International Journal of Innovative Finance and Economics Research 12(1):143-155, Jan.-Mar.

, 2024

© SEAHI PUBLICATIONS, 2024 www.seahipublications.org ISSN: 2360-896X

Impact of Taxation on Foreign Direct Investment in

Nigeria (2000-2020)
Nwankpa Linda Oluchi & *Ufomadu Ogechukwu Abel

Department of Accountancy,
Abia State Polytechnic, Aba, Abia State, Nigeria
*E-mail: ogescot@yahoo.com

ABSTRACT
Foreign Direct Investment is a requisite in the development of an economy particularly in developing
economies such as Nigeria which relies mainly on the proceeds from crude oil sales in the
international market. A critical factor that influences inflow of foreign direct investment into an
economy is the prevailing tax policies in that country. This study examined the effect of taxation on
Foreign Direct Investment (FDI) flows to Nigeria; using time series data from 2000 to 2020. Data for
the study were sourced from the Central Bank of Nigeria Statistical Bulletin, Federal Inland Revenue
and the National Bureau of Statistics and analysed using the Ordinary Least Squares (OLS) for
multiple regression technique. The study used government tax revenue disaggregated into corporate
income tax, personal income tax and value added tax as the independent variables and Foreign Direct
Investments (FDI) inflows as the dependent variable. The results showed that corporate income tax
had a negative and significant effect on FDI flows to Nigeria; personal income tax had a negative and
insignificant effect on FDI flows while value added tax had a positive and significant effect on FDI
flows to Nigeria. The study concluded that jointly, taxation has significant effect on foreign direct
investment in Nigeria and recommended that the government should embark on comprehensive tax
reform in order to increase the inflow of foreign direct investment.
Keywords: Foreign Direct Investment, Government, Revenue, Taxation.

1. INTRODUCTION
The flow of FDI to the Nigerian economy is low relative to other countries in Africa due to poor tax
policies among other things (UNCTAD, 2020). The report indicates that out of the 57billion dollars
FDI inflows to Africa, Nigeria inflows stands at 5.6billion US dollars (10% of total FDI to Africa).
However, the oil and gas sector receives 75% of FDI inflow in Nigeria, while other sectors received
25% (Corporate guide, 2020). Poor flow of FDI to Nigeria may impact negatively on economic
growth and diversification. Tapang et al., (2018), said that if Nigeria is going to migrate from a poor
Nation to a rich country, the key is industrialization. There is an inadequate attraction of FDI into the
Nigerian economy due to poor tax policies that does not favour foreign investors which has hinder
every move towards industrialization and economic diversification in Nigeria. .
Though, the problems faced are in the area of negative relationship between taxes and FDIs. The
ability to sustain and expand FDI in Nigeria are faced with the problem of high tax rates, multiple
taxation, complex tax regulations and lack of proper enlightenment or education about tax related
issues (Joseph, Omodero and Omeonu, 2019). Despite the fact that studies have been done in Nigeria
on taxation and FDI, the effects of taxation on FDI in Nigeria have received little attention. Most
studies mainly based their analysis on the effect of tax incentives on FDI flows to Nigeria (Anichebe,
2019; Oyeabo et al., 2019; Olaniyi, Ajayi and Oyedokun, 2019; Ugwu, 2018; Tapang et al., 2018;
Olaleye et al., 2016; Peters and Kiabel, 2015; Adepeju, 2012). On the other hand, studies such as Edo
et al. (2020); Boly, Coulibaly and Kere (2019), had shown that foreign investors are not just attracted
by tax incentives but by actual tax collections through company income taxes, personal income taxes

143
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024

and value added tax. As a result, the study attempted to fill the gap in literature by examining the
effect of taxation on FDI flow to Nigeria.
Every nation requires a lot of revenue to be able to provide and maintain essential services for its
citizen. One ready means of revenue for the government is through the imposition of tax. The
imposition of tax by the government is not a new phenomenon. There is hardly any government today
that does not rely on taxation. Therefore, the tax system is one of the most powerful levies available to
any government to stimulate and guide its economic and social development. The FBIR (Federal
Board of Inland Revenue) which is vested with the power to administer and carry out all the
responsibilities which may be deemed necessary and expedient for the assessment and collection of
tax, and shall for all amount so collected in a manner to be prescribed by the Federal Minister of
Finance (Anichebe, 2019). The Board has certain reserved power which shall not be delegated to
another person to perform, e.g. power to acquire, hold and dispose properties of any company in
satisfaction to tax or any judgment debt, and to specify the forms of return claim and notices.
A public policy dilemma for researchers is the use of tax policy to attract Foreign Direct Investment
(hereafter FDI). However, the link between the Taxation and FDI is unclear. The exploitation of taxes
is in the hope that the country will benefit from realized economic growth due to the inflow of FDI.
This perception is because public sector policy analysts believe increased foreign investment leads to
increased growth. Evidence of this is supported by some empirical research such as (Edo, Okafor and
Justice, 2020; Anichebe, 2019; Onyeabo, Azubuike and Ebieri, 2019). However, Tavares-Lehmann,
Coelho & Lehmann (2012), noted that despite the competition for FDI by either the developed or
developing economies, there is no explicit agreement on the relationship between taxation and FDI.
In the words of Romer (2012), investment is necessary for long-run economic growth and short-run
fluctuations of output in an economy. This implies that investment demand is vital to the behavior of
standard of living in an economy in the long-run. This because investment feeds into the economy
through increased economic activity that in turn increase employment thereby determining the long-
run standards of living of an economy. Since investment is a component of economic output and is
mostly characterized by high volatility, then it follows that investment is crucial in contributing to
explaining short-run fluctuations in any economy’s growth. However, the focus of this study is FDI.
Many developing countries welcome and encourage foreign investors to invest in all industrial sectors
of host economies. Developing countries empower foreign investors with various tax benefits such as
capital allowances, export tax allowances, tax exemptions and concessions, which often aim to foster
investment, international trade and economic growth (Tapang, Onodi and Amaraihu, 2018).
Therefore, it is prudent and expected that investors take into consideration the tax policy of the host
economies when making investment decisions. However, it is viewed that it would also be beneficial
for the fiscal arms of governments to understand the actual impact of taxation on inbound Foreign
Investment and thereby offer optimal incentives.
Multinational firms seeking opportunities to create global footprints desire economies with low tax
burdens. Governments across the globe compete to have foreign investments to bridge revenue
shortfalls, unemployment, and knowledge gap. The emergence of the corona-virus pandemic has
further crippled global economic activities, especially with the shutdown of several businesses.
Nigeria with a population of over 200 million people and adjudged the giant of Africa has had limited
foreign direct investments since its independence in 1960 compared to South Africa which is Africa's
second largest economy (Edo, Okafor and Justice, 2020). Despite its size, and massive endowment of
mineral resources, the country is still grappling with developmental challenges. Notwithstanding its
oil wealth and other mineral resources, a large chunk of its population still lives in poverty, with high
levels of unemployment, infrastructural deficit, and corruption. Nigeria’s economic woes have been
exacerbated by its weak foreign reserves and the continued decline crude oil prices in the international
market, which is Nigeria’s economic mainstay.
Besides the local investments, both developed and developing economies competitively seek FDI by
providing a favourable investment environment to foreign investors. Therefore, economies expect
benefits from efficiency gains through the transfer of management knowhow, technology, business
practices, and access to foreign markets, increased employment opportunities and enhanced standards
of living (Olaleye, Riro and Memba, 2016). However, Todaro and Smith (2012), reiterated that FDI
has its own merits and demerits. These characteristics mean that some proponents support FDI while

144
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024

others are against it with the fundamental divergences in their inclinations based on these merits and
demerits of FDI. Hence, governments use tax policies to control FDI flows.
Over the years, Nigeria has ranked high among foreign capital recipients (Edo et al., 2020). However,
there has been a consistent decline in the flow of foreign investments and much more the incessant
reversals of capital in recent years. The National Bureau of Statistics (2020), revealed that FDI flow to
Nigeria in 2017 totaled $981 million, a far cry from previous performances, and a decline of 41% in
the last ten years. This decline is attributed to infrastructural decay, unfavorable tax policies, the
economic recession witnessed in 2016 and of course the recent COVID-19 pandemic and incentives.
It was based on this backdrop that this study investigates the effect of taxation on FDI in Nigeria.
The main objective of this study was to ascertain the effect of taxation on FDI flows to Nigeria. The
specific objectives are to investigate the effect of company income tax, personal income tax, value
added tax on Foreign Direct Investment (FDI) flow to Nigeria for the period 2000 - 2020.

2. LITERATURE REVIEW
Conceptual Framework
Concept of taxation
The need for tax payments has been a phenomenon of global significance as it affects every economy
irrespective of national differences (Okoh, Onyekwelu and Iyidiobi, 2016). Taxation is an age long
event. The need for its payment was emphasized by Jesus in “Mathew 22 vs 17-21” when the
Pharisees asked Him whether it was lawful to pay taxes or not. His reply „render therefore unto
Caesar the things which are Caesar’s and to God the things that are to God’s suggests that tax
payments should be compulsory, non-negotiable, binding and obligatory on all citizens of a country
regardless of religion and social status.
According to the black law dictionary (1999), tax is a ratable portion of the produce of the property
and labor of the individual citizens, taken by the nation,, in the exercise of its sovereign rights, for the
support of government, for the administration of the laws, and as the means for continuing in
operation the various legitimate functions of the state. The Institute of Chartered Accountants of
Nigeria (2006), and the Chartered Institute of Tax revenue of Nigeria (2002), viewed tax as an
enforced contribution of money, enacted pursuant to legislative authority. If there is no valid statute
by which it is imposed; a charge is not tax. Tax is assessed in accordance with some reasonable rule
of apportionment on persons or property within tax jurisdiction.
Tax is a compulsory charge imposed by a public authority on the income and properties of individuals
and companies as stipulated by the government Decree, Acts or Laws irrespective of the exact amount
of service of the payer in return (Anichebe, 2019).
The Nigerian tax structure and tax system
Taxation is defined as a pecuniary burden upon individuals and businesses or property to support
government expenditure. It is an enforced and compulsory contribution, exacted pursuant to
legislative authority and is any contribution imposed whether under the name of duty, custom excise,
levy or other name (National Tax policy, 2012). The multiplicity of taxes in Nigeria is believed to
disrupt the flow of foreign investments and sustenance of business in the country. Ugwu (2018),
describe this as a yoke that frustrates investors and scares prospective investors. Corporate taxes
prevalent in Nigeria include but are not limited to company income tax charged at 30% of profit,
value-added tax charged at 5%, tertiary education tax charged at 2% of assessable profit, capital gains
tax charged at 10% of the gains on a chargeable asset, customs and excise duty, the Nigerian
information technology levy, as well as a hotel consumption tax.
Tax revenue has been in existence even before the amalgamation of Nigeria as a political entity in
1914. Direct taxes, which were first introduced into the northern part of Nigeria, were successfully
administered because the citizens were already used to one form of tax or another before the
formalization of direct taxes. The effectiveness of the administrative arrangement under the emirate
system was the major factor. With the amalgamation of the north and the south in 1914, direct tax
revenue was introduced into the western territory in 1916 and into the eastern provinces around 1927.
The enabling laws and regulations were fashioned after those of Britain.
Tapang et al., (2018), expressed that tax is a legal system approved by the government body to have
the charge, to have the direction, to manage and to provide policies; laws and regulations for the tax

145
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024

system to ensure all applicable taxes are collected and remitted to the appropriate authorities. Hence
one of the aid tests in determining the success of a tax system is the management of policy. The two
major legal bodies connected to the administration of company income tax, Petroleum profit tax,
Personal income tax, value added tax, withholding tax, and education tax and custom excise duty in
Nigeria are Joint Tax Board (JTB) and Federal Inland Revenue Service (FIRS). The Joint Tax Board
was established in 1961 to offer advice and coordinate various aspects of tax revenue and also to
promote uniformity both in the application of the personal income tax Act 1993, and in the incidence
of tax on individual throughout Nigeria.
According to Odusola (2006), tax administration in Nigeria does not measure up to appropriate
standards because tax is inequitable. The language of these pieces of legislation is often forbidden and
confusing. Many of the supposed tax payers know nothing of the rules under which they are to pay tax
or the range of deductible expenses and the allowance available to them; they cannot be at ease to
disclose their taxable income. The hallmark of tax convenience in Nigeria now is ability of a taxpayer
to go to the tax office, say what he is ready to pay, be assessed accordingly, pay and obtain a tax
clearance certificate (Odusola, 2006). From the above we can deduce that these have led to
administrative inefficiency. The literacy level is low and record keeping is not yet a popular culture.
There are not enough tax officials to cover the field. Most of the officials are little trained, ill
equipped, badly remunerated and corrupt.
Value-added tax (VAT)
VAT is a consumption tax that is relatively easy to administer and difficult to evade and it has been
embraced by many countries world-wide (Federal Inland Revenue Service, 1993). Value-added Tax
Act, 1993 is the law that regulates the collection of tax due on - VATable goods or services. It was
introduced to replace the old sales tax. It is a consumption tax levied at each stage of the consumption
chain, and is borne by the final consumer. It requires a taxable person upon registering with the
Federal Board of Inland Revenue to charge and collect VAT at a flat rate of 5% of all invoiced
amounts of taxable goods and services. Garba (2014), explained that evidence so far supports the view
that VAT revenue is already a significant source of revenue in Nigeria.
Personal income tax
The tax is on the Pay As you Earn (PAYE) basis that is the tax payable depend on how much is
earned by the tax payer. The tax is easy to collect from civil servants as it is deducted from source by
the appropriate authorities unlike the private sector who will have to file returns of each tax payer
which is not done in most cases (Ayuba 2014). Documentations from different scholars indicated that
even with all efforts through the various tax reforms undertaken by Nigerian government to increase
tax revenue over the years, prior statistical evidence has proven that the contribution of income taxes
to the government’s total revenue remained consistently low and is relatively shrinking. However, of
all the taxes, personal income tax has remained the most disappointing, nonperforming, unsatisfactory
and problematic in Nigerian tax system (Nzotta, 2007). Specifically, the contribution of personal
income tax remained marginal and comparatively low in Nigeria’s tax revenue. At the state and local
government levels, where the major source of internal revenue is expected to be individual income
tax. The PAYE tax payer is payable to both the Federal Inland Service and the state Board of Internal
Revenue depending on the sector in which the tax payer is employed. The tax is regulated by personal
Income Tax Act 2004.
Foreign Direct Investment (FDI) and Taxes
Foreign direct investment is, according to the IMF guidelines, defined as foreign investments in which
the investor owns more than 10% of the stock that is invested in. This generally refers to investments
by multinationals in foreign controlled corporations such as affiliates or subsidiaries (Peters and
Kiabel, 2015). FDI flows consist of two broad categories: (i) direct net transfers from the parent
company to a foreign affiliate, either through equity or debt, and (ii) reinvested earnings by a foreign
affiliate. Other ways to finance the investments of subsidiaries, such as local borrowing or local
issuance of shares, are not registered as FDI. In that sense, FDI may underestimate the total
investment of corporations that are controlled by foreign parent companies.
Decisions by multinationals to undertake FDI are usually complex since they involve strategic
decisions. The most widely accepted theory of FDI is probably the eclectic approach developed by
Dunning (1981). For a multinational that seeks to maximize the value of the firm, FDI is attractive if

146
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024

the so-called OLI conditions are met, referring to Ownership, Location and Internalization (Boly et
al., 2019). First, there must be an ownership advantage for the multinational relative to ownership by
local firms. This may have something to do with specific technological or organizational knowledge
of the multinational, but could also relate to tax issues. Second, it must be attractive for the
multinational to produce abroad because of some comparative locational advantage. Otherwise, the
multinational would have chosen to export, rather than to invest. Finally, it should be attractive to
undertake activities within the multinational, rather than buying or leasing them from other firms.
The return to foreign direct investment may be subject to international double taxation. In particular, a
foreign subsidiary is always subject to corporate income tax in the host country. These profits of the
subsidiary can be taxed again under the corporate income tax in the home country of the parent. As
this international double taxation would strongly discourage international business activity, most
countries avoid it by means of bilateral tax treaties based on the OECD Model Tax Convention.

Theoretical Framework
Though, there are many theories explaining the relationship between taxation and FDI. The theories
are x-rayed below:
Tax Discrimination Theory
Tax Discrimination theory Glaeser (2001), which stated that government imposes different tax rates
based on regions and investments developed tax discrimination theory. The tax rate is determined by
demand for firms to locate in a particular location. The government applies tax discrimination to
encourage development in the rural areas. Tax holidays and low tax rates are given to investors to
locate their businesses to less developed areas from the major cities and towns. According to Mason
(2006), tax discrimination subjects the residents and non –residents to different tax regimes in the
same jurisdiction. That the resident tax payer is usually taxable on all of his or her global income,
whereas a non – resident is taxable on income derived in the host state. Mason (2006), states
European court of Justice (ECJ) argues that tax discrimination promotes economic efficiency and
integration of the European common market.
Dunning's Eclectic Paradigm
Dunning (1993), came up with this theory that has three diverse but correlated theories. These theories
are Ownership, Location and Internalization (OLI) which are used to describe how the factors therein
contribute to changes in foreign direct investments. Ownership related advantages are those provided
by intangible assets. These assets must however be considered as exclusive possessions held and
owned by the company and are transferable to other firms at prices that would lead to reduction of
costs to the company, or would lead to the company registering high rates of return. In his arguments,
Dunning (2005), argued that when all other factors were held constant, a company with a higher level
of competitive advantages, in comparison with its competitors, had a higher chance in increasing its
overall production and hence increasing its global presence.
Location benefits, as explained by Dunning (2005), were used to compare the different economies, as
per their strengths and opportunity. The end result of this analysis was that the most suitable country
was selected to be a host country for the activities of multinational firms. The correlation existing
between location and ownership advantages was that when a multinational corporation was able to
host itself in the most suitable economy, it was then able to engage in the exploitation of its ownership
related abilities, and thus leading to the firm engaging in foreign direct investment. Internalization
establishes a need for the firm to be able to have an established business in each of the economies that
the company sells its products or services. The firm must derive ways through which it can benefit
further through foreign production as compared to the meagre fees that are earned in international
trade activities such as exporting and franchising. Dunning (2005), stated that a corporation was more
likely to get higher returns if, it engaged in foreign production as opposed to the extension of its
production rights to other countries. The eclectic paradigm is therefore in support of the establishment
of production markets by a corporation through exploitation of its competitive advantages and the
selection of suitable locations. In doing this, the corporations are not only engaging in foreign direct
investments but also gaining much more than their competitors. This study is hinged on this theory.

147
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024
Empirical Review
Edo, Okafor and Justice (2020), investigated the effects of corporate taxes on the flow of foreign
direct investments (FDI) in Nigeria between 1983 and 2017. Research data was analyzed using the
Error Correction Model (ECM). The coefficient of determination showed that about 77 percent of the
systematic changes in FDI are attributed to the combined effect of all the explanatory variables
captured in the study. It was found that Company Income Tax, Value Added Tax, and Custom and
Excise Duties have a significant but negative relationship with FDI. In contrast, Tertiary Education
Tax has a positive association with FDI. Also, Exchange Rate had a negative but significant
relationship with FDI; Inflation had an insignificant but positive association with FDI, while GDP
growth rate and Trade Openness showed a positive and significant association with FDI. Our findings
deviate from previous results, as we find new evidence that a higher Education tax rate influences
FDI, and the emerging evidence on the effect of non-tax variables on FDI inflow.
Anichebe (2019), examined the impact of tax revenue on foreign Direct Investment in Nigeria; using
time series data from 1981 to 2017. Data for the study was sourced from the Central Bank of Nigeria
Statistical Bulletin and the National Bureau of Statistics and analyzed using the Ordinary Least
Square (OLS) technique. The results showed that: Tax Revenue has long-run relationship with
Foreign Direct investment in Nigeria. Company income tax and Personal income tax have negative
impact on Foreign Direct investment in the long run, while Value added tax and Custom and excise
duty have positive relationship with Foreign Direct investment in the long run. Based on findings, the
following recommendations were made; provision of infrastructures by the government, elimination
of multiple taxes as well as simplifying tax laws and adjusting tax rates to encourage investments.
Oyeabo, Azubuike and Ebieri (2019), examined the effect of corporate taxes on foreign direct
investment in Nigeria. Ex post facto research design was adopted as it extracted relevant data from
Central Bank of Nigeria Statistical Bulletin and various annual reports of Federal Inland Revenue
Service for the period 1985 to 2016, a period of significant deregulation of the economy. The study
engaged cointegration regression and unrestricted vector autoregression analysis to estimate the
relationship of the variables. The results established that petroleum profit tax and education tax
individually has inverse relationship with foreign direct investment while there is direct relationship
between company income tax and foreign direct investment in Nigeria. It concluded that jointly,
corporate taxes have significant effect on foreign direct investment in Nigeria and recommends that
the government should embark on comprehensive tax reform in order to increase the inflow of foreign
direct investment.
Boly, Coulibaly and Kere (2019), empirically assessed impact of corporate income tax on foreign
direct investment inflows in Africa. Using a dynamic spatial Durbin model with fixed effects, the
results revealed that cuts in total collected corporate income tax revenue increased FDI net inflows in
the host country and in the neighboring countries in the short-run and long-run. These findings were
to the use of alternative spatial weighting matrices as well as the inclusion of additional controls in the
baseline specification. Also, a strategic complementarities in FDI inflows was found between the
sampled countries which suggest that an increase in FDI inflows in a host country is likely to boost
FDI inflows of its neighbours.
Joseph, Omodero and Omeonu (2019), examined the impact of tax revenue on economic growth of
Nigeria proxied as gross domestic product (GDP) from 2000-2017. The study employed Exploratory
and ex-post facto designs and secondary data sourced from Federal Inland Revenue Services (FIRS),
UNCTAD, FDI/MNE database, World Bank Report, United Nations Development Programme
(UNDP) reports, CBN statistical bulletin. Ordinary Least Squares (OLS) regression technique was
adopted to test the hypotheses of the study. The result revealed that tax revenue has significant impact
on GDP in Nigeria with R-squared showing that about 87% variations in GDP can be attributed to tax
revenue, while the remaining 23% variations in GDP are caused by other factors not included in this
model.
Olaniyi, Ajayi and Oyedokun (2018), investigated the impact of company income tax incentives,
petroleum profit tax incentives, value added tax incentives, and custom and excise duties incentives
on inflow of foreign direct investment into the country from 1994 to 2016. This study adopted ex-post
facto research design, while multiple regression and correlation methods were used to analyze the
secondary data obtained from Central Bank of Nigeria database. The study revealed that custom and

148
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024

excise duties and value added tax incentives had significant effects (Coef = -2.096 and 4.247, p-
values=0.0233, 0.0125) respectively on foreign direct investment in the country, while companies
income tax and petroleum profit tax incentives showed insignificant impact (Coeff = -1.514 and 2.749
percent; p-values=0.1510, 0.7375) respectively on foreign direct investment in Nigeria. The study
concluded that tax incentive policy is a good driver of foreign direct investment into Nigerian
economy.
Ugwu (2018), evaluated the contribution of tax incentives towards FDI inflow into Nigeria, Ghana
and South Africa as well as the effect of such FDI inflows on those countries’ exports after their
adoption of IFRS for the period 1999-2015. Secondary data were collected and analyzed using
descriptive and inferential statistics. Findings revealed a positive association between tax incentives
and FDI and that FDI had no significant effect on the exports of Nigeria, Ghana and South Africa.
There was also, no significant difference in the effect of FDI on exports of all the countries of study in
their pre and post-IFRS adoption periods. This implied that the more corporate tax rate is reduced, as
well as increase in other tax incentives, the more FDI inflow into those countries and when significant
level of FDI inflow have been achieved, the effect on export would become significant.
Tapang, Onodi and Amariahu (2018), focused on the effect of tax incentives on foreign direct
investment in the petroleum industry in Nigeria. Secondary data were collected and analyzed using
regression analysis with the aid of STATA 13. The findings revealed that tax incentives proxy by
investment tax allowance, non-productive rent, capital allowance has a significant effect on foreign
direct investment. Based on the findings it is concluded that firms’ enjoying tax incentives will
generate more employment opportunities than firms in highly taxed regions. Conducive investment
climate is a strong requirement for the flow of sustainable physical investment in an economy.
Kiburi, Mirie, Okiro and Ruigu (2017), established the relationship between tax burden and FDI
inflows. Taxation components such as tax system, tax types, tax rates, tax base, tax structures affected
the amount of tax revenues collected hence the tax burden. Therefore, tax burden was represented by
itself and taxation components in this study. The research found literature had two divergent
relationships between tax burden and FDI inflows: negative and none. However, the relationships
largely depended on the taxation components and country or economic region under study. The
research findings demonstrated that world over there was no universal consensus on the relationship
between tax burden and FDI inflows. Therefore, tax competition theory, which proposes that there is
inverse relationship between tax burden and FDI inflows might not be applicable universally.
Thuita (2017), investigated influence of tax incentives in attracting Foreign Direct Investments in
Export Processing Zones (EPZ). A sample size of 72 employees of the firms operating under EPZs
was selected for the study using stratified method for the firms and purposive method for the
respondents. The study used descriptive survey design based on self-administered questionnaires to
solicit information from sampled senior staff of Export Processing Zones firms. The study found that
the use of tax holiday greatly influenced the attraction and retention of Foreign Direct Investments.
Arguably, the manufacturing sector seemed greatly favored by the tax incentives compared to other
sectors due to extended capital allowances. The research concluded that tax incentives should be
enhanced towards boosting the growth and expansion of the foreign direct investment inflows and that
the government should be willing to extend the tax holiday beyond ten years for the firms depending
on capital injected on long term basis.

3. METHODOLOGY
Research Design
The study applied the ex-post facto design. This implies that the event to be investigated had already
taken place. Therefore, the data to be used are already in existence. This type of design is often
utilized when it is not possible to control the experience, exposure, or influences which may affect
participants.
Nature and Sources of Data
Basically, the annual secondary time series data used for the study were sourced from various sources
like Central bank of Nigeria (CBN) Statistical Bulletin vol. 30, 2019, National Bureau of Statistics
(various issues) and Federal Inland Revenue Service (FIRS).

149
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024

Model Specification
The empirical model adopted for this study was based on the study of Edo et al. (2020) as specified
below:
…….Eqn.
(3.1)
Where,
FDI = foreign direct investments
CIT = company income tax
VAT = value added tax
TET = tertiary education tax
EXRT = exchange rate
INFL = inflation
GDPGR = gross domestic product growth rate
Eqn. 3.1 above will be modified to suit the objectives of this study by excluding TET, EXRT and
INFL. These variables were dropped because they are not components of taxation while TET was
replaced with Personal Income Tax (PIT) which represents a component of tax on peoples’ periodic
income. The modified model is as expressed in Eqn. (3.2) below:
……………………..……………….Eqn. (3.2)
Where,
FDI, CIT and VAT remain as explained in Eqn. 3.1
PIT = personal income tax
= constant
= coefficients
= error term
Description of Model Variables
The variables used for the study were described as follows:
Dependent variable:
Foreign direct investments (FDI): Foreign direct investment (FDI) entails the act of foreign
investors moving their assets into another country where they have control over the management of
assets and profits. These assets when moved into Nigeria by foreign investors or multi-national
companies are termed FDI inflows. Hence, the sum of equity capital, reinvestment of earnings, long
term and short term capital flow from foreigners constitute FDI inflows in Nigeria.
Independent variables:
Company income tax (CIT): Company’s income tax is levied on the profits made by corporate
organizations operating in Nigeria. Ceteris paribus, higher CIT discourages foreign firms from
establishing subsidiaries in Nigeria.
Personal income tax (PIT): PIT is a tax imposed on individuals in respect of the income or profits
earned by them. Income tax generally is computed as the product of a tax rate times the taxable
income
Value added tax (VAT): This is a type of consumption tax that is placed on a product whenever
value is added at a stage of production and at final sale. The collection of value-added tax (VAT) in
Nigeria is regulated by Value-added tax Act, 1993.
Technique of Data Analysis
This study applied the Ordinary least squares (OLS) for its analysis. OLS is a method for estimating
the unknown parameters in a linear regression model. A regression model describes the nature of the
relationship between variables by expressing the relationship in a mathematical form. In other words,
regression analysis provides an estimated equation which expresses the functional relationship
between the relevant variables. Using this equation, one variable (dependent variable) is predicted
given the values of the other variables. Thus, this study used the multiple regression model, which
involves one dependent variable and two or more independent variables.

150
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024

4. DATA PRESENTATION AND ANALYSIS

Presentation of Data
In the course of this study, time series data were collated for the model variables in a bid to conduct
an empirical analysis. The data were presented in Table 4.1 below:
Table 4.1: Annual time series data used for the analysis
Foreign direct Company’s income Personal income tax Value added tax
investments (FDI) tax (CIT) (PIT) (VAT)
YEAR ₦’billion ₦’billion ₦’billion ₦’billion
2000 115.95 239.45 30.83 28.73
2001 132.43 438.70 41.03 31.93
2002 225.22 321.38 53.26 37.81
2003 258.39 241.69 60.27 39.65
2004 248.22 351.30 66.58 47.12
2005 39.35 519.50 92.8 59.96
2006 80.10 552.39 126.07 100.79
2007 177.71 759.32 90.62 133.96
2008 339.98 960.89 249.77 240.39
2009 616.01 1,152.80 369.27 298.61
2010 1,881.18 883.87 423.22 308.45
2011 1,979.57 918.55 353.72 318.00
2012 2,051.32 874.83 662.59 347.69
2013 2,137.54 1,108.39 597.28 389.53
2014 2,229.51 783.12 796.98 388.85
2015 2,285.33 818.37 716.75 381.27
2016 2,360.27 634.80 1,023.24 397.06
2017 2,455.19 973.02 818.55 372.93
2018 2,627.99 1231.23 1,546.99 533.74
2019 2,716.45 1086.45 1,093.23 564.35
2020 1,045.27 792.88 598.18 297.64
Source: Central Bank of Nigeria (CBN) Statistical Bulletin, vol. 30, 2019 and Quarterly Publications of
National Bureau of Statistics, 2020 and Federal Inland Revenue Services (FIRS).

Data Analysis
Regression Analysis
The results of the multiple regression analysis carried out to establish the effect of taxation on FDI
flows to Nigeria have been presented in Table 4.2 below:
Table 4.2: Regression Results
Variable Coefficient Std. Error t-Statistic Prob.

CIT -1.618662 0.556388 -2.909231 0.0098

PIT -0.266331 0.548418 -0.485636 0.6334
VAT 8.704130 1.876894 4.637518 0.0002
C 364.0033 222.7321 1.634265 0.1206
R-squared 0.911170 Mean dependent var 1238.237
Adjusted R-squared 0.895494 S.D. dependent var 1047.656
S.E. of regression 338.6792 Akaike info criterion 14.65763
Sum squared resid 1949961. Schwarz criterion 14.85658
Log likelihood -149.9051 Hannan-Quinn criter. 14.70081
F-statistic 58.12574 Durbin-Watson stat 1.910087
Prob(F-statistic) 0.000000
Source: Author’s computations using EViews 10.0

151
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024

Table 4.2 succinctly shows the effect of different components of taxation on FDI flows to Nigeria.
The analysis was carried out by using FDI as the dependent variable and using Corporate Income Tax
(CIT), Personal Income Tax (PIT) and Value Added Tax (VAT). The result reveals that CIT and PIT
has a negative effect on FDI meaning that a unit increase in CIT and PIT resulted to approximately
1.62 unit and o.27 unit decrease in FDI flows to Nigeria. On the other hand, the positive coefficient of
VAT implied that a unit increase in value added tax caused approximately 8.70 unit increase FDI
flows to Nigeria.
From the result, the Adjusted R-squared (0.895494) indicates that approximately 89.6% of the total
variation in foreign direct investment (FDI) was as a result of variations in CIT, PIT and VAT in
Nigeria within the period covered in the study. This implies that there is goodness of fit and the model
is well specified. This was well-supported by the high and significant F-statistics value which shows
that the collective effect of the explanatory variables (CIT, PIT and VAT) on the dependent variable
(FDI) was significant which implies that the model was well-specified and stable. The Durbin-Watson
statistics of 1.910087 is approximately 2, implying that the regression model is free from
autocorrelation problems.

Test of Hypotheses
Null hypothesis (Ho): No significant effect of taxation on FDI
Alternative hypothesis (HA): Significant effect of taxation on FDI
Decision rule: If the probability value of the t-statistic is less than 0.05 (5%), the null hypothesis will
be rejected and the alternative hypothesis will be accepted. On the other hand, if the p-value of the t-
statistic is greater than 0.05 (5%) the null hypothesis will be accepted while the alternative is rejected.
Ho1: Company income tax has no significant effect on FDI flow to Nigeria
Following the p-value (0.0098) associated with the coefficient of CIT, it was concluded that the effect
of corporate income tax on FDI was significant. It then implies that the null hypothesis (HO 1) was
rejected and the alternative hypothesis (HA) was accepted that company income tax has a significant
effect on FDI flows to Nigeria.
Ho2: Personal income tax has no significant effect on FDI flow to Nigeria
With a p-value (0.6334), it was accepted that personal income tax (PIT) has a significant effect on
FDI flows to Nigeria. As such, the null hypothesis (HO2) was accepted and the alternative rejected.
Hence, the study concluded that PIT has no significant effect on FDI flows to Nigeria.
Ho3: Value added tax has no significant effect on FDI flow to Nigeria
The p-value (0.0002) shows that value added tax (VAT) exert significant effect on FDI flow to
Nigeria. It then implies that the alternative hypothesis was accepted while the null hypothesis (HO)
was rejected. As such, the study concluded that values added tax significantly affect FDI flow to
Nigeria.

DISCUSSION OF FINDINGS
The study found that CIT has negative and significant effect on FDI flows to Nigeria. This implies
that increase in company’s income tax discouraged FDI flows to Nigeria probably due to the fact that
higher CIT would reduce investment returns. This finding was in consonance with those of Edo,
Okafor and Justice (2020) but contradicts the findings of Oyeabo, Azubuike and Ebieri (2019), Boly,
Coulibaly and Kere (2019) probably due to time period geography covered by their respective
studies.
Again, it was found that personal income tax (PIT) had a negative and insignificant effect on FDI
flows to Nigeria. This implies that though PIT had a diminishing effect on FDI flows to Nigeria, this
negative effect was not large enough to reckon with. Studies such as Peters and Kiabel (2015);
Olaleye, Riro and Memba (2016) and Kiburi, Mirie, Okiro and Ruigu (2017) lent support to this
finding by stating that foreign direct investors do not possibly consider the effect of PIT since they are
often taxed on their corporate income.
Finally, it was found that value added tax (VAT) had a positive and significant effect on FDI flows to
Nigeria. This implies that a possible increase in VAT did discourage inflows of FDI to Nigeria. This
could be linked to the postulations of Joseph, Omodero and Omeonu (2019) that Nigeria often grant
tax relief to foreign investors so as to retain them within the country. There are exemptions to those

152
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024

foreign companies that VAT is chargeable and as a result if the objective of the tax incentive is to
drive in foreign direct investment, VAT incentive policy may not yield an expected result because the
study finds the effect VAT on FDI to be positive. This finding is in tandem with Anichebe (2019) but
against the findings of Edo, Okafor and Justice (2020) probably due to differences in time period
covered and methodology applied.

Summary of Findings
The study analyzed the effect of taxation on foreign direct investment (FDI) flows to Nigeria using
time series data from 2000 to 2020. Based on the data analysis, it was found that taxation exerts
significant effect on FDI flows to Nigeria. More specifically, the following findings were made:
1) Company income tax has a negative and significant effect on FDI flows to Nigeria which
implied that increase in CIT did not encourage FDI flows to Nigeria.
2) Personal income tax has a negative and significant effect on FDI flows to Nigeria which
means that a rise in PIT did not enhance FDI flows to Nigeria.
3) Value added tax has a positive and significant effect on FDI flows to Nigeria indicating that
rising VAT did not discourage inflows of FDI to Nigeria.

CONCLUSION
The study investigated the effect of taxation on foreign direct investments (FDI)in Nigeria covering
the period 2000 to 2020. It used ex post facto research design consequent upon the use of time series
data. Data were extracted from Central Bank of Nigeria statistical bulletin and various Federal Inland
Revenue Service reports and National Bureau of Statistics. Company income tax revenue, personal
income tax revenue and value added tax revenue were used as the independent variables while foreign
direct investment was used as the dependent variable. The study therefore used the regression analysis
to estimate relationship of the variables. The study established that corporate income tax and value
added tax significantly affect foreign direct investment in Nigeria. The study has implications for
various stakeholders such as the government, investors and researchers.

RECOMMENDATIONS
Based on the findings and conclusion of this study, the following policy recommendations were
proffered from the findings of this study:
1) Policy makers on corporate tax laws should articulate ways to provide incentives to attract
foreign direct investments. Revenues derived from taxes should be used to create critical
infrastructure specifically in the productive sectors for investors to have reduction in overhead
costs.
2) Government should use revenue personal income taxes to provide basic infrastructures such
as stable power supply, good road networks etc. This would lower the cost of doing business
in the country thereby positively impacting business investment. This will lead to higher
foreign direct investment inflows in Nigeria.
3) The strategy of Government will be to continue with the current VAT rate of 7.5% or less to
encourage investments, increase tax compliance and attract foreign investments into the
country.

REFERENCES
Adeniyi, A.R. (2012). The effect of tax administration on revenue generation in Enugu State. (A case
study of the State Board of Internal Revenue Enugu State). Department of Accountancy,
Caritas University Amorji – Nike Enugu State.
Adegbite, T.A. & Akande, S.S. (2017).The impact of corporate income tax on investment in Nigeria.
World Wide Journal of Multidisciplinary Research and Development, 3(3), 60-64.
Adepeju, S.A. (2012). The impact of tax incentives on foreign direct investment in the oil and gas
sector in Nigeria. Journal of Business and Management, 6(1), 1-15.
Anichebe, A.S. (2019). Impact of tax revenue on foreign direct investment in Nigeria. Journal of
Business and Management, 21(7), 50-56.

153
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024

Ayuba, A.J. (2014). Impact of non-oil tax revenue on economic growth: the Nigerian perspective.
International Journal of Finance and Accounting, 3(5), 303-309.
Boly, A., Coulibaly, S. & Kere, E. (2019). Tax policy, foreign direct investment and spillover effects.
African Development Bank Group, Working Paper, no. 310.
Coase, R. H. (1937).The nature of the firm. Economica, 3(4), 386 – 405.
Dunning, J. (1993). Foreign direct investment and governments: Catalysts for economic
restructuring. London: Routledge.
Dunning, J.H. (2005). The eclectic (OLI) paradigm of international production: past, present and
future. International Journal of the Economics of Business, 8(2), 173-190.
Edo, O., Okafor, O. & Justice, A. (2020). Corporate taxes and foreign direct investments: an impact
analysis. Public Policy and Administration Research, 10(9), 51-62.
Garba, S. L. (2014). Tax revenue and economic growth. Thesis Submitted to Postgraduate Studies,
Ahmadu Bello University, Zaria.
Glaeser, E.L. (2001). The Economics of Location-Based Tax Incentives Retrieved
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=289834
Joseph, F.I., Omodero, C.O. & Omeonu, O.M. (2019). The role of tax revenue and foreign direct
investment in promoting economic progress in Nigeria. Annals of SpiruHaret University.
Kiburi, W., Mirie, M., Okiro, K. & Ruigu, G. (2017). The relationship between tax burden and foreign
direct investment inflows: a review of empirical literature. European Journal of Accounting,
Auditing and Finance Research,5(5), 67-77.
Mason, R. (2006). A theory of Tax Discrimination, Jean Monnet Working Paper,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=289834
Nzotta, S. (2007). Tax evasion problems in Nigeria: a critique. Nigeria Account, 40(2), 40-43.
Odusola, I. I. (2006). Personal income tax in Nigeria. Enugu: Ochumba Printing and Publishing
Company
Okoh, J.I., Onyekwelu, U.L. & Iyidiobi, F.C. (2016). Effect of petroleum profit tax on economic
growth in Nigeria. International Journal of Business and Management Review, 5(1), 47-53.
Olaleye, M.O., Riro, G.K. & Memba, F.S. (2016). Effect of reduced company income tax incentives
on foreign direct investment in listed Nigerian manufacturing companies. European Journal
of Business, Economics and Accountancy, 4(1), 39-54.
Olaniyi, T.A., Ajayi, R.O. & Oyedokun, G.E. (2019). Tax policy incentives and foreign direct
investment in Nigeria. Fountain University Osogbo Journal of Management, 3(3), 59 – 71.
Onyeabo, P., Azubuike, J. &Ebieri, J. (2019). Corporate taxes on foreign direct investment in Nigeria.
International Accounting and Taxation Research Group, 3(3), 58-68.
Peters, G.T. & Kiabel, B.D. (2015). Tax incentives and foreign direct investment in Nigeria. IOSR
Journal of Economics and Finance, 6(5), 10-20.
Romer, D. (2012). Advanced Macroeconomics. fourth ed. New York: McGraw-Hill.
Someah-Addae, E. (2015). The impact of tax, economic growth, grant and inflation on foreign direct
investment in Ghana. A Thesis Submitted to the School of Business, Kwame Nkrumah
University of Science and Technology, Kumasi, Ghana.
Tapang, H.T., Onodi, E.O. & Amaraihu, H.A. (2018). Effect of tax incentives on foreign direct
investment in the petroleum industry in Nigeria. International Journal of Economics and
Business Management, 4(7), 30-39.
Thuita, G.W. (2017). An investigation of the effect of tax incentives on the FDIs: A case of EPZs in
Athi River Kenya. Journal of Accounting, Finance and Auditing Studies, 3(1):17-36.
Todaro, M. & Smith, C.(2012). Economic Development. 11th ed. Boston: Addison-Wesley.
Uguru, L.C. (2016). On the tax implications of capital flight: evidence from Nigeria. Journal of
Research in Economics and International Finance, 5(1), 1-7.
Ugwu, J.I. (2018). Tax incentives and foreign direct investment (FDI): implication for export
promotion in Nigeria, Ghana and South Africa, post IFRS adoption. International Journal in
Management and Social Science, 6(9), 31-52.

154
 Nwankpa & Ufomadu ….. Int. J. Innov. Finance and Econs Res. 12(1):143-155, 2024

APPENDIX
Regression Results
Dependent Variable: FDI
Method: Least Squares
Date: 06/07/23 Time: 09:32
Sample: 2000 2020
Included observations: 21

Variable Coefficient Std. Error t-Statistic Prob.

CIT -1.618662 0.556388 -2.909231 0.0098

PIT -0.266331 0.548418 -0.485636 0.6334
VAT 8.704130 1.876894 4.637518 0.0002
C 364.0033 222.7321 1.634265 0.1206

R-squared 0.911170 Mean dependent var 1238.237

Adjusted R-squared 0.895494 S.D. dependent var 1047.656
S.E. of regression 338.6792 Akaike info criterion 14.65763
Sum squared resid 1949961. Schwarz criterion 14.85658
Log likelihood -149.9051 Hannan-Quinn criter. 14.70081
F-statistic 58.12574 Durbin-Watson stat 1.910087
Prob(F-statistic) 0.000000

155