Financial Policies and Corporate Income Tax Administration in Nigeria

Abstract

Corporate taxation assumes a pivotal role in all economies, as it constitutes a substantial source of revenue for governmental agencies tasked with fulfilling social obligations. Nonetheless, modifications in financial policies and the unpredictability of macroeconomic factors result in a significant decline in this vital revenue source for the government. This study examines the financial determinants influencing corporate tax revenue in Nigeria from 1990 to 2022. In this analysis, the broad money supply, access to credit by the private sector, borrowing costs, and exchange rates are utilized as independent variables, while corporate tax revenue serves as the dependent variable. Data pertinent to this investigation on corporate income tax are sourced from the Federal Inland Revenue Service, whereas information regarding the broad money supply and credit extended to the private sector is acquired from the Central Bank of Nigeria. Additionally, statistical data on interest and exchange rates are gathered from the World Bank. This investigation applies autoregressive distributed lag and error correction models, acknowledging the existence of a long-term relationship within the series. The significant findings indicate that the broad money supply positively and significantly affects corporate income tax in the short run, but this effect diminishes to a positively insignificant level in the long run. Additionally, the interest rate is shown to have a significant harmful effect on corporate tax income in the short run, while it becomes negatively insignificant over the long term. Other financial policy factors do not significantly account for changes in corporate income tax. This study suggests the formulation of financial policies that are advantageous to corporate organizations, particularly through the reduction in borrowing costs, to facilitate business growth and enhance the government’s ability to collect substantial corporate tax revenue. The originality of this research is apparent in its utilization of financial policy instruments to illustrate the effectiveness of financial guidelines on corporate tax receipts and to argue for particular amendments that are essential when these guidelines prove detrimental to business activities.