The Impact of Tax Incentives on Foreign Direct Investment in the Oil and Gas Sector in Nigeria.

Abstract

The government of oil-rich Nigeria strived to attract Foreign Direct Investment (FDI) through tax incentive, because of its acknowledged advantages as a tool for economic development.However, the trade-off between the sacrificed tax revenue and the expected gains from FDI are inconsistentas there is contentious evidence in the literature that tax incentive is actually the attraction for FDI. This study is aimed at filling this gap, therefore, it examines the impact of tax incentives on foreign direct investments in the oil and gas sector in Nigeria. This study investigates the determinant factors of FDI andanalyse whether or not some selected factors such as tax incentives, availability of natural resources, macro-economic stability, market size, openness to trade, infrastructural development and political riskhave an impact on FDI in the oil and gas sector. Data from a sample size of twenty-one years (21) from the Central Bank of Nigeria annual statistical bulletin and the United Nations Conference On Trade and Development(UNCTAD) reportswere analysed. Karl Pearson coefficient of correlation 'r' statistical method of analysiswas employed in analysing the data collected. The results of the analyses show that there is significant impact of tax incentives, availability of natural resources and openness to trade on FDI in the oil and gas sector in Nigeria. Also, there is no significant impact of market size, macro-economic stability, infrastructural developmentand political riskon FDI in the oil and gas sector in Nigeria.This result supports the trend of findings in similar studies in the literature. In view of these findings, the study recommends that in particular attention should be given to institute new regulations to encourage the type of FDI needed to support the economic objectives of vision 20-20-20, such as provision of needed infrastructure especially electricity. This is in order to improve economic growth and the inflow of FDI in Nigeria. I. Introduction 1.1 Background Oil-rich Nigeria has been hobbled by political instability, corruption, inadequate infrastructure, and poor macroeconomic management which have hindered economic development and growth. Government is interested for improvement in all of these areas. Therefore, in recent years Nigeria began pursuing economic reforms in order to meet its target of becoming the world " s top 20 economies by 2020. This has led to an interest in the Foreign Direct Investment (FDI) as a means of achieving economic growth. According to Nwankwo (2006), FDI creates employment and acts as a vehicle of technology transfer, provides superior skills and management techniques, facilitates local firm " s access to international markets and increases product diversity. Ayanwale (2007), stated that most countries strive to attract FDI because of its acknowledged advantages as a tool of economic development. This view is supported byNwankwo (2006) " s study on Nigeria which stated that FDI is an engine of economic growth and development in Africa where its need cannot be over emphasized. Nigeria joined the rest of the World in seeking FDI as evidenced by the formation of the New Partnership for Africa " s Development (NEPAD). In view of the NEPAD initiative, the government is working toward developing stronger public-private partnerships for roads, agriculture, and power through the attraction of FDI among other measures. A National Council on Privatisation was established, in addition the Nigerian Investment Promotion Council (NIPC), has been strengthened to serve as a one-stop office for clearing all the requirements for investment in Nigeria. This is through the promulgation of Nigerian Investments Promotion Commission Act cap n.117 (1995), LFN. Also attracting FDI through taxation policy in form of tax incentives is an avenue being adopted. Taxation is the bedrock of a Country to fulfill its responsibility and ensure its continuity. According to Modugu, Eragbe and Izedonmi (2012), taxation goes hand in hand with economic growth and lifeblood for governments to deliver essential services and to make long-term investments in public goods. However sometime, government waives taxes in exchange for certain gains. This is done in form of tax incentives. Therefore, as part of the efforts to provide an enabling environment that is conducive to the growth and development of industries and encouragement of FDI, the Federal government has developed a package of tax