EFFECT OF TAX PLANNING AND MANAGEMENT ON CORPORATE FINANCIAL ORGANIZATION IN NIGERIA
CASE STUDY OF FIRST BANK PLC, ILORIN BRANCH, KWARA STATE)
- BACKGROUND TO THE STUDY
The concept of taxation has been a concern of global significance as it affects every economy irrespective of national differences (Oboh et al., 2014). Within the context of Africa, tax, a concept as old as mankind can be described as an amount, effort, contribution or service rendered either in kind (goat, cow, farm produce, clearing of grass etc.) or monetary value contributed into a common purse for the running of the society.
Since the administration of a publicly held corporation is an agency relationship between the shareholders (principals) and management (agents), necessity is laid on management to act in utmost good faith and discharge their responsibilities diligently in a manner the owners (shareholders) would have done so as to enhance the market value of the firm. Hence, all material matters regarding the operations of the firm including financial performance and position should be disclosed timely and accurately by management. To this end, there is need for effective monitoring of management by shareholders in order to promote fairness, transparency and accountability.
A review of extant previous literatures, reveal that the utmost interest of shareholders is wealth maximization, and one reliable means of achieving this, is through cost minimization. Okoye and Akenbor (2010) claimed that one of the costs of doing business and therefore constitutes a serious barrier to wealth maximization is taxation. In order to minimize the cost of taxation, tax planning and management becomes imperative for management of corporate organization.
Tax planning is the analysis of a financial situation or plan from a tax perspective. The purpose of tax planning is to ensure tax efficiency, with the elements of the financial plan working together in the most tax-efficient manner possible. Tax planning is an important part of a financial plan, as reducing tax liability and maximizing eligibility to contribute to retirement plans are both crucial for success. It encompasses many different considerations, including the timing of income, purchases and other expenditures; the selection of investments and types of retirement plans; and a person’s filing status and common deductions.
According to Kiabel and Nwikpasi (2001), tax planning and management is the planning and operation of business activities within the context of existing legislation in such a way that the business realizes the optimal or best tax position while achieving its set goals. In other words, tax planning include not only strategies aimed at the minimization of tax liability but also considers the cash flow effect on the business in terms of when it is most advantageous for a business to settle its tax liability without incurring any penalty. In a nutshell, tax planning is an act of transferring value from the state to the firm.
Tax planning is indispensable if management hopes to minimize the tax cost of operating a business. It forces management to utilize and exploit the available resources as best as possible. Corporate tax planning focuses on the form, nature and size of business, capital mix, choice of accounting period, market structure, investment policy and dividend policy.
Financial institutions and banks in particular, are well-placed to be solicited in aggressive tax planning. They have access to the significant amounts of capital implied, in some cases for only a very limited period of time, in large-scale arrangements. Their network of entities across multiple jurisdictions provides the conduit for these funds. Their ability to tailor often extremely complex financial securities can respond to any conceivable tax planning demand.
On one hand, tax planning increases corporate profitability and on the other hand, the payment of appropriate taxes is considered to be an important factor of social responsibility (Sartori, 2009). Shareholders’ interest in corporate social responsibility has extremely increased in recent times. Paying a fair amount of taxes infers ethical behaviour that companies are generally required to present to the public. Therefore any act of minimizing tax liability is unethical behaviour, and is not in the interest of shareholders and other stakeholders, more reason why corporate organization needs extreme measures when planning the payment of tax to the relevant authority.
1.2. STATEMENT OF PROBLEM
Tax reform today has been moving towards considering new legislation, such as whole new taxes or reliefs, rather than patching of existing taxes by either increasing or decreasing the amount of taxation. This breaks down into the fact that there are ongoing considerations of widening the tax base. Nigeria is no exception to this and there are ongoing considerations into taxing the financial sector and informal sector, the non-financial sector as well as the taxation of all informal tax payers of small amounts.
A question that appears to generate surprisingly little debate in Nigeria corporate world today is the scope for legally mitigating taxes payable by individuals and corporate entities. Tax planning is bound to gain increasing significance with the ever greater aggressiveness and sophistication of the country Federal Inland Revenue Service and other tax collecting bodies. The trend of increased aggressiveness and sophistication in tools and methods is occurring against a backdrop of a public policy of domestic sources being the primary sources of revenues for budgetary purposes.
Investing in mutual funds, stocks and bonds, purchasing real estate, and saving for retirement or college are all smart moves for consumers who want to minimize tax obligations over the long haul. Most individuals spend a lifetime earning as much money as possible, but few are aware of the legal means of protecting assets and keeping the government from dipping into savings. Thousands of taxpayers fail to take more than standard deductions simply because of a lack of knowledge about federal and state incentives, though when compared to corporate financial organizations some of this tax planning and management techniques violates the rules of good corporate governance, though it increases the market value of banks.
Although previous empirical studies have established that tax planning has a significant influence on corporate governance by increasing the value of the firm, it should be noted that tax planning has its associated costs. Such costs include administrative costs for lawyers, accountants and consultants in designing the strategies; and also the risk of legal challenge and penalty. Most prior studies related to this study failed to take into account the whole dimension of the costs-benefits analysis.