of the regression variables with the exception of the investment-income ratio with a probability value of (0.904153) and infinitesimally small JB statistics of (0.201513). The average GDP per capita for the period is (384.44), (16.59) average for the tax revenue to GDP ratio, the average ratio for government expenditure to GDP ratio is (35.568) while that of investment-income ratio is (22.880). Table 2: Diagnostic Test Heteroskedasticity Test: Breusch-Pagan-Godfrey f-statistic 2.163939 Prob. F(4, 26) 0.1013 Obs*R-square 7.742679 Prob. Chi-Square (4) 0.1015 Scaled explained SS 12.78568 Prob. Chi-Square (4) 0.0124 Breusch-Godfrey Serial Correlation LM Test f-statistic Obs* R-squared Ramsey RESET Test

t-statistic f-statistic likelihood ratio

0.585243 Prob. F(2, 23) 0.5651 1.501215 Prob. Chi-Square (2) 0.4721

Value 0.865005 0.748234 0.951710

df 24 (1,24) 1

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Probability 0.3956 0.3956 0.3293

Researchers Computation 2014 Preliminary econometric test of the assumption of no heteroskedasticity reveal a robust estimate as seen in the Breusch-Pagan-Godfrey test result in Table 2. The f-statistic with a probability value of 0.10 exceeds the critical value at the 5% significance level. Hence, we accepted the hypothesis of homoskedastic error term. The Breusch-Godfrey serial correlation LM test result reveal probability values of (0.56) and (0.47) respectively, which exceeds the critical values at 5% level of significance which validates the absence of serial correlation., The Ramsey RESET test result shows that the t-statistic, f-statistic and likelihood ratio indicates that the model exceeds the critical values at (p>0.05) level of significance. Table 3: Result of Variance Inflation Factor Variables Coefficients Uncentered Variance VIF C 4297.162 3.595889 GOVTEXP 0.359940 2.067755 TAX 0.676091 1.632377 INVEST 0.886440 1.831078 LFP 1.220997 3.403606 Researchers Computation 2014

Centered VIF NA 1.775742 1.272640 1.458543 1.238490

The Variance Inflation Factor (VIF) test shows that all the variables are relevant to the study since the VIF factors are all below the benchmark of 10 which eliminates the possibility of multicollinearity in the regression model. The DW statistics of (1.88) is statistically close to (2.00) and can be said to be biased towards accepting the null hypothesis of no autocorrelation. Table 4: Results of the Unit Root Test Variables ADF Stat. GDPPCQ GOVTEXP TAX INVEST LFP

-1.84 -1.01 -3.42 -5.21 -1.63

LEVELS Critical Value at 5% level -3.56 -3.56 -3.56 -3.56 -3.56

FIRST DIFFERENCE ADF Stat. Critical Value at 95% level -13.46 -3.58 -5.41 -3.58 -6.20 -3.58 -5.01 -3.58 -6.28 -3.58

Order of Remark Integration 1(1) 1(1) 1(1) 1(1) 1(1)

Stationary Stationary Stationary Stationary Stationary

Researchers Computation 2014 The result of the Augmented Dickey Fuller test shows that only the investment- ratio is stationary at level since its absolute ADF value of (5.21) exceeds the ADF critical value of (3.56) at the 5% level of significance. After the first difference, all the variables became stationary (integrated of order one). Co-integration Test Table 5: Result of the Unit Root Test of Residuals t-statistic Augmented Dickey-Fuller test statistic -4.597375 Test critical values: 1% level -4.284580 5% level -3.562882 10% level -3.215267 *MacKinnon (1996) one-sided p-values Researchers Computation 2014 14

Prob.* 0.0047

The result of the unit root test of residuals shows that the residual is stationary since the absolute ADF test statistics of (4.597375) exceeds the absolute ADF critical value of (3.562882) at the 5% level of significance which means a co-integrating relationship exists among the regression variables. Error Correction Model Interpretation Table 6: Results of the Parsimonious Error Correction Estimates Variables Coefficients Std. Error t-Statistic Prob. C 5.483720 2.415924 2.269823 0.0317 DGOVTEXP -0.102243 0.441430 -0.231618 0.8186 DTAX 1.587587 0.639275 2.483417 0.0198** DINVEST -0.576482 0.690945 -0.834338 0.4117 DLFP -0.462462 0.532296 -0.842631 0.5624 ECM(-1) 0.724347 0.513862 5.301715 0.0000

R-Squared Adjusted R-Squared S. E. of regression Sum squared resid. Log likelihood f-statistic Prob (f-statistic) Researchers Computation 2014

0.597089 0.535102 13.00321 4396.173 -120.7819 9.632579 0.000065

Mean dependent var S. D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criterion Durbin-Watson stat

3.972581 19.07094 8.114960 8.346249 8.190354 1.888934

The result shows that the sign of the ECM is negative and significant (p=0.0000). The coefficient of the ECM with a value of (0.72) signifies a speed of adjustment of 72% meaning that 72% of the disequilibrium between actual and equilibrium real GDP per capita in any period is taken care of in the current period. From the results, 53% of the systematic variation in the dependent variable is accounted for by the explanatory variables. The f-value of (9.63) is an indication of the overall statistical significance of the model at the 5% level. Discussion of Findings As presented in Table 6, the significance of the parameter of total tax to GDP is beyond the likelihood of chance. With a coefficient of (1.587587) and a robust t-value of (2.483417) it shows that there exist a positive and statistically significant relationship between taxation and economic growth in Nigeria. As posited by the endogenous growth theory and some empirical studies, taxes have positive and statistically significant impact on economic growth. (Lucas, 1990; Jones, Manuelle & Rossi 1993; Abizadeh, 1979 and Ilaboya 2012). The result is however at variance with existing studies which established negative relationship between taxation and economic growth (Roman & Sabrahmanya, 1979; Engen & Skinner, 1996; Barry & Jules, 2008 and Karras & Furceri, 2009). The negative relationship between government size and economic growth is expected and consistent with extant empirical literature. Government is known to be inefficient in the provision of goods and services, uncompetitive, wasteful and distorts free market economy with restrictive regulations. While some government spending may be growth enhancing, majority are not only distortive but frivolous. Therefore, there is need for reduction in government presence to reduce the level of inefficiency in operations of the 15

national economy. Government cannot compete effectively and competition breeds efficiency. A good example of the inefficiency of government is evident in the Nigerian telecommunication sector which has been transformed from a hitherto sleeping giant (NITEL) to productive private sector driven telecom service providers such as Globacom, MTN, Visafone, Etisalat and Airtel. The result of negative relationship between government size and economic growth is supported by several studies (Guseh, 1997; Fuceri, 2007; Antonio et al, 2008). The control variable of investment income ratio was found to impact negatively on economic growth in Nigeria which means that inverse relationship exists between investment-income ratio and economic growth in Nigeria. In the same vein, the parameter of labour force participation was also found to impact negatively on economic growth in Nigeria. V. CONCLUSION Using annual time series variables from Nigeria between 1980 and 2012, we investigated the relationship between taxation, government size and economic growth based on cointegration analysis and error correction model. From the results emanates the following general summation: First, the study found a robust and positive relationship between taxation and economic growth. The implication of this is that tax is a viable alternative source of government revenue. Therefore, the Nigerian tax system should be strengthened through effective administration which can translate into enhanced government revenue. Finally, since a negative relationship exists between government size and economic growth, there should be decentralisation of government activities through effective public private partnership initiative. High level of government presence in economic activities exerts negative influence on the economy due to the inefficiency of government in providing goods and rendering services.

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REFERENCES Abizadeh, S. (1979) Tax ratio and the degree of economic development. Malaysian Economic Review. 24, pp.21-34 Alexander, W. R. J. (1994) Growth: some combined cross-sectional and time series evidence from OECD countries. Applied Economics, 22, pp. 1197-1204. Al-Yousif Y, (2000) Does government expenditure inhibit or promote economic growth: Some empirical evidence from Saudi Arabia. Indian Economic Journal. 48(2). Ariyo, A. (1997) Productivity of the Nigerian tax system 1970 – 1990. AERC Research Paper 67. African Economic Research Consortium, Nairobi, November. Barro R, (1990) Government spending in a simple model of endogenous growth. Journal of Political Economy. 98(5): pp.103-125. Barro R, (1991) Economic Growth in Cross-Section of Countries. Quarterly Journal of Economics. 106(2): pp.407-443. Barro, R. & Sala-I-Martin, X (2003) Economic growth, (2nd ed). New York: McGraw Hill. Barry, W.P., & Jules G.K. (2008) State income taxes and economic growth. Cato Journal. 28 (1), pp.53 – 71. Bauer P. T., & Yamey, B.S. (1957) The economics of underdeveloped countries. Chicago: University of Chicago Press. Donald N. B. & Shuanglin L. (1993) The differential effects on economic growth of government expenditures on education, welfare, and defense. Journal of Economic Development, 18 (1). Easterly, W., & Rebelo, S. (1993) Fiscal policy and economic growth: An empirical investigation. National Bureau of Economic Research, Working Paper 4499. Engen, E., & Skinner, J. (1996) Taxation and economic growth. National Tax Journal, 49, (4), 617 – 642. Engle, F., & Granger C.W.J. (1987) Co-integration and error correction: Representation, estimation and testing”. Econometrica, 55, 251-276. Fajingbesi A. A. & Odusola A. F. (1999) Public expenditure and growth. A Paper Presented at a Training Programme on Fiscal Policy Planning Management in Nigeria, Organized by NCEMA, Ibadan, Oyo State, 137-179. Folster S. & Henrekson M. (2001) Growth effects of government expenditure and taxation in rich countries. European Economic Review, 45(8): pp.1501-1520. Galor, O. (2005) From stagnation to growth: Unified growth theory: Hand Book of Economic Growth. Aghion, P., & Purlauf, S. (eds.). Hand Book of Economic Growth. Amsterdam: Elsevier. Ghali, K. H. (1998) Government size and Economic growth: Evidence from a multivariate co-integration analysis. Applied Economics, 31. Pp.975-987. Guseh, J. S. & Oritsejafor, E. (2007) Government size, political freedom and economic growth in Nigeria 1960-2000. Journal of Third World Series 24 (1), pp.139-165. Hsieh, E. & Lai, K. S. (1994) Government spending and economic growth: the G7 experience. Applied Economics, 26, pp. 535-542. Ibrahim, Z. (2002) On exports and economic growth. Journal Pengura sun, 21, pp.3-18 Karras, A., & Furceri, D. (2009) Taxes and growth in Europe. South – Eastern Europe Journal of Economics, 2, pp.181-204. 17

King, R.G., & Rebelo, S. (1990) Public policy and economic growth: Developing neoclassical implications. Journal of Political Economy, 98 (5),pp.126-150. Kormendi, R. & Meguire, P. (1985) Macroeconomic determinants of growth: Crosscountry evidence. Journal of Monetary Economics, pp.63-141. Laudau D. (1983) Government expenditure and economic growth: A cross country study. Southern Economic Journal, 49: pp.783-792. Levine, R., & Renelt, D. (1992) A sensitivity analysis of cross-country growth regressions. American Economic Review, 82 (4), pp.942-963. Lin, S. (1994) Government spending and economic growth. Applied Economics, 26, pp. 83-94. Liu Chih-Hl, Hsu C, & Younds M. Z, (2008) The association between government expenditure and economic growth: The Granger Causality Test of the US data, 19742002. Journal of Public Budgeting, Accounting and Financial Management, 20(4): pp.439-52. Loizides J, & Vamvoukas G, (2005) Government expenditure and economic growth: Evidence from trivariate causality testing. Journal of Applied Economics, 8 (1): pp.125-152. Lucas, R.E. (1990) Supply-side economics: An analytical review. Oxford Economics Paper. 42 (2), pp.293-336. Mamatzakis, E.C. (2005) The dynamic response of growth to tax structure for Greece. Applied Economics Letters. 12, pp.107-180. Marsden, K (1983) Links between taxes and economic growth: some empirical evidence. World Bank Staff Working Papers no. 605. Mba, I. N. & Olugu, K. N. (2011) Increasing size of government: Implication for output growth in Nigeria. Retrieved from: http//:ssrn.com/abstract=1911843. [Accessed: 4-5-2-2014) Mitchell J. D, (2005) The Impact of Government Spending on Economic Growth. Backgrounder, 1831. Newbold, (1974) Spurious regressions in econometrics. Journal of Econometrics 2, pp.111-120. Padda, I. U., & Akram, N. (2009) The impact of tax policy on economic growth: Evidence from South-Asian Economies. The Pakistan Development Review. 48, (4), pp.961 – 971. Pearson, T. & Tabellini, G. (2002) Do constitutions cause large governments? Quasi experimental evidence. European Economic Review. 46, pp.908-918. Peter S, (2003) Government expenditures effect on economic growth: The case of Sweden, 1960-2001. A Bachelor Thesis Submitted to the Department of Business Administration and Social Sciences, Lulea University of Technology, Sweden. Ram, R. (1986) Government size and economic growth: A new framework and some evidence from cross section and time series data. American Economic Review. 76, pp. 191-203 Ramayandi, A. (2003) Economic growth and government size in Indonesia: Some lessons for the local authorities. Padjad Jaran University Working Paper No. 200302. Ranjan K. D. & Sharma C. (2008) Government expenditure and economic growth: Evidence from India. The ICFAI University Journal of Public Finance. 6 (3): pp.6069. Roman, S, T., & Subrahmanya. M, G. (1979) State and local taxes, transfers and regional economic growth. Southern Economic Journal. 46 (2), pp.435-444. 18

Romer P.M. (1994) New goods, old theory and the welfare costs of trade restrictions. Journal of Development Economics. 5, pp.43-65. Solow, R.M. (1956) A contribution to the theory of economic growth. Quarterly Journal of Economics. 70 (1), pp.65-94

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THE DYNAMIC INTERACTIONS BETWEEN FISCAL AND MONETARY POLICIES IN NIGERIA By OMOJOLAIBI, JOSEPH AYOOLA

ABSTRACT ______________________________________________________________________ ________ This article examines the dynamic interactions among the fiscal and monetary policies in Nigeria. The data spans the period 1970:Q1 to 2010:Q4. The study leans on the Structural Vector Autoregressive (SVAR) technique. The empirical results suggest that there is evidence of strong interactions among the policies. The SVAR results are interpreted via Impulse Response Functions (IRF) and Variance Decompositions (VDC). The analyses show an evidence of strong responses of variables to shocks induced by various variables. The variables converge to their long run path after the short gap of about two years, showing that there is very strong response of policy makers to each other policies. The study, therefore, conclude that there is strong interactions among fiscal and monetary policy makers in Nigeria. ______________________________________________________________________ _______ Keywords: Fiscal Policy, Monetary Policy, Structural VAR, Nigeria. JEL Classification Codes: H61, H62, E61

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1.

Introduction

Fiscal and monetary policies are the tools through which an economy is regulated by the government or the respective central bank. Fiscal policy corresponds to taxation and spending decisions of the government, while monetary policy, formulated by the monetary authorities, is related to the decisions regarding optimal amount of money and interest rate prevailing in the economy. The objective of fiscal policy is to maintain high employment level in the economy while that of monetary policy is concerned with money creation, level of optimal interest rate and with level of inflation in the economy (Raj, et al., 2011). In recent years, the issue of central bank independence has also been brought to limelight and, consequently, many countries have granted independence to their respective central banks in their policy formulations (Nordhaus, 1994). However, the degree of independence varies among countries varying from Germany where central bank is totally independent to Japan where central bank is accountable to finance ministry. Countries whose policies are not well interacted may suffer from high deficits and inflationary pressures. Fiscal authorities, with the objective to be re-elected, are reluctant to decrease spending and hence may cause high budget deficit which may lead to inflationary pressures. Monetary authorities, on the other hand have a harsher stance on deficit and inflation (Khurshid, et al., 2010). Mostly, the central banks stance towards inflation and deficits is negative as low inflation is preferred over high one to achieve their objective of price stability. The early debate of the 1960s on the relative effectiveness of monetary and fiscal policies in the stabilization of demand pressure has reach a point where a big pool of economists ask for a coordinated/interacted effort of both policies to deal with huge deficits and high inflation. The reason for this is the view that these policies are not independent of each other and pursuing only one policy without taking other into consideration may not produce the desired results. For instance, Sargent and Wallace (1981) pointed out the so called fiscal dominant regime, where fiscal authority sets its spending objectives independently of public sector liabilities; a fiscal expansion might require monetization and result in higher inflation. Fiscal policy can also affect inflation through its impact on aggregate demand. Furthermore fiscal policy influences other monetary variables as well as interest rates, exchange rates and interest spreads. In such cases, interaction among the stabilization policies (Fiscal and Monetary) is required to stabilize the economy. Since interactions among the stabilization policies can be fruitful in the progress of an economy that is facing dual challenges of growth and price stability. The objective of the underlying study therefore, is to examine Nigeria's economy for the presence of interaction among policy makers for the period 1970:Q1-2010:Q4 by investigating the policy responses to, and their effects on, all the endogenous variables (unemployment rate, fiscal deficit ratio, inflation and real interest rates). The rest of the paper is organized as follows: section two review the relevant literature that are germane to the theme of discussion. Presentation of theoretical framework, model specification, data issues and description of variables are the pre-occupation of section three. Empirical results are discussed in section four. Section five concludes. 21

2. Review of Relevant Literature The issue of fiscal and monetary policies interaction has attracted the attention of researchers in recent years. A great deal of analysis takes the conduct of monetary and fiscal policies as game between governments and their respective central banks. The question that arises is: why is there a need for coordination between the government and monetary authorities if the later are committed to price stability?. Sargent and Wallace (1981) established that, a persistent budget deficit in a fiscally dominant regime will ultimately be financed through monetization, which will cause inflation in the economy. In another study, Nordhaus (1994), for the US economy, demonstrated that, under certain assumption, government and monetary authorities acting independently and noncooperatively will produce an outcome, in which budget deficit and real interest rate will be higher than wishes of the either authority. Similarly, Semmler, and Zhang (2003) concluded that budget deficits have a positive and significant direct effect on inflation, through the formation of price expectations, which is a viable channel of transmission. The interest rate rises in active monetary policy regime, if inflation is above target and fiscal policy is conducted in such a way that it stabilizes the government debt, while in passive policy regime fiscal policy is not self stabilizing, and for stability, real interest rates need to be reduced if there is excess inflation (Raj, et al, 2011). Similarly, the relationship between monetary and fiscal policy in the process of macroeconomic stabilization have been examined by Lambertini and Rovelli (2002). By analyzing the Stackelberg equilibrium, they identified three cases each assigning the initiative to treasury, government and central bank respectively in the conduct of policy measures. The study concluded that the preferable and probable outcome is the one in which the fiscal authority appear as the leader in macroeconomic policy game. In an empirical investigation of a group of emerging market countries, Zoli (2005) found that there is fiscal dominance in the case of Brazil and Argentina. He explored that, fiscal policy actions appeared to have contributed to movements in the exchange rates more than unanticipated monetary policy maneuvers, establishing the fact that fiscal policy does affect monetary variables. Agha and Khan (2006), also concluded that inflation is a fiscal phenomenon, showing that fiscal policy significantly influences monetary policy conduct, and for better performance of the economy there needs to be coordination in the policy makers. However, the consolidated budget deficit does not have a long-run component unlike the inflation rate, suggesting that changes in the consolidated budget deficit have no permanent effect on the inflation rate (Von Hagen, and Mundschenk, 2002). Studies that address the issue of fiscal and monetary policy interaction have emphasized the presence of co-ordination among the policy makers in order to have stability in the economy. The fiscal and monetary policies are the major steering forces of the economy, so there is need for proper mechanisms that will help the policymakers in effective coordination/interaction, otherwise, high deficits and high level of prices are predicted to exist in the economy. 3. Theoretical Framework and Research Methodology This present study leans on the model developed by Nordhaus (1994), where the main focus is on the interaction between monetary and fiscal policies. The study developed a game-theoretic model of coordination of domestic fiscal and monetary policies. This approach provides a rich set of possible outcomes depending on the degree of interaction or cordination, and on the objectives of the two policy makers. Furthermore, it puts some empirical flesh on the analytical bones by examining the likely economic impact of deficit reduction with different degrees of coordination for American economy. The present study takes the analysis for Nigeria. 22

3.1. Theoretical Linkage The monetary authority is responsible for monetary policy as represented by the interest rate, r. The fiscal authority is responsible for the fiscal deficit ratio, (s), which measures the government surplus (or Deficit) divided by gross domestic product. It is assumed that the two authorities have preferences over the macroeconomic outcomes, inflation (p), unemployment (u), and interest rate (r). The fiscal authority has a tendency for high deficits because government spending and reduced taxes are the life blood of politics. The monetary authority has no interest in the government surplus, and neither group has any basic interest in interest rates. 3.2 Model Specification Using the above theoretical linkage, the preferences of the two authorities are: (1) F F

U = V (u, p, r , s ) UM = V M (u, p, r )

(2)

Where U F and U are the preferences or utility levels of the fiscal and monetary authorities respectively. V F and V M are the preference functions. M

The unemployment rate is the measure of the utilization of resources and could equally well be replaced by the ratio of actual to potential output. Unemployment is a function of the two policies: (3) u= u (r , S , ) The dots in the parenthesis in the above equation are a reminder that the model describes that many variables are fixed for the period of analysis. The model follows modern inflation theory in assuming that the rate of inflation is a function of both the level of resource utilization (the unemployment rate) and the expected rate of inflation: (4) P= P(u ) + Pe It is further assumed that the expected rate of inflation is a mixture of the underlying rate of inflation inherited from the past (a backward-looking component, P B ) and the actual rate of inflation in the economy: (5) Pe = w P+ (1 w )P B Where w shows the relative weights. From equation (4) and (5), we obtain:

P(u ) P= + P B for 0 £ w £ 1 (1 w )

(6)

U= U n , for w = 1

(61)

When w =1, this system reduces to equation (6') of the new-classical macroeconomics in which output and unemployment are unaffected by anticipated monetary or fiscal policies and, shocks are absent, where the unemployment rate is always equal to the natural rate of unemployment. Combining equations (3)-(6) with equations (1) and (2) yield the preference of each institution with respect to the policy variables.

{

UF = V F u (r , S , ), P [ u (r , S , )] (1 w )+ P B , g ( S ), S F

= U (r , S )

23

}

(7)

} (8)

{

UM = V M u (r , S , ), P [ u (r , S , )] (1 w )+ P B , g (S ) = U M (r , S )

Where U F and U M are the implicit preferences as the functions of policy variables. For new classical assumptions, U equals U N and macroeconomic policies determine the inflation rate. Hence, ultimately, there are only two policy variables (interest rate and fiscal surplus/deficit ratio) that play a decisive role in policy formulation as shown below.

UF = VF é u n , P (r , S , ), g ( S ), S ù = U F (r , S ) ë û

(71)

UM = VM é u n , P(r , S , ), g ( S ) ù = U M (r , S ) ë û

(81)

3.3 Data Issues and Description of Variables This section describes the variables as well as the nature, format and sources of data for the variables used in the study. The analysis is performed on the basis of quarterly data for the period 1970:Q1-2010:Q4. The main sources of data are Central Bank of Nigeria Statistical Bulletin, 2012, and International Financial Statistics, 2012. Inflation is measured by consumer price index (CPI), which reflects changes in the cost of a fixed basket of goods and services consumed by a typical consumer. In our case, the base year for consumer price index is 2000. For interest rate, we have taken central bank's discount rate in the study. Surplus (deficit) rate is defined as Surplus (deficit) divided by GDP. Unemployment rate is defined as the ratio of the unemployed persons actively seeking employment to total labor force. 4. Empirical Analysis and Interpretation of SVAR Results The empirical evidence on macroeconomic variables (unemployment rate, fiscal deficit ratio, inflation rate and interest rate) for the Nigerian economy is presented in this section. Impulse Response Function (IRF) of SVAR result is shown at the appendix. 4.1. Response of Unemployment Rate Panel A depicts the accumulated impulse response function (IRF) of unemployment rate to generalized one S.D. innovation of all variables up to ten periods. As shown in panel A, unemployment rate has a negative response to inflation rate and fiscal deficit ratio shocks, however, the response of unemployment rate to interest rate shock is positive. Interest rate shock has the dominant effects on unemployment movements. The justification for this may be due to the fact that when interest rate increases, investors tend to reduce their level of borrowing from banks and this affect the level of investment and unemployment becomes the resulting effect. This result is consistent with the empirical result of Dibooglu &Aleisa (2004) for Saudi Arabia. A closer examination of the chart further shows that the negative relationship that exists between unemployment rate and inflation rate becomes widened as the period increases. Analysis of the error variance decomposition for unemployment rate shows that about 15% of the error variance is explained by the shock from interest rate. 4.2 Response of Fiscal Deficit Ratio Panel B represents the accumulated IRF of fiscal deficit ratio to shocks in unemployment rate, inflation rate and interest rate. The IRF graphs show that unemployment rate and inflation rate affect fiscal deficit ratio positively. While the effect of interest rate on fiscal deficit ratio is negative. This result is in consonance with the work of Mehrara and Oskoui (2007). The variance decompositions for fiscal deficit ratio suggest that approximately 24

40% of the error variance of fiscal deficit ratio is explained by inflation rate shocks. However, about 30% of the error variance is explained by the shock from unemployment rate. 4.3 Response of Inflation Rate Accumulated response of inflation rate shock to unemployment rate, fiscal deficit ratio and interest rate shocks are depicted in Panel C. It is evident in the chart that fiscal deficit ratio and interest rate shocks are positively related to inflation rate from the first period to the tenth period. Based on the apriori expectation, fiscal deficit ratio has the maximum impact on inflation rate. Similarly, according to error variance decomposition, fiscal deficit ratio shocks are responsible for nearly 80% of inflation shocks. It can therefore, be concluded that fiscal deficit is the main cause of inflation dynamics in Nigeria. This result is consistent with variance decompositions of Akcay et al, 2001. 4.4 Response of Real Interest Rate Panel D depicts the accumulated response of interest rate from unemployment rate, fiscal deficit ratio and inflation rate shocks. It is clearly shown that in the short run, inflation rate is the only variable that has a positive relationship with interest rate. The reason for this may be due to the fact that there is a bidirectional relationship between inflation rate and interest rate. This result was empirically established in the work of Semmler and Zhang. (2003). Fiscal deficit ratio has a negative relationship with interest rate from the first period to the tenth period. However, unemployment has a negative relationship with real interest rate in the first five periods, however, this relationship in the last five periods are positive. According to error variance decomposition, unemployment shocks explain about 32% of real interest rate fluctuations in the long run. This result supports the empirical analysis of error variance decompositions of Hooker, 2004 for G7. 5. Conclusion This paper examined the interaction between fiscal and monetary policies in Nigeria. Despite the large body of literature on the subject matter especially in developed economies, this study focused on a developing country-Nigeria. The IRF and VDC results suggest that there is evidence of strong interactions among the policies. The results are interpreted using Impulse Response Functions (IRF) and Variance Decompositions (VDC). It was observed in the analyses that there is evidence of strong responses of variables to shocks induced by various variables. The variables converge to their long run path after the short gap of two years, showing that there is very strong response of policy makers to each other policies. Hence, one may conclude that there is strong interaction among the policy makers.

25

REFERENCES

Agha, A. I. and Khan M. S. (2006) An Empirical Analysis of Fiscal Imbalances and Inflation in Pakistan, SBP Research Bulletin 2 (2). CBN, (2011) Statistical Bulletin, Vol. 21, Central Bank of Nigeria, Abuja, December. Dibooðlu, S., Aleisa, E. (2004) Oil Prices, Terms of Trade Shocks, and Macroeconomic Fluctuations in Saudi Arabia. Contemporary Economic Policy, 22(1), 50-62. International Financial Statistics (IFS)-International Monetary Fund (IMF) on-line data bank, (2011). Khurshid, U., Rashid, A., and Zaman, K. (2010) Monetary and Fiscal Policies Integration: Evidence from Pakistan, Int. J. Buss. Mgt. Eco .Res., Vol 1(1) Lambertini, L. and Rovelli, R. (2002) Independent or Coordinated? Monetary and Fiscal Policy in EMU. Mehrara, M., Oskoui, N.K. (2007) The sources of macroeconomic fluctuations in oil exporting countries: A comparative study”. Economic Modeling, 24, 365–379. Nordhaus W. D. (1994) Policy Games: Coordination and Independence in Monetary and Fiscal Policies, Brookings Papers on Economic Activity, Issue 2, pp. 139-216. Raj, J., Khundrakpam J. K. & Das, D. (2011) An Empirical Analysis of Monetary and Fiscal Policy Interaction in India, RBI Working Paper Series, WPS (DEPR) Sargent, T. and N. Wallace. (1981) Some Unpleasant Monetarist Arithmetic in T. Sargent Rational Expectations and Inflation, Harper&Row, New York. Semmler, W., and Zhang. W. (2003) Monetary and fiscal policy interactions: Some empirical evidence from the Euro-Area. Mimeo, Bielefeld University Working Paper, No. 48, March,m 2003. Von Hagen, J. and Mundschenk, S. (2002) Fiscal and Monetary Policy Coordination in EMU, Central Bank of Chile Working Papers, No. 194. Zoli E. (2005) How Does Fiscal Policy Affect Monetary Policy in Emerging Market Countries? BIS Working Papers 174, Bank for International Settlements. 26

APPENDIX Panel A: Response of unemployment rate

Panel B: Response of fiscal deficit ratio

Accum ulated Res pons e of UNER to Choles ky One S.D. Innovations

Accum ulated Res pons e of FDR to Choles ky One S.D. Innovations

20

.5

15

.4

10

.3

5

.2

0

.1

-5

.0

-10

-.1

-15

-.2 1

2

3

4

UNER

5

6

FDR

7

8

INF

9

10

1

2

IR

3

4

UNER

Accum ulated Res pons e of INF to Choles ky One S.D. Innovations

5

6

FDR

7

8

INF

9

10

IR

Accum ulated Res pons e of IR to Choles ky One S.D. Innovations

30

20

20

15

10

10

0

5

-10

0

-20

-5

-30

-10 1

2

3 UNER

4

5 FDR

6

7 INF

8

9

10

1

IR

2

3 UNER

Panel C: Response of inflation rate

4

5 FDR

6

7

8

INF

Panel D: Response of interest rate

27

9 IR

10

PUBLIC GOVERNANCE QUALITY AND TAX COMPLIANCE IN AFRICA By Masud, Abdulsalam And Dandago, Kabiru Isa

ABSTRACTS The paper examines whether or not positive relationship exists between public governance quality indicators and tax compliance in Africa using cross-country analysis. The population of the study is 61 African countries. Samples were selected using multi-stage sampling. At first stage all countries were given equal chance of being selected. Some countries were rejected due to inconsistent data. At the second some outlier countries were rejected through normally test leaving us with 44. A linear regression was used to analyze the data through SPSS version 19. The result shows that four public governance indictors: accountability, political stability, government effectiveness and rule of law are positively related with tax compliance in Africa, though insignificantly. However, negative relationship was found between tax compliance and the remaining two indicators: regulatory quality and control of corruption. The study recommends that African countries should improve on public accountability, political stability, government effectiveness and rule of law to improve the level of tax compliance. It is also suggested that future research should use multiyear data, when available, to reduce error and probably, improve the findings. The study is relevant to the academic literature. There is scanty evidence from Africa on the relationship between public governance quality and tax compliance. Moreover, the available literature used survey approach as it methodological design. This study use cross-country data thus provides evidence for comparison of findings. Keywords: Tax compliance; accountability; political stability; government effectiveness; regulatory quality; rule of law; control of corruption

28

1.0 Introduction Achieving an acceptable level of tax compliance is a challenge facing both developed and developing countries. Top ten countries with highest tax evasion are developed and transition economies. Specifically, in Africa, the amount of tax evasion is equivalent to 97.7% of health sector budgets (Tax Justice Network, 2011). Ordinarily, tax is collected for the provision of public goods, social security, social welfare and social amenities. However, for taxpayers to be more willing to pay their quota in the provision of such public goods, they must have certain level of confidence on public governance. Especially on issues relating to accountability, voice, effectiveness of government, regulatory quality, rule of law, and absence of corruption (Tax Justice Network, 2011). Several studies were conducted on the relationship between quality of institution/governance and tax compliance in cross-country perspectives among the European countries (Torgler and Schneider, 2009, Torgler et al., 2007, Torgler, 2003). Other studies consider the effect of public governance quality on tax compliance in a country (Alabede et al., 2012, Alabede, 2012). However, it appears as if there is no study that investigated the correlation between tax compliance and public governance indicators in African cross-country perspective. Hence, the key objective of this study is to investigate whether or not relationship exists between tax compliance and quality of public governance in Africa. The remaining part of the paper is organized as follows: the second part reviews previous studies on the subject area. The third part discusses methodology used in the study. The fourth part presents the results as well as the discussion of findings. The last part contains conclusion, recommendations and suggestion for further research. 2.1 Tax Compliance Behavior: A Review of Literature In the literature, tax compliance has been categorized into two: administrative compliance that has to do with complying with tax laws and judicious compliance that has to do with accuracy in filing tax returns by taxpayers (Chow, 2004). Regardless of its form, tax compliance has been defined as filing with relevant tax authority all income and expenses as well as tax payable using applicable tax laws, regulations and court orders (Jackson and Milliron, 1986). Tax compliance could also be defined as a process in which individual discloses all his income accurately and pays the tax due appropriately on the due date as prescribed in relevant tax laws (Palil and Mustapha, 2011). However, voluntary tax compliance has been defined “as timely filing and reporting of required tax information, the correct self-assessment of taxes owed, and the timely payment of those taxes without enforcement action” (Silvani and Baer, 1997). Different from official assessment, under voluntary tax regime, individual assesses him/herself to tax using correct and accurate information on timely manner as well as making timely payment of tax due to the relevant tax authority without any enforcement action. However, noncompliance refers to the failure of taxpayer to file a tax return or underreporting his/her tax liability. Noncompliance is of two classifications; intentional and unintentional. Intentional tax noncompliance is called tax evasion while unintentional is caused by taxpayer's condition such as knowledge of tax laws or financial condition 29

(Loo, 2006). Figure 2.1 depicts the antecedent and consequences of tax noncompliance: Figure 2.1: Antecedent and Consequences of Tax Noncompliance Figure 2.1: Antecedent and Consequences of Tax Noncompliance Noncompliance

Intentional Noncompliance

Unintentional Noncompliance

Tax Evasion/Avoidance

Poor Tax Knowledge and Financial condition

Source: Authors' Design, 2013 Tax evasion is a global problem disturbing both developed and developing nations. In United States (US), for instance, tax evasion amounted to $127 billion in 1992 for both individual and corporate taxpayers which was estimated based on annual increase of 10% since 1973 (Alm, 1999, Inland Revenue Service, 1996). This figure has escalated to about $285 billion in 2005 (Cobham, 2005). Table one below shows the statistics for top ten countries around the world losing tax from tax evasion. From table one, (see appendix) column 1 is list of countries with highest tax evasion. Column 2 is the Gross Domestic Product (GDP) of the ten countries calculated in US dollars. Column 3 is size of shadow economy as a percentage of GDP. Shadow economy refers to the informal business sectors whose transactions are not disclosed to relevant tax authorities for tax purpose. The higher the size of shadow economy the higher the possibility of tax evasion (Torgler and Schneider, 2009). Column 4 depicts income tax as percentage of GDP for the respective countries. Lastly, column 5 is tax lost as a result of shadow economy estimated as size of shadow economy multiplied by GDP. In summary, the table depicts the extent of tax evasion in some developed and transition economies. In Africa, however, the tax evasion is equivalent to $79.2 billion which is equivalent to 97.7% of the continent's health sector budget (TJN, 2011). Hence, the need to examine the factors that cause tax evasion or noncompliance in Africa, as a way of providing solution to tax noncompliance problem and improving revenue generation effort of governments in the continent for the wellbeing of individual and corporate citizens. 2.2 Public Governance Quality and Tax Compliance Many studies confirmed that quality of governance affect tax compliance. Schneider and Togler (2007) used about 25 proxies to evaluate the effect of governance and institutional quality on shadow economy. Size of shadow economy determines the level of tax compliance; the lower the shadow economy the higher the compliance and vice-versa (Schneider and Torgler, 2007). Schneider and Togler (2007)'s study was empirical and cross-country in nature and it employed panel analysis. The finding shows that the higher the governance and institutional quality, the lower the size of the shadow economy (high tax compliance). Moreover, Togler and Schneder (2009) examine the impact of tax morale and institutional quality on shadow economy. The study was empirical and employed the use of multivariate analysis. After controlling many factors associated with the variables, the results of this study depicts that tax morale and institutional quality reduce the size of 30

shadow economy. Similar finding was also made by Altunbus and Thornton (2010) who conducted a cross-country analysis to find the relationship between governance quality and tax compliance. The study indicates that significant correlation exist between governance quality and tax compliance. Hence, it recommended that quality of public governance should be improved to achieve an acceptable level of tax compliance. More so Alabede, Ariffin and Idris (2012) investigated the relationship between public governance quality and tax compliance behavior in Nigeria. The study was a quantitative, which was conducted through questionnaire administration. The result from this study shows that relationship between public governance quality and tax compliance is positive and significant; the higher the public governance quality the higher the level of tax compliance. Studies have confirmed that public governance quality is multidimensional (Torgler and Schneider, 2009, Torgler et al., 2007, Alabede et al., 2012). These dimensions are classified into six; voice and accountability; political stability; government effectiveness; regulatory quality; rule of law; and control of corruption (Kaufmann et al., 2010). Thus, the following subheadings reviewed the relationship between each of the six dimensions and tax compliance. 2.2.1 Public accountability and tax compliance Togler, Schaffner and Macintyre (2008) examine among others the relationship between public accountability and tax compliance through gross-country analysis in Europe. Finding from this study shows that public accountability is positively related with tax morale, and tax morale is negatively related to evasion. In another study, Modugu, Eragbhe and Izedonmi (2012) examine the effect of government accountability on voluntary tax compliance in Nigeria. The study was empirical and data was collected through questionnaire and tested using Z-score. Finding shows that government accountability has significant effect on voluntary tax compliance in Nigeria. Moreover, in an experimental research conducted in Washington department of revenue to find the effect accountability of officers' responsible for filing and reviewing tax returns finding was consistent with those of other studies that accountability has effect on tax compliance (Sanders et al., 2008). Furthermore, Bird, Martinez-Vazquez, & Torgler (2008) argued that it is more easy for poor countries looking to improve revenue generation to improve tax collection through strengthening public accountability than to go in tax hurdles and change of natural structure of the economy such as searching for oil deposit which may result to cheap source of rent-tax to the government. Thus, findings from Bird, Martinez-Vazquez, & Torgler (2008) shows that public accountability has positive effect on tax compliance. Hence they recommend that for country to realize improve revenue generation they must as matter of simplicity improve their accountability and reduce the level of corrupt practices in the public service. More evidence on the effect of government accountability and tax compliance was also disclosed in Altunbas & Thornton (2010) who concluded that the workability of any policy on improved tax generation would depend on the level of government accountability. Therefore, from the foregoing it is evident that public accountability is positively related to tax compliance. However, the evidences on this relationship exist mostly from developed European countries. Consequently, the following hypothesis is developed: H1 Public accountability is positively related with tax compliance in Africa. 2.2.2 Political stability and tax compliance Political stability is another indicator for public governance quality (Kaufmann et al., 2010). Study by Togler, Schaffner and Macintyre (2008) confirmed the effect of political stability on tax compliance. Moreover another study reveals that tax play importance role in the emergence of effective democracy in OECD and other developing countries 31

(Everest-Phillips, 2011). Citizen can use their right of paying taxes to play important role in ensuring check and balances in government, so that tax can be paid in there is good and consistent governance. In Gambia for example tax revenue loss rose to 9% of GDP as a result of military coup in 1994 with an expanding tax evasion to 70% of total revenue(Everest-Phillips, 2011). However, Everest-Phillips (2011) further pointed that the power of taxpayers to control taxpaying right for controlling political stability and good governance depend on whether significant number of population pay taxes. For instance, in Bangladesh less than 1% of the population fall into the tax catch net, that is 4% of the total taxpayers in the country(Everest-Phillips, 2011). In this situation the power of the taxpayers' to use their taxpaying right to control political stability is very low. Similarly, this study also highlighted that the degree of state political legitimacy improve tax morale, thus tax compliance. From this analysis, though not in all cases, there can be positive relationship between political stability and tax compliance and the existing evidence are based on supposition not actual statistical analysis. Hence, in line with the evidence from the literature, we develop the following hypothesis: H2 Political stability is positively related with tax compliance in Africa 2.2.3 Government effectiveness and tax compliance Government effectiveness as a dimension of public governance quality has been disclosed in prior research. Togler, Schaffner and Macintyre (2008) provide empirical evidence on the government effectiveness and tax compliance. The result from their studies shows that government effect increase tax morale among citizen, which in turn significantly affect tax compliance. In another study by Cummings, Martinez-Vazquez, McKee, & Torgler (2009) examine how tax compliance behavior is influenced by nature of institutions saddle with responsibility of tax administration as well as quality of governance. Their study highlights how government effectiveness among other public governance indicators can have effect on tax compliance across-different cultures. Moreover, as suggested by history, tax administration can serve as catalyst for broader effective government in rural areas (Prichard, 2010). This mean that a robust tax administration system linked strongly to national tax system can result to well-built improvement in the performance of local government. From the forgoing literature review it is evident that few studies examine how government effectiveness as a public government quality indicator affects tax compliance in Africa. Thus, we develop the following hypothesis: H3 Government effectiveness is positively related with tax compliance in Africa. 2.2.4 Regulatory quality and tax compliance Regulatory quality is another dimension of public government quality(Kaufmann et al., 2010, Alabede et al., 2012). Regulatory quality focuses more on policies, such as incidence of market/unfriendly policies, perceptions of the burdens imposed by excessive regulation (Torgler and Schneider, 2009). This means that if these policies are considered qualitative to taxpayers, it will motivate them to comply with their respective tax obligation. Studies confirm the effect of regulatory quality on tax compliance (Torgler and Schneider, 2009, Torgler et al., 2007). However, the studies on this effect were carried-out in developed countries, evidence on this effect are very scanty in developing countries, thus we proposed that countries with qualitative regulation that protect investors' and business individual will benefit from more tax compliance, than otherwise. Thus, the following hypothesis is developed in line with this proposition: H4 Regulatory quality is positively related with tax compliance in Africa. 2.2.5 Rule of law and tax compliance Rule of law is another indicator of public governance quality in relation to tax compliance 32

(Kaufmann et al., 2010, Alabede et al., 2012). It can be describe as the ability of government to enforce law and the obedience of the citizens on such enforcement. McCoon (2010) investigated how citizens' compliance with general laws in a country relates to their compliance with tax laws in particular. The study regress citizens' compliance with general laws with their compliance with tax law in particular, using ordinary least square regression. The finding shows that low level of compliance with general laws has association with lower level of compliance with tax laws (McCoon, 2010). Moreover, Bergman, (2010) argued that rule of law in a country poster environmental compliance with norms and value as well as regulation but only where rational individuals have disposition to comply. The rational individual think that there is pay-off in the compliance behavior as the benefit to be derived from compliance can outweigh the compliance cost. He further argued that countries that establish strong rule of law are more successful in developing cooperation that those that are not; thus, maintained that country's establishment of rule of law is a precondition for tax evasion control (Bergman, 2010). Therefore, in a country where rule of law is prevalent, taxpayers' perceive that they are more likely to maximize the benefits from their tax compliance behavior than they would be otherwise. Therefore, in line with Bergman argument we develop the following hypothesis in African perspectives: H5 Rule of law is positively related with tax compliance in Africa. 2.2.6 Control of corruption and tax compliance Control of corruption is a strong indicator of public governance quality in its association with tax compliance. Togler, Schaffner and Macintyre (2008) examine the relationship between tax compliance, tax morale and governance quality. The study was cross-country and empirical in nature. The result of the study shows that quality of governance measured by many proxies such as zero or low level of corruption, rule of law, voice and accountability, regulatory quality and political stability has strong effect on tax morale; hence tax compliance. This is a clear indication of the effect of tax corruption as a public governance quality indicator on tax compliance. In another study, it was found that tax evasion in international analysis is negatively related to bureaucracy but positively related to country's control of corruption (Imam and Jacobs, 2007). They further suggest that the most powerful deterrence to tax evasion is creation of tax morale and compliance climate in which citizens would be protected from corruption and bloated bureaucracies. Moreover, study by Picur & Riahi-Belkaoui (2006) disclosed that findings from empirical investigation comprising over 30 developed and developing countries indicated that tax compliance is found to be high in countries characterized by high level of corruption control and low level of bureaucracy. Thus, countries that are keen in improving the level of tax compliance should try and reduce their levels of corruption as well as level of bureaucracy so as to enhance both tax compliance and economic development. Therefore, in line with evidence from global literature on the effect of corruption control on tax compliance, we develop the following hypothesis: H6: Control of Corruption is positively related to Tax Compliance in Africa. We find that the low revenue collection as a share of GDP there compared to other middleincome regions is due in part to corruption, and certain taxes are more affected than others (Imam and Jacobs, 2007) This suggests that if governments need to raise more tax revenues in a way that minimizes distortions and maximizes social welfare, they should implement reforms that either reduce corruption or raise revenues from tax categories that are less susceptible to corruption. In summary of the overall effect of public governance quality on tax compliance is 33

positive; meaning that the higher the public governance quality indicators the higher the compliance. Thus, findings on the relationship between governance/institutional quality and tax compliance depict relatively consistent result; strong effect or positive relationship between variable (Torgler and Schneider, 2009, Torgler et al., 2007, Torgler et al., 2008, Altunbas and Thornton, 2010, Alabede et al., 2012). Disappointingly, in the course of this study, the researchers have not come across any study that examined the relationship between public governance quality indicators and tax compliance behavior using crosscountry data in Africa with large sample covering 44 countries. Hence, this study will provide evidence on this relationship from an environment where evidence on such effect is very scanty. 3.0 Methodology and Methods Having developed six hypotheses, in this part we described the methods followed in sourcing the research data, the population, sample selection as well the data analysis techniques used in testing the hypotheses. 3.1 Population and Sample The population of the study is made up of all 61 African countries as contained in (http://listofafricancountries.com). The sample of the study is 72% of the population that is 44 countries. The sample was selected using multi-stage sampling technique. In the first instance, all the 61 countries were given equal chance of being selected. Some countries where deleted due to inconsistent data, hence losing their chance of being selected. Normality test was conducted on tax compliance scores against all the independent variables, leading to deletion of some outliers, leaving us with 44 countries that served as our sample. 3.2 Variables and Variables Measurement For the dependent variable, which is the tax compliance, we use income tax as a percentage of GDP obtained from United States Central Intelligence Agency (US-CIA) data base for 2012. The scores for this variable ranges from 1-100% (Central Intelligence Agency, 2012). This variable indicates that the higher the incomes tax as percentage of GDP of a country, the higher the level of tax compliance achieved in a particular country and viceversa. Furthermore, information on the proxies to independent variables (public accountability; political stability; government effectiveness; regulatory quality; rule of law and control of corruption) was obtained from World Bank Group (WBG) Worldwide Governance Indicators (WGI). The information was measured based on Kaufmann, Kraay and Mastruzzi (2010) methodology. It is defined based on percentile of low 0–10th; 11-20th; 21-30th; 31-40th; 41-50th; 51-60th; 61-70th; 71-80th; 81–90th; 91–100th high (World Bank Group, 2012) . The variables are considered as measure of public governance quality (Torgler and Schneider, 2009, Torgler et al., 2007, Torgler et al., 2008, Torgler, 2002, Alabede et al., 2012, Alabede, 2012). 3.3 Data and Data Analysis Technique Data for the dependent variable (tax compliance) were sourced from the US Central Intelligence Agency for 2012. But those of independent variable used to measure public governance quality (public accountability; political stability; government effectiveness; regulatory quality; rule of law and control of corruption) were sourced from World Bank Group for 2012 under their Worldwide Governance Indicators (WGI). Data were analyzed through Pearson Correlation Coefficient, using SPSS version 19. The data are presented below in table two (see appendix). 34

Table two depicts the data for dependent and independent variables. Explanation on how these variables were measured has been disclosed in 3.2 above under the caption variables and variables measurement. 3.4 The Research Model From the six independent variables and the dependent variable we developed these models: TC i = â 0 + â 1 PC i + â 2 PS i + â 3 GEF i + â 4 RQ i + â 5 RL i + â 6 CC i + µ i ………1 Where TC i is tax compliance rating for a country, â0 constants, PA i Public Accountability, PS i Political Stability, GEF i Government Effectiveness, RQ i Regulatory Quality, RL i Rule of Law, and CC i Control of Corruption and µ the error term. 4.0 Result and Discussion This part presents the result derived from the analysis conducted using the data presented in table two. Table three depicts linear regression result between dependent variable (Tax Compliance) denoted with TC and independent variables; Public Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption denoted with PA, PS, GE, RQ, RL and CC respectively. From table three (see appendix) we test the hypotheses raised in part 2 of the paper. For hypothesis 1, the relationship between TC and PA is found to be positive (t=0.720; p=0.476) but insignificant. This confirms our hypothesis that public accountability is positively related with tax compliance in Africa. Although such relationship is not significant, but result implied a linear positive relationship between the two variables; showing that increase in public accountability even in small form can lead to increase in tax compliance in Africa. For hypothesis 2, the regression result showed that PS is positively related with TC (t=1.636; p=0.110). Though the positive relationship is insignificant, but it shows that TC and PS move in the same direction, meaning that increase in political stability may increase tax compliance even in slight portion. As such the result supports hypothesis two. For hypothesis 3, the linear regression results showed that TC is positively related with GEF (t=0.503; p=0.618). This confirms our hypothesis that there is positive relationship between tax compliance and government effectiveness in Africa. Although the positive relationship is insignificant, but moving in similar direction between tax compliance and government effectiveness implies that even in small portion, GEF contributes to TC. For the fourth hypothesis, to our surprise the relationship between TC and RQ is negative and significant (t= -2.488; p= 0.017). We expect such correlation to be positive and because, where there is quality in regulation taxpayers may find the environment suitable for business which may increase their intrinsic motivation to pay tax. Hence, the finding did not confirm our hypothesis that RQ is positively related TC. For the fifth hypothesis, the result shows that TC is positively related with RL (t=0.519; p=0.607). This confirms our hypothesis 5 that TC is positively related with RL in Africa. Though such positive relationship is insignificant but the linear relationship implies that no matter little RL can improve tax compliance as they move in the same linear direction. For the last hypothesis, to our surprise the result shows that TC and CC are negatively related (t= 0.236; p=0.815). . However, the negative relationship is insignificant. This does not confirm hypothesis 6 that TC is positively related with CC in Africa. To our expectation when a country holds stringent measures to control corruption, taxpayers will be more willing to pay taxes. However, since tax is a compulsory levy which taxpayer must pay even if corruption exists in a country, this may not be surprising, although they will be more 35

willing to pay if the country is free from corrupt practices. Moreover, the unexpected direction of the relationship may be due to data computation error from the source. In fact, it was pointed that institutional data bases are not free from data computational error, hence, it is recommended that using multiyear data can minimize such errors (Richardson, 2008, Richardson, 2006). Thus further research can consider the use of multiyear data when available in order to minimize such errors. The databases from which the data from some of the variable are sourced have only single year data. For instance, in CIA data base the tax as percentage of GDP is only available for 2012. 5.0 Conclusion The paper examines the relationship that exist between tax compliance and public governance quality variables (Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption) in Africa using cross-country data. The result showed that there is positive relationship between four indicators or proxies of public governance quality and tax compliance in Africa. These indicators include Public Accountability, Political Stability, Government Effectiveness and Rule of Law. This means that tax compliance has association with these variables (indicators), though not at significance level, thus, probably, the higher government improves on accountability, political stability, effectiveness and rule of law, the higher would be tax compliance. However, result did not indicate positive relationship between tax compliance and two other indicators (regulatory quality and control of corruption). Ordinarily, we expect such variables to have significant positive correlation with tax compliance, thus we expect that this may be due to data error from the sources and recommend for the use of multiyear data to control such error. Based on this result, we recommend that for African countries to achieve an acceptable level of tax compliance, they should improve on their public governance, more specifically on issues relating to public accountability, political stability, government effectiveness and rule of law. The paper suggests that future studies should use multiyear data when available which may probably increase the strength of the relationship for the four variable with positive relationship and change the direction of the two variables with negative relationship.

36

REFERENCES Alabede, J. O. (2012) "An Investigation of Factors Influencing Taxpayers' Compliance Behaviour: Evidence From Nigeria" PhD Thesis Universiti Utara Malaysia. Alabede, J. O., Ariffin, Z. B. Z. & Idris, K. M. (2012) "Public Governance Quality and Tax Compliance Behavior in Nigeria: The Moderating Role of Financial Condition and Risk Preference". Issues in Social and Environmental Accounting, 5, 3-24. Alm, J. (1999) "Tax compliance and administration. Public Administration and Public Policy", 72, 741-768. Altunbas, Y. & Thornton, J. (2010) "Does Paying Taxes Improve The Quality of Governance? Cross-Country Evidence", Bangor Business School Working Paper, Number: BBSWP/10/006. Bergman, M. (2010) "Tax evasion and the rule of law in Latin America: the political culture of cheating and compliance in Argentina and Chile", Penn State Press. Bird, R. M., Martinez-Vazquez, J. & Torgler, B. (2008) Tax effort in developing countries and high income countries: The impact of corruption, voice and accountability. Economic Analysis and Policy, 38, 55-71. Central Intelligence Agency (2012) "World Facts Book". Chow, C. Y. (2004) "Gearing up for the self assessment tax regime for individuals. Tax Nasional", 20-23. Cobham, A. (2005) "Tax evasion, tax avoidance and development finance". Queen Elizabeth House, Série documents de travail. Cummings, R. G., Martinez-Vazquez, J., Mckee, M. & Torgler, B. (2009) "Tax morale affects tax compliance: Evidence from surveys and an artefactual field experiment". Journal of Economic Behavior & Organization, 70, 447-457. Everest-Phillips, M. (2011) "Tax, Governance and Development. In: FRANKSON, J. R. (ed.)" Discussion Paper. Commonwealth Secretariate Imam, P. A. & Jacobs, D. F. (2007) "Effect of Corruption on Tax Revenues in the Middle East", International Monetary Fund. Inland Revenue Service (1996) "Federal Tax Compliance Research: Individual Income Tax Gap Estimates 1985, 1988 and 1992". In: TREASURY, U. S. D. O. (ed.). Washington DC. Jackson, B. R. & Milliron, V. C. (1986) "Tax compliance research: Findings, problems, and prospects". Journal of Accounting Literature, 5, 25-65. Kaufmann, D., Kraay, A. & Mastruzzi, M. (2010) "The Worldwide Governance Indicators: Methodology and Analytical Issues World Bank Policy Research Working Paper No. 5430 [Online]". Available: SSRN: http://ssrn.com/abstract=1682130. Loo, E. C. (2006) "Influence of the introduction of self assessment on the compliance behavior of individual taxpayers in Malaysia" PhD Thesis, The University of Sydney Mccoon, M. (2010) "Tax compliance in Latin America: a cross country analysis". Journal of Finance and Accountancy. Palil, M. R. & Mustapha, A. F. (2011) "Factors affecting tax compliance behaviour in self assessment system". African Journal of Business Management, 5, 12864-12872. Picur, R. D. & Riahi-Belkaoui, A. (2006) "The impact of bureaucracy, corruption and tax compliance". Review of Accounting and Finance, 5, 174-180. Prichard, W. (2010) "Citizen-State Relations. Improving governance through tax reform". Paris: OECD/DAC www. oecd. org/dataoecd/19/60/46008596. pdf. Richardson, G. (2006) "Determinants of tax evasion: A cross-country investigation". Journal of International Accounting, Auditing and Taxation, 15, 150-169. Richardson, G. (2008) "The relationship between culture and tax evasion across countries: Additional evidence and extensions". Journal of International Accounting, Auditing and Taxation, 17, 67-78. 37

Sanders, D. L., Reckers, P. M. & Iyer, G. S. (2008) "Influence of accountability and penalty awareness on tax compliance". Journal of the American Taxation Association, 30, 1-20. Schneider, F. & Torgler, B. (2007) "Shadow economy, tax morale, governance and institutional quality: A panel analysis". Working Paper, Department of Economics, Johannes Kepler University of Linz. Silvani, C. & Baer, K. (1997) Designing a tax administration reform strategy: experiences and guidelines. Tax Justice Network (2011) The cost of tax abuse: a breifing paper on the cost of tax evasion worldwide. Tax Justice Network. Torgler, B. (2002) Tax morale and institutions, Wirtschaftswissenschaftliches Zentrum (WWZ) der Universität Basel. Torgler, B. (2003) Tax morale and institutions. Available at SSRN 663686. Torgler, B., Demir, I. C., Macintyre, A. & SCHAFFNER, M. (2008) Causes and consequences of tax morale: An empirical investigation. Economic Analysis and Policy (EAP), 38, 313-339. Torgler, B., Schaffner, M. & Macintyre, A. (2007) Tax compliance, tax morale, and governance quality. International Studies Program Working Paper, Andrew Young School of Policy Studies, Georgia State University. Torgler, B. & Schneider, F. (2009) The impact of tax morale and institutional quality on the shadow economy. Journal of Economic Psychology, 30, 228-245. World Bank Group (2012) Worldwide Governance Indicators.

38

APPENDICES Table One: Top 10 Countries Losing to Tax Evasion

COUNTRY GDP (1) ($ MILLIONS) (2) U.S. Brazil Italy Russia Germany France Japan China U.K. Spain

14,582,400 2,087,890 2,051,412 1,479,819 3,309,669 2,650,002 5,497,813 5,878,629 2,246,079 1,407,405

SIZE OF SHADOW ECONOMY (%) (3) 8.6% 39% 27% 43.8% 16% 15% 11% 12.7% 12.5% 22.5%

US Tax Justice Network (2011)

39

TAX BURDEN OVERALL (%) (4) 26.9% 34.4% 43.1% 34.1% 40.6% 44.6% 28.3% 18.0% 38.9% 33.9%

TAX LOST AS A RESULT OF SHADOW ECONOMY ($ MILLIONS) (5) 337,349 280,111 238,723 221,023 214,996 171,264 171,147 134,385 109,216 107,350

2 0 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9 3 0 3 1 3 2 3 3 3 4 3 5 3 6 3 7 3 8 3 9 4 0 4 1 4 2 4 3 4 4

23.6 GUINEA

17

11

9

16

4

12

9

18

10

11

2

9

39

10

35

42

22

12

36

32

12

15

18

34

21

7

5

3

13

2

25

28

15

31

20

31

41

44

38

26

47

40

31

4

16

36

30

25

21

16

19

28

21

32

29

32

53

50

49

42

43

59

30

35

34

33

59

79

59

54

60

67

35

14

28

29

28

28

27

3

16

25

10

11

14

39

53

49

47

73

55

45

27

23

24

44

47

41

39

50

46

48

36

38

11

26

22

19

65

44

64

63

58

54

4

2

6

5

9

1

99

98

98

95

97

98

42

47

28

37

35

22

18

34

8

22

18

17

34

19

33

44

45

18

44

65

38

36

43

46

14.8 GUINEA-BISSAU 18.0 KENYA 27.8 LIBERIA 70.3 LIBYA 17.4 MADAGASCAR 24.5 MALAWI 17.6 MALI 27.2 MAURITANIA 26.0 MOROCCO 29.6 MOZAMBIQUE 36.8 NAMIBIA 25.8 NIGER 8.3 NIGERIA 23.1 RWANDA SÃO TOMÉ AND PRINCIPE

39.9 24.2

SENEGAL 13.5 SIERRA LEONE 25.9 SOUTH AFRICA 6.6 SUDAN 38.7 SWITZERLAND 26.1 TANZANIA 20.7 TOGO 14.8 UGANDA 20.7 ZAMBIA

Source: US CIA (2012) & WBG (2012)

40

Table Three: Linear Regression Result

Independent Variable Constant PA PS GEF RQ RL CC R2 R2 Adjusted F F test significance

Statistics 0.000 (8.063)* 0.476 (0.720) 0.110 (1.636) 0.618 (0.503) 0.017(-2.488)** 0.607 (0.519) 0.815 (-0.236) 20.5% 7.6% 1.587 0.179

Dependent Variable: TC Significant at á = 0.01; ** Significant at á = 0.05 . *

41

LOCAL GOVERNMENT FINANCING AND COMMUNITY DEVELOPMENT IN NIGERIA By Nwidobie, Barine Michael

Abstract The existence of socio-economic infrastructures in local councils for economic development is made feasible with finances provided to local governments in Nigeria from the Federation Account, value-added tax disbursements, allocations from state governments, internally generated revenues and grants and donations. Research result from OLS analysis shows that local government councils' contribution to national GDP (LGGDP) has a minimal positive relationship with allocations to the councils from the Federation Account and allocations from VAT collections with â values of 0.001901 and 0.082839 respectively. A below average positive relationship exists between contributions by the local councils to total national GDP and internally generated revenues of the councils with a â of 0.390276. Minimal negative relationships exist between LGGDP and statutory allocation from the state governments' accounts and grants with â values of -0.036804 and -0.002441 respectively necessitating improvement in generating revenues from internal sources as its use seem to be monitored by tax payers with positive effects on councils' GDP; minimize allocations to local councils from the Federation Account and VAT collections as these seem to be wasted due to non monitoring of their uses; and local government residents and national and state assemblies should monitor allocations to their councils and participate in selecting socio-economic investments into which these allocations are put, ensuring that only socio-economic infrastructures improving GDP are selected. Key words: GDP, revenue allocations, community economic development, human resources development, economic development policies, and economic development programmes.

42

1.0 Introduction The rise of a robust national economy and the potential of increased rural-urban migration give weight to the notion that the capacity to solve the problems of rural-urban drift, as well as poverty and low economic growth in local government areas lies within these communities, requiring that the communities market their resources intelligently and gain competitive advantages to create new employment opportunities for residents and maintain the communities existing economic base. This implies the use of financial and physical resources by the communities to build a self-sustaining economic system at the local level to increase their contributions to national gross domestic product (GDP). The higher the amount of these resources available to local government councils, the higher will likely be the GDP contributed by the local government councils to national GDP. The Nigerian constitution allows local government councils in Nigeria to generate revenues internally from collection of tenement rates, radio and television license, registration of business premises, business permits and mobile adverts to finance socioeconomic infrastructures positively affecting GDP and excludes them from collecting oil and value-added-tax (VAT) revenues. These are solely collected by the federal government. Federally collected revenues are distributed among the three tiers of government for provision of socio-economic infrastructures and development at these tiers of government. State governments are by law expected to distribute 10% of their internally generated revenues among the local government councils within the state. Funds also accrue to local councils from grants. These provide financial resources to the local councils in Nigeria to provide conducive business environments, create jobs, enhance socio-economic developments and increase economic growth within the councils. Economic developments at local government councils to Idachaba (1980), Lele (1979) and Olatunbosun (1976) must be an outcome of a series of quantitative and qualitative changes occurring among a given rural population with specific changes in time, standard of living and way of life of the citizenry. The absence of true federalism in Nigeria has necessitated federal collection of most revenues in the country and subsequent disbursement to the three tiers of government with the local government currently receiving 20.6% for development. This percentage has been reviewed over the years from 10% from 1978-1989, 15% from 1990-1991, 20% from 1992-2000, and 20.6% from 2000 to date increasing total receipts to the councils from N19,874.5 million in 1993 to N1,644,303.8 million in 2012. Olubanjo and Akinleye (2012) contended that despite the huge resources allocated to local governments in Nigeria from positive growth in oil sales and VAT collections with expected rural developments, these expectations still remain a mirage due to the inability of the local authorities to perform, contrary to arguments by Yilmaz (2000) and Rommer (1994) that increased allocations to lower tiers of government has increased economic growth in Eastern Europe. Usman (2011) and Akujuobi and Kalu (2009) concluded from their studies of Nigeria that there exists a positive and significant relationship between statutory allocations to state governments in Nigeria and state governments' real assets' investments and state GDP. This study seeks to determine the relationship existing between revenues accruing to local government councils in Nigeria from statutory sources and economic developments in these councils? 43

1.1 Purpose of study The aim of this study is to determine the relationship between revenues accruing to local government councils in Nigeria from statutory sources and economic developments in these councils from 1993 to 2012. 1.2 Research hypothesis The following hypothesis will be tested on the assured relationship between identified variables: Ho: There exists no significant positive relationship between revenues accruing to local government councils in Nigeria from statutory sources and economic developments in these councils H1: There exists a significant positive relationship between revenues accruing to local government councils in Nigeria from statutory sources and economic developments in these councils 1.3 Scope of study This study covers the total annual revenues accrued to the 774 local governments in Nigeria from statutory sources and local government GDP from 1993-2012. 2.0 Review of literature 2.1 Nigerian Constitution and local government revenue The Nigerian constitution requires that 20.6% of federally collected revenues be shared among the constitutionally recognized local governments in Nigeria. In addition, 25% of VAT collections are to accrue to the local governments. State governments are also expected to share 10% of their internally generated revenues among local governments within their states. Local governments in Nigeria are also expected to generate revenue internally from radio and television license, tenement rates, street naming, business premises registration, mobile advertisement. Collected revenues can be expended by the councils on economic planning and development, financing of primary healthcare, primary education, provision and maintenance of cemeteries and burial grounds, houses for the destitute and infirm, sewage and refuse disposal, provision of roads, street lightings, drains and other public facilities. Finances to local government councils have increased over the years. Khemani (2001) observed that between 1993 and 1997, federally collected revenue amounted to an overwhelming 94% of cash inflows to cash inflows to local governments in Nigeria which averagely contribute only 5% of the total national GDP. With governments at the federal, state and local government inducing developments at the local government levels in Nigeria with allocated financial resources from oil revenues with its attendant price and quantity volatility (due to production sabotage), external shocks affecting oil volume and price affect developments at the local government level negatively if unfavorable, and positively if favorable. The implication of this to local government development policy makers is the necessity to shield local government developments in Nigeria from external shocks, basing its development on internal fiscal finances, community self-help projects and developments dependent on natural resources endowed on the communities which are cheap, available and accessible by the inhabitants. 2.2 Theories of local government/community economic development Theories abound in local government literature explaining developmental activities at the local government level. The location theory of local government development posits that development accrue to a community because of geographical factors supporting the natural distribution of resources, which attract industries requiring these resources to it. The economic-based theories look at the flow of economic activities into and out of local 44

communities to identify and explain which firms and industries have the greatest capacity to expand and place development emphasis on them as they have multiplier impacts on the host communities. This theory relates the community's economic growth directly to the demand for its goods and services from outside its local economic boundaries. The growth of industries using local resources, labour and material, according to Giloth (1998) generate both local wealth and jobs. The local economic development strategies that emerge from this theory he argued, emphasizes the priority of aids to, and attraction of local industries to local environments which have markets both within and outside the community. Robinson (1989) observed that the implementation of this model requires measures that reduce barriers to the establishment of industries producing for sale within and outside the local government councils; adding that current and high technology strategies aimed at attracting new firms draw on this economic-based model. Jobs created in these firms are known to generate jobs elsewhere within the community as they are seen to have high job multiplier effects within the local communities. Critics of this model opine that it relies more on extra-community demand for community growth. The rush to adopt this model according to Nagel (2003) can lead to a skewed local economy dependent entirely on extra-community market forces. Giloth (1998) advised that this model should be used in determining the balance of industrial types and sectors that a community need to develop for economic stability. The supply-side theory of community development according to Lynch (2004) contends that tax reductions for individuals and businesses provide incentives for work and increase savings and investment, thereby stimulating economic activity. Countering, Heckman (1993) argued that that after-tax wages have little effect on the supply of labour. The demand-side theory of community development posits that reductions in taxes for businesses and individuals stimulate the community economy as a result of their impact on spending (Lynch, 2004). The business climate theorists of community development argue that developments at the community level are only possible when community/state business climate is improved. Antagonists of this theory argue that business decision makers are apt to be persuaded by “perception” rather than the facts of business costs and benefits. The competitive theorists of local government development contend that development is attracted to local government areas with competitive abilities which are made possible through tax deductions. These deductions may not be sustainable in the future as the local and state governments may increase taxes to provide increasing demand for social services. In a survey of 204 branches of multiplant firms in the United States of America (USA), Hekman (1982) found that business incentives and taxes are not major factors in business location decisions. Application of growth theories according to Rommer (1994) ensures that policy measures of a state as revenue allocations positively influence the long-run growth rate of an economy measured by real gross domestic product (GDP). Empirical results by MartinezVazquez and McNab (2002) show that allocation of revenue significantly reduces the real GDP growth in developed countries. A cross-country study by Yilmaz (2000) using annual data for the period 1971-1990 showed that decentralization of revenue collections result in real GDP growth in unitary countries and its effect on real GDP in federal countries is insignificant. These theories bring to the fore the myriad approaches to community economic development as the economic development of communities is economic development of a 45

nation. 2.3 Determinants of local government/community economic development A community's economic opportunities to Nagel (2003) are determined by the amount of funds available to it and quality of the available human resource base and not the on availability of natural as propounded by location theorists nor on the ability of the community to exploit natural resources in the community, arguing that location is no longer a “pull” factor as manpower are trained on site and off site. Emerging local economic development models suggest the existence of locationdevelopment-inducing factors in local government economic development determination. These factors according to these theorists apply more to the quality of the local financial, physical and social environment than to larger-scale geographic considerations. Robinson (1989) observed that the development of a community's recreational, housing and social institutions determine community economic development as social needs of the economic institutions would have been provided by the community, reducing set-up costs of these facilities by proposed firms. To the United States Accounting Office (2000), federal programs and policies affect the ability of local governments and communities to plan for and manage growth. To Bartik (2003), community economic development is affected strictly by local government activities. The existence of businesses and subsisting economic base in local communities according Giloth (1998) determine the rate and amount of economic development, as the availability of myriad of job training and development schemes in the community or non-distant locations are important for transforming existing unusable labour into a more human input to existing and potential employers. Guaranteeing local government development requires that the communities not only build jobs to fit the existing populace but also the institutions that expand the capacity of the population in that community. Evidences show that rural and semi-urban communities rarely have higher educational institutions or research institutes that serve them: which are essential for the present future growth of the industries in the communities. To harness growth potentials from development opportunities, Nagel (2003) opined that communities should build economic opportunities to “fit” the human resources in the community and utilize the existing natural and institutional resource base for its economic development; shifting emphasis from the demand side of economic development equation to the supply side consisting of labour and natural resources. To him local economic development is a process that emphasizes full use of existing human and natural resources to build employment and create wealth within a defined locality. On the effect of allocations on real investment in Nigeria, Akujuobi and Kalu (2009) concluded that statutory allocations significantly affect state governments' real assets' investments. Furthering, Usman (2011) using the ordinary least squares (OLS) noted that allocations to state governments in Nigeria from the Federation Account contributes to economic growth in Nigeria. Findings by Emengini and Anere (2010) showed no effect on the economic and social performances of states and local governments of revenue allocations to them from the Federation Account. From the above, one can deduce that the role of government can shift from creating market through artificial means to enabling the markets to work efficiently to create new wealth, employment and social capital for each community. Multi-sectoral approach to a successful local economic development with the above government role, require that individuals and institutions build on indigenous resources that create opportunities to generate sustainable wealth for the community. 46

3.0 Methodology 3.1 Population for the study The population for this study is the 774 constitutional local government councils in Nigeria. These councils are entitled to allocations from the Federation Account, their respective State governments' internally generated revenue accounts, VAT collections and grants, and are constitutionally allowed to generate revenues internally from approved sources and expend these resources constitutionally. 3.2 Study samples The samples for this study are the entire 774 local government councils in Nigeria with similar revenue and expenditure characteristics. 3.3 Sources of data Data for this study: LGGDP=local council GDP, ALFEDAC=allocation from the federation account, STALC=allocation from state account, VATALC= allocation from VAT collections, INTGREV=internally generated revenues, and GRNTTH=grants to the local councils, were obtained from the Statistical Bulletin, 2012. 3.4 Data presentation and description Data on total statutory annual local government revenues and local government GDP which Khemani (2001) argues is 5% of national GDP obtained for the study are shown in table 1. Within the study period, local government GDP increased by 223.94% from N13,746.67 million in 1993 to N44,531.0 million in 2012. Allocations from the Federation Account increased by 5236.2% from N18,316.4 million in 1993 to N977,401.9 million in 2012. Similarly, allocations from the State Accounts to local governments in Nigeria increased by 1760.5% from N253.1 million in 1993 to N4709.0 million in 2012. Total internally generated revenues of local governments in Nigeria increased by N2470% from N1,035.6 million in 1993 to N26, 615.5 million in 2012. Grants to the councils also increased by 147,276% from N269.4 million in 1993 to N397,031.1 million in 2012. Allocations from VAT collections increased from N0.00 in 1993 to N238,546.4 million in 2012. These growths are attributed to growth in oil revenues from increased oil production and favourable price changes, tax reforms increasing the number of vat-able products, the tax base, and the increased efforts of the local and state governments to increase internally generated revenues. Table 1: Total local government finance variables' values and local government GDP (at 5%of national GDP) 1993-2012

47

Source: Statistical Bulletin, 2012. *Computed from annual national GDP 3.5 Model specification The Ordinary Least Squares (OLS) equation: Y=á + â1X1 + â2X2 + â3X3 + â4X4+ â5X5……. ânXn +ìi is used to test the hypothesis to determine existing relationships existing between local government statutory revenues and economic development in the local governments in Nigeria measured by local government GDP from 1993-2012 with Y as the dependent variable, X1, X2, X3, X4, X5….Xn as independent variables; and ìi the unexplained variations. 3.6 Model justification In their studies on the effects of revenue allocation from federation accounts on economic growth at the federal and state government levels in Nigeria, Olofin et al (2012), Akeem (2011), Usman (2011), Akujuobi and Kalu (2009), Akinlo (1999) and Aigbokhan (1999) used the ordinary least squares (OLS) to determine the relationship between resource allocations from the federation account and economic growth. This study similarly uses the OLS equation to determine the relationships existing between allocations from the Federation Account, VAT collections, State governments accounts, grants and revenue generations from internal sources and economic growth at the third tier of government in Nigeria. 3.6 Data analysis Secondary data on LGGDP, ALFEDAC, STALC, VATALC, INTGREV, and GRNTTH with LGGDP=local council GDP, ALFEDAC=allocation from the federation account, STALC=allocation from state account, VATALC= allocation from VAT collections, INTGREV=internally generated revenues, 48

GRNTTH=grants to the local councils, and for the period 1993-2012 obtained from the Statistical Bulletin, 2012 were analysed using EViews 7. ALFEDAC, STALC, VATALC, INTGREV and GRNTTH (independent variables) were regressed on the dependent variable (LGGDP) to determine relationships existing between statutory local government revenues in Nigeria (ALFEDAC, STALC, VATALC, INTGREV and GRNTTH ) and economic development in the 774 local governments in Nigeria measured by local government GDP from 1993-2012. The OLS result from EViews analysis is shown on table 2.

Dependent Variable: LGGDP Method: Least Squares Sample: 1993 2012 Included observations: 20 Variable

Coefficient

Std. Error

t-Statistic

Prob.

C ALFEDAC STALC VATALC INTGREV GRNTTH

13405.49 0.001901 -0.036804 0.082839 0.390276 -0.002441

341.9417 0.003854 0.039107 0.012338 0.066568 0.003206

39.20401 0.493299 -0.941125 6.714170 5.862796 -0.761416

0.0000 0.6294 0.3626 0.0000 0.0000 0.4590

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic)

0.994957 0.993156 851.5818 10152682 -159.7539 552.4075 0.000000

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

24648.59 10293.48 16.57539 16.87411 16.63371 2.379891

4.0 Research results and policy implications of findings Regression result: The resultant regression equation from the OLS analysis is: LGGDP=13405.49 + 0.001901ALFEDAC – 0.036804STALC + 0.082839VATALC + 0.390276INTGREV – 0.002441GRNTTH showing that local government councils' contribution to national GDP has a minimal positive relationship with allocations to the councils from the Federation Account and allocations from VAT collections with â values of 0.001901 and 0.082839 respectively. A below average positive relationship exists between contributions by the local councils to total national GDP and internally generated revenues of the councils with a â of 0.390276. Minimal negative relationships are seen to exist between LGGDP and statutory allocation from the state governments' accounts and grants with â values of -0.036804 and -0.002441 respectively. This result supports the findings of Usman (2011) and Akujuobi and Kalu (2009). The implications of these findings for public finance policy makers and local government administrators is that focus should be on increasing internally generated revenue through increase in tax base, tax payers' education, blockage of tax revenue leakages, tax evasion 49

and avoidance by eligible tax payers in the councils as such will spur council residents to demand service and infrastructural developments for taxes paid/payable; with attendant positive responses from the councils with spiral socio-economic developmental effects on the councils, increasing local government GDP. Allocations from the Federation Account and VAT collections to the councils should be minimal as the source (the federal government) is distant from the councils and it being unable to monitor the utilization of allocated funds coupled with the non-chalant attitudes of local residents to revenues to local councils not directly contributed by them, resulting in squandering of the revenues without much contributions to local governments' GDP in Nigeria. The negative relationships existing between state allocations to local governments' contribution to national GDP suggest that transfers to the councils in Nigeria may not be in the control of council administrators as such transfers are into the State-Joint-Local government account, which operation is under state control with their investments in the councils not into socio-economic infrastructures improving local government GDP. This seems to explain the negative relationship existing between local government GDP and revenues from grants to councils as such are expected to be paid into the State-Local government Joint Account making reform in this administrative procedure necessary. R2 result: The resultant regression equation significantly explains variations in LGGDP with R2 =0.994957 Durbin-Watson result: The Durbin-Watson value of 2.379891 is within the acceptable region of ≥2.0 indicating that there exists no serial autocorrelation among variables' value. 5.0 Conclusions From the research findings, we conclude that: (i) Internally generated revenues of local government councils in Nigeria positively and significantly affects local government GDP; (ii) Allocations to the local government councils from the Federation Account and from VAT collections positively affect local government GDP, though the effect is minimal; and (iii) Allocation to the local government councils from the State Accounts and receipts from grants negatively affect local government GDP. 5.1 Recommendations To improve the contribution of local government councils to national GDP: (i) The councils should improve revenue generation from internal sources as these revenues seem monitored by tax payers with positive effects on council GDP; (ii) Allocations to local councils from the Federation Account and VAT collections should be minimal as such seem to be wasted as monitoring of their uses seem not existent; (iii) Local government residents and national and state assemblies should monitor allocations to their councils and participate in choosing socio-economic investments into which these allocations are put, ensuring only socioeconomic infrastructures improving GDP are selected; (iv) Grants and state allocations to local councils should be directly paid to the councils and revenue application decisions should be by the council administrators because of their proximity to the grassroots with adequate knowledge of their socio-economic needs; (v) Local government administrators in Nigeria should be trained on community 50

economic development, inculcating economic development planning and implementation skills in them; and (vi) A comprehensive development policy for the third tier of government in Nigeria should include strategies focused on business attraction, business retention and new business start-ups; creating a rural industrial base, employment and income opportunities.

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REFERENCES Aigbokhan, B. (1999) “Fiscal federalism and economic growth in Nigeria”. Paper presented at the Annual Conference of the Nigerian Economic Society in July 1999 at Abuja. Akeem, U. (2011) “Revenue allocation and its impact on economic growth process in Nigeria”. Journal of Economic and Sustainable Development. Vol. 2, Pp 29-37. Akinlo, A. (1999) “A cross-sectional analysis of the expenditure responsiveness of states to the federal allocations during civilian era in Nigeria”. Paper presented at the Annual Conference of the Nigerian Economic Society in July 1999 in Abuja. Akujuobi, L. and Kalu, I.U. (2009) “State government finances and real assets investments: The Nigerian experience”. African Journal of Accounting, Economics, Finance and banking Research. Vol. 4, Pp 22-29. Bartik, T.J. (2003) “Local economic development policies”. Retrieved from www.weupjohninstituteforemploymentresearch.org on 11/5/11. Giloth, R. P. (1998) Jobs and Economic Development Strategies and Practice. Sage Publications. Michigan. Emengini, S. and Anere, J.I. (2010) “Jurisdiction impact of revenue allocation on states and local councils in Nigeria”. International Multidisciplinary Journal. Vol. 4, Pp 76-95. Heckman, J. (1993) “What has been learned about labour supply in the past twenty years”. American Economic Review. Vol. 83, No. 2. Pp 116-121. Hekman, J.S. (1982) “Survey of location decisions in the south”. Economic Review. Federal Reserve Bank of Atlanta. Pp 6-19. Idachaba, F.S. (1980) “Concepts and strategies of integrated rural development: lessons from Nigeria”. Department of Agricultural Economics, University of Ibadan. Khemani, S. (2001) “Fiscal federalism and service delivery in Nigeria: The role of states and local governments”. Retrieved from www.worldbank.org on 13/4/14. Lele, U. (1979) The Design of Rural Development: Lessons from Africa. Baltimore: John Hopkins University Press. Lynch, R.G. (2004) “Rethinking growth strategies –how state and local taxes and services affect economic development”. Retrieved from www.epinet.org on 11/5/11. Martinez-Vazquez, J. and McNab, R.M. (2002) “Cross-country evidence on the relationship between fiscal decentralization, inflation and growth”. In Proceedings of the 19th Annual Conference on Taxation, 2001, Washington, DC, Pp 42-47. Nagel, S.S. (2003) Handbook of policy Evaluations. Sage Publications Inc. California. Nigeria: Poverty Reduction strategy Paper-National Economic Empowerment and Development Strategy (2005) International Monetary Fund. Washington, D.C. Retrieved from www.imf.org on 15/3/2007. Olatunbosun, D. (1976) “Rural development in Africa: An integrated approach”. Paper presented at the Commonwealth Workshop on Rural Development in Africa. Olofin, S; Olubusoye, O.E.; Bello, A.J; Salisu, A.A. and Olalekan, A.S. (2012) “Fiscal federalism in Nigeria: A cluster analysis of revenue allocation to states and local government areas, 1999-2008”. CBN Journal of Applied Statistics. Vol. 3, Pp 65-83. Olubanjo, O.O. and Akinleye, S.O. (2012) “Rural agricultural and economic development as a panacea to Nigeria's national development: issues and options”. Retrieved from www.unilag.edu.ng/opendoc on 9/4/2014. Rommer, P. (1994) “The origins of endogenous growth”. Journal of Economic 52

Perspectives. Vol. 8, Pp 3-22. Statistical Bulletin (2012) Abuja: Central Bank of Nigeria. United States General Accounting Office Report to Congressional requests (2000). “Community development: local growth issues-federal opportunities and challenges”. Retrieved from www.gao/Rced.org on 10/5/11. Usman, O. (2011) “Fiscal federalism and economic growth process in Nigeria”. European Journal of Business and Management. Vol. 3, Pp 1-11. Yilmaz, S. (2000) “The impact of fiscal decentralization on macroeconomic performance”. In Proceedings of the 92nd Annual Conference on Taxation in 1999 in Washington, DC. Pp 251-260.

53

TAXATION AND INFRASTRUCTURAL DEVELOPMENT IN NIGERIA BY ASASU, OBARETIN AND ANYANDUBA, JOHN OBI

ABSTRACT This paper focused on taxation and infrastructural development in Nigeria using expenditure on education and transportation as the focal point in line with the various taxes collected by the federal government over a period of twelve years (i.e. 2000 to 2011). A time series approach was adopted in analyzing the data gathered and the Ordinary Least Square statistical technique was employed. From the analysis, the paper concluded that the dependent variable education development was significantly influenced by Petroleum profit tax (PPT), Value added tax (VAT) and Education tax (ET) while the dependent variable transportation was significantly influenced by Company income tax (CIT) and Education tax (ET) only. Premised on the conclusion the paper recommended that more public awareness should be carried out. Also, that the tax process should be more transparent and accountable while an effective tax system should be encouraged to promote CIT, PPT, VAT and ET and their role in the development of the educational sector and transportation sectors respectively. Key Words: Taxation, Infrastructural development, Regression Analysis

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1. INTRODUCTION Tax is a compulsory imposition on income or profit or capital gains of individual, companies or other legal entities by government in order to raise revenue (Eiya, 2012). Tax is also a fee charged or levied by a government on a product, income or activity. If it is levied directly on personal or corporate income, it is called a direct tax. If it is levied on the price of a good or service, then it is called an indirect tax. The main reason for taxation is to finance government expenditure and to redistribute wealth which translates to financing development of the country (Ola, 2001, Jhingan, 2004, Musgrave and Musgrave, 2004, Bhartia (2009). Whether the taxes collected are enough to finance the development of the country will depend on the needs of the country. Under current Nigerian laws, taxes are collected by the 3 tiers of government that is federal, state and local government with each having its jurisdiction clearly spelt out in the taxes and levies (approved list for collection) Act 1998. Tax is a nexus between the state and its citizens, and tax revenue is the life blood of the social contract. The very act of taxation has profoundly beneficial effects in fostering a better and more accountable government. (Tax Justice Network TJN, 2012). Taxation is central to the current development of the present Federal government led by President Goodluck Jonathan. It provides a stable flow of revenue to finance development priorities such as strengthening physical infrastructure and is interwoven with numerous other policy areas, from good governance and formalizing the economy to growth. Infrastructure is a basic system and service that are necessary for a country or an organization to run smoothly (Oxford Advanced Dictionary 8th Edition, 2010). Infrastructure spending was historically defined as consumption expenditure by either government or the private sector but is now nearly universally defined as capital expenditure. Infrastructural development demands a lot of resources and funding. Nigeria with a Federal budget of N4.97 trillion for the year 2011, representing a 12% increase over the 2010 annual budget shows that revenue is one of the ways of funding infrastructural development. Government has shown considerable effort in expanding infrastructural development such as education, health, communication system, employment opportunities and essential public service (maintenance of law and order) irrespective of the prevailing ideology through collection of taxes which is noted by TJN (2012) as the most important, beneficial and sustainable source of finance for development. However, the contribution of tax has not been encouraging due to corruption, tax evasion, avoidance among others. Thus, expectations of government are being cut short (Attila, Chambas and Combes 2008). According to (Adegbie and Fakile 2011), the more citizens lack knowledge or education about taxation in the country, the greater the desire and opportunities for tax evasion, avoidance and non compliance with relevant tax laws. In this respect, the country will be more adversely affected because of absence of tax conscience on the part of the individuals and companies, and also failure of tax administration to recognize the importance of communication and dialogue between the government and the citizens in matters relating to taxation. However, Government's all over the world undertakes huge public expenditure to provide basic infrastructure and social services from tax. Due to increase in population, there has been undue pressure on existing infrastructures, there is therefore the need for Government 55

to ascertain the extent to which revenue generated from taxation is used to provide infrastructure for the good for the populace, hence the need for this paper The main objective of this paper is to examine empirically the extent to which tax revenue is used for the provision of infrastructure in Nigeria while the specific objectives are; to ascertain the effect of petroleum profit tax on the infrastructural development in Nigeria, the impact which value added tax, companies income tax and educational tax have on infrastructural development in Nigeria. To achieve this, the paperis divided into five sections; closely following the introduction is the review of literatures on taxes and infrastructures in Nigeria while three is on methodology, four is on analysis and interpretation of results and five on conclusions and the recommendations of the paper. 2.

LITERATURE REVIEW AND THEORETICAL FRAMEWORK

INTRODUCTION Taxation is central to the current economic development and has been the oldest governmental activity since the country's unification in 1914. The history of both developed and developing countries reveals that taxation is an important weapon in the hands of government, not only to generate revenue but also to achieve fiscal goals such as influencing the direction of investment. Tax originated from the Latin word 'Taxo' which means 'I Estimate'. Ariwodola, (2008) defined taxation as a method by which a nation implements decisions to transfer resources from the private to the public sector. Adejuwon (2009) also defined Taxation as a compulsory levy imposed by the government through its agencies on the income, capital and consumption of its subject so as to increase the resources of the government and enhance effective provision of social amenities to the subjects. Traditionally, taxes are based on income of individuals or profits of an economic entity (Naiyeju, 1996). Ndekwu (1991) also notes that more than ever before, there is now a great demand for the optimization of revenue from various tax sources in Nigeria. The need for government in the affairs of man is the basis for taxation. If there is to be a government to superintend human affairs in a given territory, such a government will need resources, human and material. The most efficient way of getting such resources is for individuals in the territory concerned to contribute in an agreed manner, such contribution referred to as tax (Osemeke, 2010). Taxation provides a stable flow of revenue to finance development priorities, such as strengthening physical infrastructure, and is interwoven with numerous other policy areas. Taxation is an instrument used to bring about infrastructural development. The provision of public infrastructure is a key factor for development. Lack of public service provisions slows down growth and effort to improve standard of living. Aschauer, (1989c) noted that private or more commonly public infrastructure may reduce investment in other areas, particularly other forms of physical capital that promote growth. Tax is beneficial for societal development. There are however contrasting individual goals for societal development vis-a-vis personal development. What is clear to all is that taxes are generally unavoidable and are certain. Achieving meaningful development will require national wealth to be directly applied to the lives of all citizens generally. More so, most of the prior studies have found a positive relationship between tax and development which indicates that there is a general agreement as to the impact of taxation on development. Ogbonna and Ebimobowei (2012) provided a comprehensive assessment of the impact of tax revenue on economic growth and development. They disaggregated tax revenue into its various components such as excise duties, personal income tax, 56

petroleum profits tax, and companies' income tax; value added tax and education tax. COMPANY INCOME TAX (CIT) This tax Act deals with the assessment of the profits of limited liability companies incorporated under the companies and Allied Matters Act of 1990, or any enactment replaced by that Act. The present companies Income Tax Act (CITA) 1990, is a consolidation of the previous Companies Income Tax of 1961, which was re-enacted in 1979. Certain corporate acts, like reorganizations, may not be taxed. Adegbie and Fakile (2011) concentrated on company Income Tax and Nigeria's Economic Development relationship. Using Chi-square and Multiple Linear Regression analyzing the primary and secondary data respectively .They concluded that there is a significant relationship between company income tax and Nigeria's economic development. And that tax evasion and avoidance are major hindrances to revenue generation .United Nations (2000) stated that, tax revenue contributes substantially to development and therefore, there is the need to streamline a nation's tax system to ensure the realization of optimal tax revenue through equitable and fair distribution of the tax burden.. PETROLEUM PROFIT TAX (PPT) The present PPTA (1990) is a consolidation of the previous Act and the various tax amendments carried out over the years in the oil sector. Separate tax laws regulate companies in the oil and gas sector together with construction and consulting companies providing services to oil companies. Tax rates are different for resident companies in the upstream sector of the oil and gas industry. The rates range from 50% for some of the new production sharing contracts to 65.75% for others in the first five years, during which all pre-operation expenses are expected to be fully amortized, and 85% of their chargeable profits thereafter. Among the areas set out in this legislation are the contractual arrangements under which companies can explore and develop the resources within the country. These arrangements include Exploration and production license. These were the main legislature instrument during the period 1900 to early 1970s. However, it was found that given the rapid oil developments, better administration of the contractual arrangements was needed. In 1974, the first two production sharing contracts (PSCS) for acreage off the east coast of Trindad were signed. In 1995, with the adoption of the world Bank PSC Model, the PSC was extensively expanded with enhanced contractual terms and conditions. These include provisions for cost recovery, financial obligations such as research and development, training of nationals and technical equipment. EDUCATION TAX (ET) The education tax Act (No.7) 1993 imposes an education tax on all companies registered in Nigeria and establishes an Education law into which the tax collected shall be paid (Eiya, 2012). This Act deals with the assessment and collection of an annual education tax of 2% imposed on the assessable profits of companies registered in Nigeria. The Education fund is administered by a Board of Trustees which is responsible for the disbursement of the money in the fund to Federal, state and Local Government educational institutions. The tax shall be chargeable on the profit of a company registered in Nigeria. Education development incentives are formally intended for use in attracting new businesses to a particular part of a community. VALUE ADDED TAX (VAT) The value added tax is an improvement on the sales tax. Unlike the sales tax, VAT is a multi-stage levy collected on sales at all stages of sales and distribution (Naiyeju, 1996).This Act deals with the assessment of the increase in value of goods as they proceed through various stages of production and distribution and also to services as they are 57

rendered. Value added tax is presently imposed at a flat rate of 5% on all goods and services that are taxable under the Act. It is a tax on consumption rather than income. Owolabi and Okwu (2011) examined the contribution of Value Added Tax to development of Lagos State Economy, using simple regression models as abstractions of the respective sectors considered in the study. The study considered a vector of development indicators as dependent variables and regressed each on VAT revenue proceeds to Lagos State for the study period. Development aspects considered included infrastructural development, environmental management, education sector development, youth and social development, agricultural sector development, health sector development and transportation sector development. The result showed that VAT revenue contributed positively to the development of the respective sectors. However, the positive contribution was statistically significant only in the agricultural sector development. On the aggregate, the analysis showed that VAT revenue made a considerable contribution to the development of the economy during the study period. INFRACSTRUCTURAL DEVELOPMENT Infrastructure refers to a network of transport, communication and public social servicesall functioning as a system or as a system or a set of interrelated and mutually beneficial services provided for the improvement of the general well-being of the population (Ogbuozobe,1997). Adequate access to social welfare services, such as medical services, education, potable water supply, roads, electricity, employment opportunities etc., are strong indices of development (Adeyemo, 1989). In any disclosure on infrastructure, it is important to note that infrastructure can be broadly classified in two: physical, such as power, telecommunication, piped water supply, sanitation and sewage, public works which include roads and other transport project and social such as education, health, recreation, housing (Aigbokhan, 1999). TRANSPORT Public transport in the country has lacked investment and adequate maintenance for many years. Indeed there has been a failure of planning to integrate different transport modes. For instance, there are currently no rail connections to the country's ports. The railway system has almost ceased to function, although efforts are on to revive the railway system in the country. Assessment of transport sector in many modes shows that the country has fallen well behind international benchmarks. The condition of much of her infrastructure has suffered from many years of under-investment and lack of maintenance. For instance, the Lagos-Ibadan expressway (a federal road) was opened to the public in 1981 and 30 years after, it is just being prepared for the first major maintenance works. This is the situation of many national highways across the country. Nigeria has a total road length of 193,200 kilometers, comprising 34,123km Federal roads, 30,500km State roads, and 129,577km Local Government roads. At 2005 prices, this road network is estimated to have a replacement value of N4.567 trillion. It has been estimated that over the next 10years. N300 billion will be required to bring national roads into a satisfactory condition. Current neglect of these roads implies a loss of network value of N80 billion per year and additional operating costs of N35 billion per year (FGN,2009b). This situation is unhealthy and cannot support the country's drive for economic transformation. The airports are still in federal Government ownership and are managed by the Federal Airports Authority of Nigeria (FAAN). Government Air space Management Agency, although much of the equipment is obsolete. Only three airports (Lagos, Abuja and Kano) cover their operating costs (FGN 2009b). EDUCATION An assessment of the education sector in the country shows that a lot needs to be done if 58

Nigeria would be ranked among the top 20 economies by 2020. As at 201, there were 117 universities in Nigeria (36 federal, 36 states and 45 private). The federal universities fare better than the state owned, while the private universities are working hard to bridge the gap in the university education in Nigeria. Many of the private universities are well funded because their students pay economic fee unlike the federal and state universities. Oyeyinka (2011) observed that university education in Nigeria has experienced considerable decline in quality over the last two decades or so, owing to factors acting in tandem. They include episodic and uncertain political-policy environments that led to declining support from governments. With declining investment in teaching and research facilities resulted to poor products in graduate and evident employment opportunities and diminishing value of earned income. The declining quality of education is largely a result of continuous budget cuts since 1980 together with rapid increases in enrolment rates. SUPPORTING THEORIES OF TAXATION According to Bhatia (2009), a taxation theory may be defined on the assumption that there need not be any relationship between tax paid and benefits received from state activities. In this group, there are two theories namely: Socio-political theory and the expediency theory. Also a taxation theory may be on a link between tax liability and state activities. This reasoning justifies the imposition of taxes for financing state activities and also providing a basis for apportioning the tax burden between members of the society. According to Anyanfo (1996), the faculty theory states that one should be taxed according to the ability to pay. It is simply an attempt to maximize an explicit value judgment about the distributive effects of taxes. Bhatia (2009) argues that a citizen is to pay tax because he can and relative share in the total tax burden is to be determined by his relatively paying capacity. THEORIES OF INFRASTRUCTURE Opinions differ among scholars and decision makers on how infrastructure affects development. This section presents some discussions on theories that are related to infrastructure and economic development. In particular, efforts are made to lay a foundation on the link between infrastructure and economic development on one hand and on the other, on investment in infrastructure through commercialization and privatization. Infrastructure, Poverty Reduction and Economic Development Infrastructure is a broad concept that embraces public investment in physical assets and social services. Theoretically, three schools of thought exist on the effectiveness of investment in infrastructure as a poverty reduction strategy. The first school argues that investment in social infrastructure, which embraces investment in education and health, is more relevant to the goal of poverty reduction than physical infrastructure (Jahan & McCleery, 2005; Jerome & Ariyo, 2004). The second school maintains that investments in both physical and social infrastructure reduce poverty. The last school holds that investment in infrastructure in general has no effect on poverty reduction. The main protagonists of the third view base their theoretical position on three arguments. First, there is the presumption that though investment in infrastructure is important for economic growth, it has little relevance to poverty reduction. Second, it has been argued that actual benefits from infrastructure have been significantly lower than anticipated. Third, there is a view that in developing countries characterized by weak governance and institutions, the tendency for government officials to be corrupt is very high and in this scenario decisions to invest in infrastructure may be distorted, thereby lowering the contribution of infrastructure to growth and diverting benefits intended for the poor (Ali & Pernia,2003). Privatization and Commercialization Theory 59

Privatization and commercialization strategy is a latter- day form of the classical laissezfaire policy or strategy of development. The concept embraces deregulation of the economy so as to encourage private initiative and boost productivity and efficiency. The key elements are the “disengagement of government from the ownership of hither to stateowned enterprises (SOEs) and the concomitant sale of such to private entrepreneurs” (Olukoju, 1996).The organized private sector becomes the driving force or the engine of development and growth while the government's role is reduced to that of a catalyst responsible for the creation of an enabling environment for the growth of the economy. From a global perspective, this is a strategy of development through a more efficient pattern of resource allocation by a free interplay of market forces. Deregulation encourages competition and in this way, a greater quantum of economic and social overhead capital or infrastructures will be built up in a more efficient and competitive market environment. 3. METHODOLOGY A time series design was chosen for this paper while relevant data were gathered from the Federal Inland Revenue Service and the Central Bank of Nigeria Statistical Bulletin for a period of 2000 to 2011. Thereafter the Ordinary Least Square regression method was used in analyzing the data gathered. The significant level is set at 0.05 level of significance. The dependent variables were Education expenditure and Transportation expenditure, while the independent variables were companies income tax, petroleum profit tax, education tax and value added tax. The data were further analyzed using procedures within the Eviews 7 Model Specification In an attempt to determine the impact of Taxation on Infrastructure in Nigeria from the year 2000 to 2011, the following regression models were formulated. EDU = â0 + â1CIT + â2PPT+ â3EDU+ â4VAT + UE TP = â0 + â1CIT + â2PPT +â3EDU+ â4VAT + UE The dependent variable is captured by EDU and TRANSPORT, which is used for measuring Taxation. The independent variables are: CIT = Company Income Tax PPT = Petroleum Profit Tax ET = Education Tax VAT = Value Added Tax UE = error term â1 â2 â3 â4 are coefficient for each variable while â0 is the intercept. The dependent variables measured education expenditure and transportation expenditure. They were measured using the federal government recurrent expenditure contained in CBN Statistical Bulletin 2011 and the independent variables are measured by the following variables. Petroleum Profit tax, company income tax, value added tax, education tax. They are measured using the total revenue generated from (PPT, CIT, VAT, and ET) of the federation. The goal of this study is to empirically estimate models that help explain Taxation as a Tool for Infrastructural Development. The nature of the research requires the use of time series data. All the variables of Education Expenditure (EDU), Transportation Expenditure (TP), and Petroleum Profit Tax (PPT), company Income Tax (CIT), Value Added Tax (VAT) and Education Tax (ET) have been employed in the course of this research work where both Education Expenditure (EDU) and Transportation Expenditure (TP) acted as dependent 60

variables, all other variables stood as independent variables. Research Hypotheses Hypotheses relevant for this paper are stated in their null form (Ho) as follows: (i) Ho: Petroleum Profit tax does not significantly influence infrastructural development in Nigeria. (ii) Ho: Value added tax does not significantly influence the level of Infrastructural development in Nigeria. (iii) Ho: Company income tax does not significantly influence infrastructural development in Nigeria. (iv) Ho: Education tax does not significantly increase the level of Infrastructural development in Nigeria 4. DATA ANALYSIS, INTERPRETATION OF RESULTS AND DISCUSSION OF FINDINGS The empirical analysis helps to explain Taxation as a Tool for Infrastructural Development was analyzed using (a) Descriptive Analysis, (b) Correlation Analysis (c) The Ordinary Least Square Estimation Technique (OLS) Descriptive Statistics Table 1

VARIABLE MEAN EDU 601477.00 TP 30000.31 PPT 1910.44 CIT 300.83 VAT 283.60 ET 49.18 Eviews 7:0 software

MAX 5795664.00 90027.93 13652.50 715.44 659.15 139.50

MIN 39882.60 3034.68 30.70 53.30 58.00 8.30

SED 1637569.00 26309.08 3745.45 243.85 199.87 47.37

Authors' Computation 2014 In describing the properties of the data, in the table above, we observe that the mean value of the variable of Education Expenditure (EDU) stood at 604177 and had its peak at 5795664. However the standard deviation value of this variable which shows its spread away from the mean stood at 1637569 during the period under review. More so, we observe that the mean value of the variable of Transportation Expenditure (TP) during the period under review remained at 30000.31 and deviated from its mean with a value of 26309.08, reaching a maximum value of 90027.93. All the variables under study during the same period showed positive values using the descriptive analytical measure. The Jarque -Bera Statistics of all the independent variables except for the variable of Petroleum Profit Tax (PPT) showed that the data were not normally distributed. However, only the dependent variable of Education Expenditure (EDU) showed normality of data due to its absolutely best Jarque – Bera probability result of 0.00. CORRELATION MATRIX ANALYSIS

61

Table II

EDU TP PPT CIT VAT ET

EDU

TP

PPT

CIT

VAT

ET

1

-0.32 1

0.13 0.17 1

-0.28 0.50 -0.02 1

-0.32 0.44 -0.03 0.99 1

-0.24 0.58 -0.11 0.95 0.93 1

Eviews 7:0 software Authors' Computation 2014 The correlation matrix analysis among the variables of interest is shown in table II above. From the analysis above, we observe that both dependent variables of Education Expenditure (EDU) and Transportation Expenditure (TP) are negatively correlated with a value of (-0.32). The result simply suggests a weak association among 60th variables as 32% strength is not good enough. The analysis above also showed that all independent variables studied in this research associated positively with the dependent variable of Transportation Expenditure (TP). Although for the variables of Petroleum Profit Tax (TP) and Value Added Tax (VAT) all other independent variables had fairly strong association strength of 50% (CIT) and 58% (ET). In order to estimate the relationship that exists between the dependent and independent variables under study, we employed the ordinary least square regression technique to the models specified. The result obtained thereof from “Regression Result 1” contained elements of auto correlation owing to the poor Durbin Watson statistical value (1.4). This automatically invalidates the potency of the model in case of policy usage. As a result, the Cochrane – Orcutt Method AR Roots (-00) converged after 3 iterations was resorted to, and the result presented on (Regression Result II) Shown in the Appendix was accepted. A close examination of the estimated equation shows that the results are satisfactory from the high value of the R2 of 95%. This goodness of fit have been confirmed by the high value of its adjusted R2 89% which had taken into account the degree of freedom. The goodness of fit implies that 95% of the systematic variation in the dependent variable of Education Expenditure (EDU) was explained by the four regressions of Petroleum Profit Tax (PPT), Company Income Tax (CIT), Value Added Tax (VAT) and Education Tax (ET). Hence the remainder of 5% is left unaccounted for but assumed to be captured by the error term Ut. The regression results also shows F – Statistics value of 18.24 clearly indicating there is a significant linear relationship between the regress and the repressors' put together. Except for the variable of Company Income Tax (CIT) all other explanatory variables showed positive relationship with the dependent variable of Education Expenditure (EDU). This can be deduced from the t-statistics value of (CIT) 2-3.63. More so, this suggests that one unit increase in company Income Tax (CIT) will lead to a 3.63 fall in Education Expenditure, this may be well appropriated since government expenditure on education may have been generated from various company income tax during the period under study. However, we would suggest that further study should be carried out so as to accurately determine the validity of this hypothesis. The result also showed that the most significant variable among the independent variables is the value added tax (VAT) and 4.61 It has a 62

positive relationship with the dependent variable and passes the test of significance at 1% level of Significance. This suggests that the variable of (VAT) as a single variable is good enough to explain changes which occur on the independent variable of Education Expenditure (EDU). The estimated model from the regression result is free from auto correlation due to its good Durban Watson state result of 1.6. Hence this model can be recommended for policy usage purposes. Again, the result obtained thereof from “Regression Result II ” contained elements of Autocorrelation owning to the poor Durban Watson Statistics value of 1.3. This automatically invalidates the potency of the model in cases of where this model will be used for policy purposes. As a result, the Cochrane- Orcutt Method AR Roots (-14) converging after 13 iterations was resorted to and the result presented on (Regression Result II) shown on the Appendix was accepted. A close examination of the estimated equation shows that the results are satisfactory from the high value of the R2 (0.61). This goodness of fit has been supported by the adjusted R2 value (0.22) after adjusting for degree of freedom. The goodness of fit implies that 61% of the systematic variation in the dependent variable of Transportation Expenditure (TP) was explained by the four repressors' of Petroleum Profit Tax (PPT). Company Income Tax (CIT), Value Added Tax (VAT) and Education Tax(ET).However, the remainder of 39% is left unaccounted for but assumed to be captured by the error term Ut. The result shows a weak F-Statistics value of 1.57 boldly indicating that there is weak significant relationship between the dependent and the independent variables put together. At this juncture we suggest that further research on this topic should be undertaken where different independent variables should be employed. This will go a long way to give a more satisfactory result. All independent variable except for the variable of Petroleum Profit Tax (PPT) (-0.77) and Value Added Tax (VAT) (-1.30) showed negative relationships with the dependent variable of Transportation Expenditure (TP), this implies that a one unit rise in Petroleum Profit Tax (PPT) and Value Added Tax (VAT) will result to a 0.77 and 1.30 unit fall in the dependent variable of Transportation Expenditure (TP). This does not meet apriori expectation and we suggest that further research should be carried out on this issue to gain better understanding. All independent variables failed the test of significant as the worse hit is the education tax failing at 82%. Although, the estimated result can be used for policy purposes since there seems to be no Autocorrelation as a result of a good DW statistic of 1.6. 1. CONCLUSION AND RECOMMENDATIONS This paper examined the impact of tax revenue on infrastructural development in Nigeria. It complements most of the other studies done in this area which focused mainly on taxes and economic growth and development with little attention on the specific area of infrastructural development from the perspective of taxation. From our analysis hypothesis one revealed that PPT significantly influenced development in the educational sector while PPT did not influence development in the educational sector, hypothesis two showed that CIT did not influence development in the educational sector while CIT influenced development in the transportation sector, for hypothesis three it showed that income from VAT significantly influenced development in the educational sector while VAT did not influence development in the transportation sector positively and finally ET significantly influenced development in the educational and transportation sector of the economy. However, premised on the work done and the conclusion derived the paper recommends as follows; that proper enlightenment should be carried out by government and its agencies on the extent of government developmental projects facilitated through tax revenue, 63

Transparency and accountability should be encouraged in the area of revenue generated from tax. Also, proper and effective mechanisms should be put in place by government in the area of CIT so as to encourage more development particularly in the educational sector

64

REFERENCES Adegbie, F, F., and Fakile (2011) Company Income Tax and Nigeria Economic Development. European Journal of Social Sciences, 22 (2). Adejewon, G., (2009) Analysis of Taxation Principles for Nigeria Students, Agege, Lagos, Not by Power Nigeria Limited. Adeyemo, A, M., (1989) Spatial Variation in Accessibility to Secondary School Facilities in Oyo State. Unpublished PhD Thesis, Geography Department, University of Ibadon, Nigeria. Aigbokan, B, E. (1999) Evaluating Investment on Basic Infrastructure in Nigeria, proceedings of the Eighth Annual Conference of the Zonal Research Units (Organized by Research Dept. Central Bank of Nigeria, at Hamdala Hotel, Kaduna, 11-15 June, 1999), P. 208. Alaci, D. S. A., and Alehegn, E. (2009) Experiences from Ethiopia and Nigeria, Infrastructure Provision and the Attainment of Millennium Development Goals (MDG) in Decentralized Systems of Africa, Paper Presented at the Conference on the Role of the Sub-National Jurisdictions in Efforts to achieve the MDGs, 7-9 May 2009, Abuja, Nigeria. Ali, L and E. M. Pernia. (2003) Infrastructure and Poverty Reduction: What is the Connection? ERD Policy Brief Series 15, Manila: Asain Development Bank. Anyanfo, A. M. O. (1996) Public Finance in a Developing Economy: The Nigeria Case. Department of Banking and Finance. University of Nigeria, Enugu Campus. Enugu. Ariwodola, J. A .(2008) Personal Taxation in Nigeria including Capital Gains Tax, Festac Lagos; JAA Nigeria Limited, 5th Edition. Aschauer, D. (1989) “Does Public Capital Crowd Out Private Capital?” Journal of Monetary Economics Vol. 24, pp. 171-188. Attali, J. G. G. Chambas and Jean Louis Combes (2008) “Corruption et Mobilization des recetes Publiques: Uneanalyse Econometrique,” Recherche Economique de Louvain. Bhartia, H. L. (2009) Public Finance. 14th Edn. Vikas Publishing House PVT Ltd, New Delhi. Dessai, M. A. Foley, C. F. and Hines, J. R. (2004) “Foreign Direct Investment in a World of Multiple Tax”, Journal of Public Economics. 88, pp 2727-2744. Eiya, E. O. (2012) Taxation at a glance, Benin City; The Guide Printing Press. Jahan, S and R. McCleery. (2005) Making Infrastructure Work for the poor, UNDP. 65

(Online) Available www. Undp. Org/ poverty/ docs/page /Synthesisreport.pdf. Jerome, A and A. Ariyo (2004) 'Infrastructure Reform and Poverty Reduction in Africa. Africa Development and Poverty Reduction: The Macro-Micro Linkage'. TIP Jhingan, M. L. (2004) Money, Banking, International Trade and Public Finance. Vrinda Publications, New Delhi. Musgrave, R. A. and P. B. Musgrave (2004) Public Finance in Theory and Practice. Tata McGraw Hill, New Delhi, India. Ndekwu, J. K. (1991) “An Analytical Review of Nigeria's Tax System and Administration”. Paper Presented at a National Workshop on Tax Structure and Administration in Nigeria, Lagos, 15-17 May. Naiyeju, J. K. (1996) Value Added Tax: The Facts of a Positive Tax in Nigeria, Kupag Public affairs. Obazee, G. and Abraham, T. (2003) “ A Practical Guide to Research/ Project Writing”, Benin City. Solution Publication. Ola, C. S. (2001) Income Tax Law and Practice in Nigeria, 5th Edition, Ibadan, Dalag Prints and Park. Olukoju, A. (1996) Maritime Trade, Port Development, and Administration: The Japanese Experience and Lessons for Nigeria, (Institute of Developing Economies, Tokyo, Japan), V.R.F. Series, No.268 (pp.69). Ogbonna, G. N and Ebimobowei, A. (2012) Impact of tax reforms and economic growth of Nigeria: A time series analysis, current research journal of Social Science, 4(1) 6268 Osemeke, M. (2010) Practical Approach to Taxation and Tax Management, Benin City: Ethiope Publishing Corporation, Ring Road. Owolabi S. A and A. T. Okwu (2011) “Empirical Evaluation of Contribution of Value Added tax to Development of Lagos State Economy”, Middle Eastern Finance Economics. Oyelaren -Oyeyinka, Banji. (2011) Nigeria Universities and Global trends in higher Education, Paper Presented at the 26th Annual Conference of the Association of Vice chancellors of Nigeria Universities (AVCNU), Held at Covenant University, Ota, Nigeria, 27yh-30th June, 2011. Tax Justice Network (TJN) (2012) Aid, Tax and Finance for Development

66

APPENDIX DESCRIPTIVE STATISTICS RESULT Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis

EDU 601477.0 128087.3 5795664. 39882.60 1637569. 3.003199 10.04705

TP 30000.31 26033.06 90027.93 3034.680 26309.08 1.127803 3.354564

PPT 1910.438 909.0000 13652.50 30.70000 3745.453 2.880991 9.599512

CIT 300.8283 208.4500 715.4400 53.30000 243.8451 0.642457 1.870896

VAT 283.5950 212.7000 659.1500 58.00000 199.8670 0.653132 2.083077

ET 49.17667 25.10000 139.5000 8.300000 47.36722 0.945173 2.441725

Jarque-Bera Probability

42.86889 0.000000

2.606738 0.271615

38.37700 0.000000

1.462939 0.481201

1.273537 0.528999

1.942541 0.378602

Observations

12

12

12

12

12

12

CORRELATION MATRIX ANALYSIS

EDU TP PPT CIT VAT ET

EDU

TP

1 0.31951 0.13463 0.28139 0.31567 0.23586

-0.31951 1

PPT 0.13463 0.16801

-0.16801

1 0.49626 0.02505 0.443842 0.03521 0.580592 0.11383

CIT

VAT

ET

-0.28139

-0.31567

-0.23586

0.49626

0.443842 0.580592

-0.02505

-0.03521

1

0.993698 0.949314

0.993698 1

-0.11383

0.930254

0.949314 0.930254 1

REGRESSION RESULT I Dependent Variable: EDU Method: Least Squares Date: 01/14/14 Time: 04:42 Sample(adjusted): 2001 2011 Included observations: 11 after adjusting endpoints Convergence achieved after 3 iterations Variable

Coefficient Std. Error

t-Statistic

Prob.

C PPT CIT VAT ET AR(1)

-47477.78 2.912595 -1451.933 1947.036 921.0333 -0.001119

-1.854012 1.248698 -3.626968 4.611745 1.489417 -0.212887

0.1229 0.2671 0.0151 0.0058 0.1966 0.8398

25608.13 2.332505 400.3161 422.1907 618.3853 0.005256

67

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat

0.948044 0.896089 26127.08 3.41E+09 -123.1498 1.645335

Inverted AR Roots

-.00

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

129278.2 81051.17 23.48178 23.69882 18.24717 0.003158

REGRESSION RESULT II Dependent Variable: TP Method: Least Squares Date: 01/14/14 Time: 04:56 Sample(adjusted): 2001 2011 Included observations: 11 after adjusting endpoints Convergence achieved after 13 iterations Variable

Coefficient Std. Error

t-Statistic

Prob.

C PPT CIT VAT ET AR(1)

52072.51 -1.609394 512.7340 -625.5990 161.1704 0.135384

2.317912 -0.768123 1.159627 -1.298667 0.328903 0.229610

0.0682 0.4771 0.2986 0.2507 0.7556 0.8275

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat

0.612063 0.224127 23004.17 2.65E+09 -121.7495 1.618394

Inverted AR Roots

22465.27 2.095230 442.1543 481.7240 490.0245 0.589627

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

.14

68

32451.74 26116.27 23.22719 23.44422 1.577740 0.314498

69

70

71

72

73

74

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