1.1 Introduction
Taxation is the process by which governments impose financial charges or levies on individuals, businesses, or other entities to generate revenue for public expenditure (Musgrave and Musgrave, 1989). In Nigeria, taxation is administered at multiple levels of government, including federal, state, and local authorities. Multiple taxation refers to the situation where the same taxpayer is subjected to overlapping tax obligations on the same income, profit, or business activity by more than one tax authority (Adewuyi and Adebisi, 2021). Foreign Direct Investment (FDI) is defined as an investment made by a firm or individual in one country into business interests located in another country, often involving not just capital but also technology transfer, managerial know-how, and market expansion (Dunning, 1993).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are significance of the study, scope of work, research hypothesis and questions, limitation of the study and definition of terms.
1.2 Background of Study
Multiple taxation is a tax administration challenge where a taxpayer is obligated to pay more than one tax on the same income, profit or business activity to different tax authorities without clear harmonization of tax laws and coordination of tax bases. According to Akinbode (2018), multiple taxation arises when federal, state and local government authorities in Nigeria impose overlapping tax liabilities on enterprises for the same taxable event, leading to duplication of tax responsibilities. In an era where global competition for capital is intense, scholars and policymakers have continued to argue that Nigeria's success in attracting foreign direct investment (FDI) is significantly influenced by the structure and administration of its tax regime.
Foreign direct investment is an investment by a foreign entity in productive activities of an economy beyond mere portfolio investment. Dunning's Eclectic Paradigm, according to Dunning (1998), suggests that FDI is guided by ownership, location and internalization advantages, but investment decisions are also informed by policy, regulatory and fiscal environments in host countries. Nigeria's vast market, abundant natural resources and strategic location make it an attractive potential host for FDI, yet reported that FDI inflows into Nigeria have been inconsistent, volatile and, in many periods, lower than the potential that the economy theoretically commands (World Bank, 2020). Scholars have asserted that one structural reason for this pattern is the effect of multiple taxation, which increases the cost of doing business relative to alternative destinations with more streamlined fiscal regulations.
Multiple taxation affects the business environment by increasing compliance costs for investors. According to Okoye and Eze (2019), when enterprises are required to process numerous tax registrations and satisfy similar tax obligations across various government levels, they incur higher administrative and financial costs. Furthermore, Ajayi (2017) reported that multiple taxation contributes to regulatory uncertainty because overlapping tax claims by different government agencies create confusion about legal tax obligations and expose businesses to the risk of penalties and litigations.
Economic growth is the sustained increase in a country's output of goods and services over time, typically measured by changes in Gross Domestic Product (GDP). According to Todaro and Smith (2015), economic growth is driven by capital accumulation, technological advancement and efficient resource allocation. In Nigeria's case, foreign direct investment is often viewed as a key driver of economic growth because it brings not only capital inflows but also technology transfer, managerial expertise and expanded market linkages. However, scholars have contended that the effectiveness of FDI in promoting growth is influenced by the host country's policy environment.
Okafor (2020) affirmed that fiscal barriers, such as multiple taxation, reduce the net benefits of investment by diminishing returns and lowering the attractiveness of the host economy. According to Olowo (2018), this structure was intended to enhance grassroots participation in revenue generation and promote development efforts at subnational levels. However, the reality has often been fragmented tax administration and policy misalignment, resulting in multiple taxation practices. For instance, the same business may be required to pay a business premises levy at the local government level, an operating levy at the state level and an industrial training fund contribution at the federal level without a synchronized tax schedule or effective tax credit mechanisms.
Nwankwo (2021) articulated that multiple taxation reduces aggregate investment and entrepreneurship because potential investors divert capital to economies with less fiscal friction. Nwankwo affirmed that lower investment levels, in turn, constrain economic growth by reducing capital formation, job creation and productivity enhancement. Empirical studies have documented that countries with more predictable and harmonized tax systems attract higher levels of FDI and experience more robust economic growth trajectories compared with countries where multiple overlapping taxes and bureaucratic barriers are pervasive. In the context of sub-Saharan Africa, Nigeria has often been cited as a case where policy inconsistency undermines investment potential (UNECA, 2021). This study is set against the backdrop of Nigeria's complex and overlapping tax system, which imposes multiple layers of taxation on businesses, creating uncertainty, increasing operational costs, and discouraging foreign direct investment. The resulting fiscal burden limits profitability, reduces reinvestment, and constrains the potential contribution of FDI to economic growth.
1.3 Statement of Problems
Investigation revealed that multiple taxation is a persistent challenge in the Nigerian business environment because different tiers of government impose overlapping tax obligations on the same taxpayers for the same tax base. The multiplicity of tax requirements is isomorphic to increased compliance cost, loss of investor confidence and the risk of double taxation that ultimately weakens Nigeria's ability to attract and retain foreign capital inflows (Adewuyi and Adebisi, 2021).
Additionally, Foreign Direct Investment inflows are a critical driver of economic growth in developing countries due to their ability to bring in new technology, create jobs and improve productivity. In Nigeria, however, FDI inflows have been inconsistent over recent decades despite the country's large market potential and natural resources endowment (Odediran, 2019).
Furthermore, the Nigerian government argues that revenue from multiple taxation is necessary to fund public services and local development projects, particularly at the subnational government level. The result is a paradox where efforts to raise revenue through multiple taxes reduce the broader tax yield by discouraging formal economic activity and making Nigeria less attractive relative to other destinations for international investment (Okafor and Nwokolo, 2020).
1.4 Aim and Objectives of Study
The aim of this study is to evaluate the effect of multiple taxation on foreign direct investment and its implications for economic growth in Nigeria.
The specific objectives of the study are to:
- Examine how multiple taxation influences the decision-making of foreign investors in Nigeria.
- Assess the impact of multiple taxation on the operational costs and profitability of foreign businesses.
- Evaluate the relationship between FDI inflows and economic growth in the context of Nigeria's tax environment.
- Identify the specific tax-related barriers within the existing system that affect foreign investment.
- Provide recommendations for improving tax administration and policy to enhance Nigeria's investment climate.
1.5 Research Questions
Based on the stated objectives, the study seeks to answer the following questions:
- How does multiple taxation influence foreign investors' decision-making in Nigeria?
- To what extent does multiple taxation affect operational costs and profitability for foreign businesses?
- What is the relationship between FDI inflows and economic growth under Nigeria's current tax system?
- What specific tax-related barriers in the existing system hinder foreign investment?
- What measures can be implemented to improve tax administration and enhance Nigeria's investment climate?
1.6 Research Hypotheses
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: Multiple taxation does not have a significant effect on foreign direct investment and economic growth in Nigeria.
- H1: Multiple taxation has a significant effect on foreign direct investment and economic growth in Nigeria.
Hypothesis Two
- H0: Multiple taxation does not increase operational costs for foreign businesses in Nigeria.
- H1: Multiple taxation increases operational costs for foreign businesses in Nigeria.
Hypothesis Three
- H0: There is no positive relationship between streamlined tax policies and increased foreign direct investment inflows.
- H1: There is a positive relationship between streamlined tax policies and increased foreign direct investment inflows.
1.7 Significance of Study
It is believed that at the completion of the study, the outcome will support policymakers in designing harmonized tax policies that encourage investment while maintaining government revenue. The study will also provide clarity on the challenges posed by multiple taxation and strategies to manage fiscal risks.
Furthermore, the research will assist government agencies in evaluating the effectiveness of current tax administration practices. In addition, the study will inform business strategies by identifying fiscal challenges and providing ways to mitigate tax-related operational burdens.
Lastly, the outcome of this research will serve as a platform for policy advocacy, promoting dialogue between government, private sector actors, and development institutions.
1.8 Scope of Study
The scope of the research is focused on the effect of multiple taxation on foreign direct investment and economic growth in Nigeria, using multinational companies operating in Lagos State as a case study.
1.9 Limitations of the Study
During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
- Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.
1.10 Definition of Terms
Multiple Taxation:
Multiple taxation is is the imposition of overlapping tax obligations on the same taxpayer for the same taxable base by more than one government authority. According to Adewuyi and Adebisi (2021), multiple taxation increases business costs, discourages investment, and creates uncertainty in fiscal administration.
Foreign Direct Investment (FDI):
FDI refers to an investment made by a firm or individual in one country into business interests located in another country, often involving not only capital but also managerial expertise and technology transfer (Dunning, 1998).
Economic Growth:
Economic growth is is the sustained increase in a country's productive capacity, typically measured by the rise in Gross Domestic Product (GDP) and improvements in living standards (Todaro & Smith, 2015).
Tax Compliance:
Tax compliance is is the adherence to tax laws and regulations by individuals and businesses, including accurate reporting and timely payment of taxes (Okoye & Eze, 2019).
Investment Climate:
Investment climate refers to the set of economic, regulatory, and institutional factors that influence the attractiveness of a country or region for investment (Nwankwo, 2021).
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