THE EFFECT OF TAXES ON DIVIDED POLICY OF BANKS IN NIGERIA(A STUDY OF FIRST BANK OF NIGERIA PLC ENUGU)
ABSTRACT
This research work is concerned with the Effect of Taxes on Dividend Policy of Banks in Nigeria. Nigeria banks operate in an environment that is rarely the same with their foreign counter – parts. Thus the purpose of this study is to reveal how propounded dividend policy models could apply to banks in Nigeria and the impact of taxes on dividend payout in the banks. The research methodology used in this research was the quasi-experimental design, while the sampling procedure adopted was basically the simple random sampling method. The analysis of data in this research was based on certain statistical tools including the chi-square (X²).The findings showed that taxes have a great influence on the dividend pay-out of companies. It also showed that shareholders are normally concerned about the payout ratio of their companies. It was therefore recommended that companies should not neglect the payment of taxes as this would lead to enhanced business environment and profitability in the long –run. Government on its own part should also make policies that would not lead to multiple taxation so that these indigenous banks can grow. This growth will lead to economic stability.
CHAPTER ONE
INTRODUCTION
1.1 OVERVIEW OF STUDY
           Tax is a compulsory levy imposed by government on the incomes of individuals and corporate organization for the performance of its duties of social welfare and security. In other words, it is a levy imposed by the government against the income, profit or wealth of the individuals, partnership and corporate organization. (Ochiogu 2001:1). For government it is dispensable for it to provide all the important amenities which are needed to make life worth living. Some of the services performed by government include: maintenance of law and order, defense, basic education, health services, pipe-borne water, road construction etc. If any of these services is not provided, our lives and economy (i.e. business environment) would become worse off. Therefore the government tries to generate the funds to carry out these activities through taxation.
Every corporate organization is expected as a requirement to pay taxes as one of its corporate social responsibilities. Dividend policy on the other hand forms a major financial decision often faced by management of corporate organizations in their pursuit of maximizing the value of their organization. Dividend policy allocates the earnings between payment to shareholders and reinvestment in the firm. A lot of controversies regarding taxes ad dividend policy have attracted many academic interests. Some scholars are of the opinion that taxes affect organizational corporate dividend policy. If this speculation is true, changes in corporate dividend policy would be expected whenever the government changes its income tax policy (Wu 1996). However, this is not the case in the banking business. Linter (1996:12) asserted that the major determinants of dividend policy are the anticipated future earning and the pattern of past dividend.
The banking sector is of interest to this research because of the structure of its dividends. Dividends are usually paid to owners or shareholders of a business at specific periods. This depends largely on the declared earning of the firm and the recommendation of the directors. Therefore, if no profit is made, dividends will not be declared. But when profits are made, the company is obligated to pay corporate tax and other statutory taxes to the government. The taxes no doubt reduces the profit available for disposal by the organisations either to be retained or distributed as dividends to shareholders of the company.
For many years, several postulations and assumptions have been made regarding whether such taxes paid by organisations actually affects firms pattern of dividend policy. Dividend policy is the trade-off between retaining, earning and paying out cash or issuing new shares to shareholders tax liability, it does not, in general alter the taxes that must be paid regardless of whether the company distributes o retain its earnings (Brealey, Myers and Marcus 1999).
Based on this assumptions, regarding dividend policy, this study is directed at evaluating the effects of taxes on the dividend policy of banking in Nigeria, focusing in three banks in the financial industry.
1.2Â Â Â Â Â STATEMENT OF THE PROBLEM
Problems are inevitable in achieving an end. The problem of whether or not there is any fundamental impact of taxes on dividend payout (policy) spurred this research study. This is of considerable importance not only to management of those financial institutions but also to investors planning portfolio trying to develop a flow of investments.
Again, there is the problem associated with the fact that empirical studies on the effect of taxes on dividend policy of banks have not reached a definite conclusion. For example Masculis and Trueman (1988:10) posited that taxes affect organisational corporate dividend pay-out. Linter (1958:7) on the other hand, is of the opinion that the major determinants of dividend policy are the anticipated level of future earnings and the pattern of past dividends.
Thus the problem of a clear cut empirical analysis and findings on the effects of taxes on the dividend policy of bank stimulated this research.
1.3Â Â Â Â Â PURPOSE OF THE STUDY
Most literature and empirical works on dividend policy are largely based on foreign models, which may not be applicable in Nigerian context. Obviously, Nigerian banks operate in an environment that is rarely the same with that of their foreign counterparts. Thus the purpose of this study is to reveal how propounded dividend policy models could apply to banks in Nigeria and the impact of taxes on dividend pay-out (policy) in the banks.
Other objectives of this study are:
- To identify the optional pay-out ratio adopted by banks to enhance efficiency.
- To identify the reasons for adopting the identify optimal pay-out ratio.
- To ascertain the major factors that are considered in determining the optimal dividend pay-out ratio for a firm’s dividend policy.
- To determine how the optimal pay-out ratio so chosen is affected by taxation.
- To identify the problems associated with taxation and their impact on dividend policy.
