Page 87 - CITN 2017 Journal

1. INTRODUCTION

Tax is the mandatory levy imposed by the government on the income of entities (either
natural person or artificial), transactions and properties for the purpose of running the
government and the overall development of the nation. In Nigeria, taxes are payable to the
Federal, State and Local Governments as specified by various government legislations,
which come in the form of Decrees and Acts of Parliament. Tax laws are the whole body of
enacted acts of legislation that provides a well-defined legal backing to the administration
of each tax type; for corporate bodies, Companies Income Tax Act (CITA) CAP C21 LFN,
2004 (commencement 1st Jan, 1958). This Act governs the tax matter as it relates to firms
in Nigeria and imposes tax of 30% (varied as the case may be based on fiscal policy
statement) on the profits of all corporate entities who are registered in Nigeria or derive
income from Nigeria, other than those engaged in petroleum operations that operate under
Petroleum Profits Tax Act (PPTA) CAP 13 LFN, 2004.

Within the tax laws are provisions or loopholes which the management of corporate bodies
can explore through adequate tax planning towards paying less tax thereby making fund
available for the use of the shareholders and in the long run enhancing the firm's value.
According to Osuegbu (2007), tax planning could be said to be the measures taken by a
taxpayer in order to arrange one's affairs in such a way as to reduce taxes while still acting
within the law. Tax laws are complex and cannot be said to be an all comers affair, hence,
for one to benefit from good tax planning there is the need for good managerial approach to
tax matters within the firm. This good managerial approach involves dexterity displays in
handling the company affairs vis a vis it's financial, business and operational activities.
These activities are the basic attributes that distinguish one firm from the other. It has been
established through previous studies that, there abounds a relationship between tax
planning and firm's characteristics such as the industry, firm size, firm leverage, asset mix,
political connections, and ownership structure in various countries (Desai & Dharmapala,
2006; Desai & Dharmapala, 2009b, Wang, 2010 & Lim, 2011).

Business executives, in recent times, have realized that taxation forms a major part of the
cost of doing business and therefore constitutes a serious barrier to wealth maximization.
In order to minimize the cost of taxation, tax planning becomes imperative. Since tax
planning refers to the procedures followed by a business to minimize or reduce tax
commitments and which do not conflict with the legal procedures in effect, exploring the
option of cost minimization through tax reduction is a viable option in the enhancement of
firm's value.

The literature on corporate tax planning has been growing gradually over the years as a
new facet to corporate firms' value indicators. Effective Tax Rate (ETR) which is ratio of
actual tax expenses incurred to operating profit of a firm is an indicator of tax planning.
When compared with the statutory tax rate as stipulated by the enabling Act; ETR is
expected to be lower. Reduction in ETR has been one of the ways corporate firm reduce tax
burden. In fact, many studies suggest that the financial directors of most quoted firms
consider the reduction of their firm's ETR as the main objective of their tax department.
The use of corporate ETR as a measure for tax planning as indicated in the previous study
by Minnick and Noga (2010) is in conformity with the Generally Accepted Accounting
Principles (GAAP). Consequently, firms, by reducing the effective tax rate, create value
for their shareholders. In time past, investors and analysts did not believe that a company
could sustainably out-perform the firm's Statutory Tax Rate (STR). Recent discovery by
researchers in the developed countries that the actual ETR can be less than the Statutory
Tax Rate has put other developing countries' researchers on an enquiry.

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