PRESBYTERIAN UNIVERSITY COLLEGE, GHANA

OKWAHU CAMPUS, ABETIFI.

DEPARTMENT OF BUSINESS ADMINISTRATION

(ACCOUNTING AND FINANCE OPTION)

THE IMPACT OF PERFORMANCE AND INVESTMENT ON

CORPORATE TAX

BY

ANIM ADADOWA JOSEPHINE

MAY, 2015

PRESBYTERIAN UNIVERSITY COLLEGE, GHANA

OKWAHU CAMPUS, ABETIFI.

DEPARTMENT OF BUSINESS ADMINISTRATION

(ACCOUNTING AND FINANCE OPTION)

THE IMPACT OF PERFORMANCE AND INVESTMENT ON

CORPORATE TAX

A DISSERTATION SUBMITTED IN PARTIAL FULFILMENT OF THE

AWARD OF BACHELOR OF SCIENCE IN BUSINESS

ADMINISTRATION

(ACCOUNTING AND FINANCE OPTION)

BY

ANIM ADADOWA JOSEPHINE

OK1678/11

MAY, 2015

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DECLARATION

I do declare that for the references to other people‟s work which have been cited, this work

submitted as a project to the department of Business Administration, Okwahu Campus of

the Presbyterian University College, Ghana, for the degree of Bachelor of Science in

Business Administration (Accounting and Finance) is the result of my own investigation and

has not been presented for any degree.

………………………………… ……………………....................

ANIM A JOSEPHINE MR. AGYEMANG BADU EBENZER

(STUDENT) (SUPERVISOR)

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DEDICATION

I dedicate this work first to the Almighty God who has brought me this far, to my father,

Mr. Anim Lawrence Ayeh and my mum Mrs Anim Vida, who mentored me through my

education, my loving sister Anim Susan Asantewa, my sweet brothers, Mr Anim Daniel

Ayeh and Mr. Anim Philimon Saforo who stayed by my side all along.

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ACKNOWLEDGEMENTS

At long last, the battle is over by the grace of almighty God, the creator of heavens and

earth. To Him be the glory, honor and adoration for mentoring this thesis. I am deeply

grateful to my supervisor, Mr. Ebenezer Agyemang Badu for his guidance, inspiration and

encouragement throughout this thesis research and academic life. His encyclopedic

knowledge, rigorous attitude towards research and incessant patience in mentoring me have

greatly contributed to the completion of this thesis. I will always be indebted to him for the

encouragement and his advice.

I am deeply grateful to Mr. Joseph K Bongah, Mr. Ato Say for their constructive advice and

to Mr. Kuutol Kwame Peter for his guidance and for editing this work. I am indebted to

Mrs. Gartey, Miss. Johanna Akuagyabeng Koomson and Mr Kennedy Sakyiama for their

assistance in this work. My appreciation goes to my brother inlaw Mr. Stephen Koomsom

and my good friend Mr. Raphael K Akosah Sarpong for their financial support in producing

this work.

Finally, and most importantly, I would like to thank my parents, who have always been the

foundation of my life. The contribution of my family has been immeasurable. You all make

my effort worthwhile.

May the Almighty God richly bless you.

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ABSTRACT

The study was carried out to find out the impact of performance and investment on

corporate tax a case study of Peterson (PZ) The study aimed at assessing the impact that

corporate tax has on performance and investment of manufacturing companies in the

Greater Accra region, finding out if tax has an effect on the performance and investment

companies and the challenges they face as fulfilling their tax obligation. The study applied

quantitative research designs where annual reports were used. Data was collected from

secondary sources. Data was processed and analyzed using formal tables, narrative text, and

correlation to find out the relationship between the impact of tax on performance and

investment of companies. One company was selected out of the entire population in the

region. The findings indicate that the impact of corporate tax on the performance and

investment of the companies is quite significance. , there was positive relationship between

investment and corporate tax. Which implies that the level at which companies pay tax is

influence by the investment made in the previous years.

Besides it was discover that there was a negative relationship between performance which

was measured by return on asset and tax.

There is also a clear indication that as companies makes more profit so it pays more tax to

the government and other statutory obligations.

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TABLE OF CONTENTS

DECLARATION..................................................................................................................... i

DEDICATION........................................................................................................................ ii

ACKNOWLEDGEMENTS ................................................................................................ iii

ABSTRACT ........................................................................................................................... iv

CHAPTER ONE .................................................................................................................... 1

INTRODUCTION.................................................................................................................. 1

1.0 Background Of The Study ................................................................................................. 1

1.1 Statement of the Problem ................................................................................................... 2

1.2 Objectives of the Study ...................................................................................................... 3

1.2.1 General Objective .................................................................................................... 3

1.2.2 Specific Objective .................................................................................................... 3

1.3 Research Question ............................................................................................................. 4

1.4 Scope of Study ................................................................................................................... 4

1.5 Organization of the Study .................................................................................................. 4

CHAPTER TWO ................................................................................................................... 6

LITERATURE REVIEW ..................................................................................................... 6

2.0 Introduction ........................................................................................................................ 6

2.1 The Concept of Taxation ................................................................................................... 6

2.2 Types of Taxes ................................................................................................................... 7

2.3 Classification of taxes ...................................................................................................... 13

2.4 Purpose of Taxation ......................................................................................................... 13

2.5 Approaches to tax administration .................................................................................... 14

2.6.1 Corporate Tax ........................................................................................................ 14

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2.6.2 The incidence of the corporate income tax under imperfect competition ............. 16

2.6.3 Corporate income tax ............................................................................................. 18

2.6.4 Performance of Company ...................................................................................... 19

2.6.5 Taxation and company performance...................................................................... 19

2.7 Effect of tax on Performance ........................................................................................... 20

2.8 Effect of tax on Investment .............................................................................................. 22

2.9 Taxation and investment .................................................................................................. 23

2.10 The benefits and costs of Double Taxation Treaties ...................................................... 24

CHAPTER THREE ............................................................................................................. 27

METHODOLOGY .............................................................................................................. 27

3.0 Introduction ...................................................................................................................... 27

3.1 Research design ............................................................................................................... 27

3.2 Population ........................................................................................................................ 27

3.3 Sample techniques and sample size ................................................................................. 28

3.4 Data collection method .................................................................................................... 28

3.5 Description of Variables and Measurements ................................................................... 28

3.5.1 Dependent variable ................................................................................................ 29

3.5.2 Independent variable .............................................................................................. 29

3.5.3 Control variables .................................................................................................... 29

3.5.4 Data analysis .......................................................................................................... 29

3.5.5 Profile of the Manufacturing Companies............................................................... 30

3.5.6 PZ Cussons Ghana Limited ................................................................................... 30

3.5.7 Model Specification ............................................................................................... 31

3.5.8 Ethical Consideration ............................................................................................. 32

CHAPTER FOUR ................................................................................................................ 33

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DISCUSSION AND ANALYSIS OF RESULT ................................................................. 33

4.0 Introduction ...................................................................................................................... 33

4.1 Test for normality of the data distribution ....................................................................... 33

4.2 Analysis of Descriptive Statistics Results........................................................................ 34

4.3 correlation analysis .......................................................................................................... 35

4.4 Analysis of Variation ....................................................................................................... 37

4.5 Regression Results ........................................................................................................... 38

CHAPTER FIVE ................................................................................................................. 40

CONCLUSION AND RECOMMENDATIONS ............................................................... 40

5.0 Introduction ...................................................................................................................... 40

5.1 Summary of findings........................................................................................................ 40

5.2 Conclusion ....................................................................................................................... 41

5.3 Recommendations ............................................................................................................ 41

REFERENCES ..................................................................................................................... 43

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CHAPTER ONE

INTRODUCTION

1.0 Background Of The Study

The study was meant to establish the impact of corporate tax on investment and

performance of PZ CUSSONS LIMITED , this chapter consist of the background of the

study, statement of the problem, purpose of the study, objective of the study, research

question, scope and significant of the study.

The impact of performance and investment on corporate tax is one of the central questions

in both public finance and development. This effect matters not only for the evaluation and

design of tax policy, but also for thinking about economic growth (Barro 1991, DeLong and

Summers 1991, and Baumol, Litan, and Schramm 2007).

Taxation increases incentives for public participation in the political process and creates

pressure for much accountability, better governance and improved efficiency of government

spending. Taxation also creates incentives for government to upgrade their institution for tax

collection and administration and provide more public services (Moore 2007).

Tax Collection is the main source of Government revenue for any country in the world

including Ghana. Taxes are compulsory payments for which no value or service has to be

rendered in return. It is a financial charge or levy imposed on an individual or a legal entity

by the state. According to Justice Wendell Holmes (1905) a famous American judge, “a tax

is a price we pay for living in a civilized society”. The taxation of corporate profits in Ghana

has been one of the most widely discussed issues in the area of public finance.

Taxation is based on an arbitrary system of laws passed by Parliament and interpreted by the

Judiciary, giving effect to what one must assume to be the democratic will of the citizens

(Akoto, 2001). Early form of taxation in Ghana was indirect tax in the then Gold Coast. It

was started in the form of custom duties in 1850. This was levied on imported goods at the

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rate of ½% . This tax was introduced by the British after they had taken over the Danish

Forts and trading posts to meet the cost of administering the colonies.

In Ghana, a considerable fraction of the businesses pay corporate tax for their operation.

Taxation in Ghana is based on system that existed in Britain as it was a British colony. This

also applied to other colonies elsewhere and for West Africa, one tax system operated under

British administration. In understanding why corporate taxation is such a highly contested

issue, critics argue that the current tax system discourages business entities from organizing

as taxable corporations and encourages corporations to veer from socially efficient decisions

(Scholes et al. (2005). Those critics believe that the losses to the Ghana economy caused by

the current tax system far exceed the gains from the revenues raised. They call for a neutral

tax system that does not enter into the decision making process of firms and does not distort

economic efficiency.

The firm can finance its investments using equity or debt. Equity is either cash available to

the firm or funds raised by issuing stock, primarily common stock. Dividends paid to

stockholders are not tax- deductible; thus, dividends are paid from after-tax income. A firm

raises debt by borrowing from its shareholders, from financial institutions, or from the

public. All interest paid by a corporation to its lenders is tax-deductible, thus generating a

tax shield. Clearly, there is a tax incentive for a taxable corporation to use debt instead of

equity.

1.1 Statement of the Problem

Over the years existing research have shown that corporate tax has an effect on business

performance, this is due to the fact that double taxation strips in and this affect the decision-

making process of firms. Business entities have a financial incentive to organize as

“Corporations,” where the term Corporation comes from the sub chapter of the Tax Code

defining their structure.

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Corporations are legal entities that can have multiple owners and separate management. The

ability to attract multiple investors through the sale of shares or bonds gives corporations

broad access to capital and greater potential for growth but when the corporate tax system is

not applied well the incentive of investment becomes a problem to investors. Because, in

Ghana, corporate profits are subject to double taxation, corporations in essence pay a fee for

the right to incorporate; corporate revenues are taxed first on the corporate level and then,

when distributed as dividends or when capital gains are realized, taxed a second time on the

individual level.

Since corporate tax can affect organizations shareholders companies may opt for debt, but

firms can fall into financial distress when they have difficulty making their debt payments.

Extended periods of financial distress can lead to bankruptcy.

However, Gordon and Dawson (1987) emphasize that many business people have

complained probably with some justification that taxes interfere with the opportunities as to

re-invest their profits in their business. Sometimes, the authorities might highly tax earnings

from investment to an extent that, it might become a problem for the company to raise

adequate resource in the market. This will pilot to poor performance and investment which

could lead to winding up of companies. This prompted the researcher to research more

about the impact of corporate tax on performance and investment of the company.

1.2 Objectives of the Study

1.2.1 General Objective

The main object is to examine the impact of corporate tax on performance and investment of

PZ Cussons limited.

1.2.2 Specific Objective

To assess the impact on performance and investment of PZ Cussons limited in relation to

corporate tax.

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1.3 Research Question

1. How does corporate tax affect the performance and investment of PZ Cussons?

1.4 Scope of Study

Impact of corporate tax on investment and performance is rather a very broad topic and area

of study which entails a lot.

The study will be carried out on PZ Cussons Limited.

The study will cover a corporate entity randomly selected from different types of businesses

on the Ghana stock exchange.

It is to the opinion of the author that carrying out a study on PZ Cussons limited only will be

adequate since extending it to other areas will amount to a replication, time consuming and

limiting resources.

Incidentally, all the other factors influencing growth of the selected business other than

taxation will be held constant.

1.5 Organization of the Study

This study attempts to assess the impact of corporate tax on the performance and investment

on PZ CUSSONS Limited. The study approaches the subject in the sequence that follows.

The work is divided into five (5) Chapters.

As a prelude to the study, Chapter one introduces the background of the study, statement of

the problem, purpose of the study, objective of the study, research question scope of the

study, significance of the study,

Chapter two sheds light on the review of related literature which basically covers the

conceptual and theoretical framework of corporate formation. This Chapter explores the

concept „corporate tax‟ and definitional features thereof, the economics of corporate tax

(rationale and theories of corporate tax), the law of corporate tax (policy issues), corporate

formation, corporate capital and corporate financing.

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In chapter three, the researcher presents the research design and methodology that will

describe the research design. This is the method used in gathering data for the study.

Chapter Four (4) is about the result, findings and discussions. This provided an overview of

statistical procedures, present the results by research questions, hypothesis and objectives.

Chapter five which is the last of all the chapters concludes with a summary of the research

finding, conclusions and recommendations of study as well as suggestions for future

research.

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CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter looks at performance and investment and it impact on corporate tax. It consists

of existing literature on taxation by different scholars and research studies.

This chapter covers taxation, classification and purpose of taxation; however it

predominantly addresses the problems affecting corporate taxpayers, the effect of tax on

performance and the effect of tax on investment of companies.

2.1 The Concept of Taxation

This refers to the assessment, collection, administration and management of tax in Ghana. It

deals with raising public revenue, managing public expenditure and public debts. The

general idea behind taxation is the provision of public goods and services. However the

benefit received by tax payers from the government are not related to or proportionate to the

tax paid. (Bhatia 2002).

The government is responsible for providing to its citizens certain public facilities and

services like roads hospitals schools and market securities. A tax may be defined as a

"pecuniary burden laid upon individuals or property owners to support the government. It is

a payment exacted by legislative authority. A tax is not a voluntary payment or donation,

but an enforced contribution, exacted pursuant to legislative authority and is any

contribution imposed by government [central or district assemblies] whether under the name

of toll, tribute, tillage, import duty, custom, excise, subsidy, aid, supply, or other name. A

traditional function of the tax system is to bring in sufficient revenue to meet the growing

public sector requirements. To tax (from the Latin taxo) is to impose a financial charge or

other levy upon a taxpayer (an individual or legal entity) by a state or the functional

equivalent of a state

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A tax can also be defined as a contribution imposed on any person, business/property, for

supporting central/local governments (tayebwe 1998)

2.2 Types of Taxes

This is a concept summary. It aims to show how different types of taxes are categorized, and

to highlight the strong and weak points of each type. Government is supported by resources

drawn from the economy. In return, government protects the economy from foreign and

domestic enemies, undertakes large-scale infrastructure works of general benefit, and

enforces the rights, obligations and bargains necessary for economic activity in a civil

society. In modern industrial society, a tax either claims a portion of the flow of value in

economic transactions between people, or takes a part of someone's accumulated stock of

economic value. Agrarian societies have often taxed in another way: conscripting the labor

of citizens for government works. Examples include the political office lotteries of classic

Greek democracy, the French road building corves under Louis XIV, and the reconstruction

of the Great Wall under the Ming Dynasty. This ancient type of tax survives now only in

such things as the English "poll" or head tax, and in military service drafts.

There are three types of tax which take from the flow of value: income taxes, payroll taxes,

and consumption taxes (either generally, like sales taxes, or on particular items, like

luxuries.) Wealth taxes, on the other hand, tax accumulations rather than transfers. A

common example is a property tax, which in modern US use falls largely on real

estate. Estate and inheritance taxes have a hybrid nature: they are charged on the transfer of

a decedent's entire accumulation of wealth.

All of the transaction flow taxes (income, payroll and sales) work by measuring certain

economic transactions and by applying a tax rate to that measured number.

The income tax is the most sophisticated, and most aimed at calculating that evanescent

quantity, "ability to pay". It measures the value flow received by a taxpayer, and subtracts

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such outgoing flows as are expenses matched to those receipts. A payroll tax measures the

flow of compensation to the labor factor of production. It does not deduct matched

expenses, on the theory that labor involves the pure creation of value. Since 75% of

individual income in the US comes from labor, there is a great deal of overlap between the

income tax and the payroll tax.

A consumption tax measures transfers out of the productive economy to the consumer. In

the US, such taxes typically take the form of state-level retail sales taxes, where all sales by

manufacturers and those along the distribution chain are not taxed. Other countries generally

use a different approach, the value added tax (VAT), to achieve the same end more precisely

by taxing every business on its sales, but allowing a deduction or credit for inputs on which

VAT was paid.

A wealth tax measures accumulated value in the absence of transaction flows. By nature,

wealth taxes involve a determination of the fair value of items that are not currently being

sold in any market, and the application of a rate to that value.

In examining a tax, one should always ask "who bears the burden?" The person who files

the return and pays the tax may be able to shift the cost elsewhere. Look beyond the person

paying to see who is going to get less because the tax collector has intercepted part of an

economic flow at a particular point. The answer often can by found by considering the

elasticity of the supply and demand functions for the item being taxed.

The general sense of economists is that payroll taxes burden the labor factor of production

(workers get less.) Labor has a low supply elasticity, because people often have no

alternative to work as a means of survival, and because there is a natural limit to the amount

of work any person can do. Whether the tax is paid by employer or employee, the burden

will still tend to fall on the worker. When the employer is the person paying, prevailing

wages workers receive are lower than they would be in the absence of such a tax.

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(However, it is possible that some burden will fall on employers, if payroll taxes drive up

the price of labor somewhat by reducing the supply, as when people choose untaxed leisure

instead of overtaxed work. Also, if a payroll tax burdens different occupations differently,

we would expect to see more labor force entrants choosing the lightly taxed jobs, driving

wages down to the point where they offset the lower tax.)

A tax on retail sales is a tax on consumption when the burden falls on customers, as is

usually the case. If the tax is not uniform on all consumption, or if it raises prices

sufficiently high, then demand may be dampened and the business and its suppliers will bear

some of the burden. With a sales tax, burden shifting also depends on the mobility of

customers (i.e. demand is elastic if customers can easily find untaxed substitutes.) If the

customers live on the state line dividing a high tax and a no tax state, or if they can have

packages delivered from untaxed outside suppliers, then the sales tax burdens in-state

retailers (lower sales, prices and profits reduced in order to be competitive) and not

consumers.

Personal income tax is largely not shifted but stays as a burden on the individual taxpayer.

Corporation income tax is another matter, because it taxes the legal form of business activity

and not the activity itself (unless integrated with individual income tax as in Germany or

England or US S-Corporations.) In economic sectors dominated by corporations such as the

income tax tends to raise prices across the board and be, presumably, passed on to

consumers like a sales tax (this assumes that all enterprises are equally profitable: there is no

burden on the break-even enterprise or its customers.) In the presence of competition from

non-corporate businesses, the corporate income tax drives down the return on capital in the

corporate sector, which induces capital to migrate to non-corporate sectors, until at

equilibrium all returns on capital have been driven down. Finally, in a world where capital is

the most mobile factor of production, a number of economists believe it will relocate to

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countries without corporate income taxes. Land and labor cannot move as easily, so the

ultimate result in this third case is that corporate income tax drives down the returns to these

immobile factors of production.

As for wealth taxes, that on real estate are not shifted because the supply of land is

classically inelastic. The tax burdens owners by appropriating for the government some of

the economic rent from land ownership. In the case of estate taxes, the supply and demand

curves for death are also highly inelastic, so such taxes presumably reduce the long-term

return on capital in the hands of rich people. Such taxes on the transfer of ownership of land

and capital between generations currently apply to only about 2% of all US families,

but these families own 30% or more of the nation's wealth.

Each type of tax has certain advantages and each causes unique problems in

implementation. The income tax is linked to ability to pay better than any of the other taxes.

"Income" can be thought of as receipts net of matched expenses, or as the amount a taxpayer

consumes and saves during a year. (It's a nice equation: What you get, less what it costs,

equals what's available to spend or save.) Tax is based on available resources.

Also, income taxes can be made "progressive", in that the tax takes a greater proportion of

greater resources. (The merits of progressivity make for interesting discussion. Proponents

talk of the diminishing marginal utility of wealth and the undesirability of huge inequalities

in a democratic society. Opponents accuse their adversaries of envy, and of inciting class

warfare.) Of the other taxes, only that on estates is progressive. The attempt to make sales

taxes progressive through exemptions causes major complications and shrinks the revenue

base, and doing it through rebates necessitates income tax - like calculations.

In practice, however, many flows of value, or opportunities for consumption and savings,

escape income tax. This naturally induces taxpayers to adjust (or "distort") their behavior in

favor of anything not taxed. The realization criterion means that changes in value without

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transactions aren't income, even though they may fund consumption. Income tax also

overlooks economic flows within a family, consumption funded from self-help or ownership

of personal use assets, the "insurance" effect of wealth, and consumption funded by welfare,

social security and other public benefit transfer programs. (An example is employer

provided health insurance, which traditionally has been tax free in the US.)

The weakest point of the income tax is the need for every recipient of income to calculate

taxable receipts less matched expenses. Enforcement is difficult because of the sheer

number of taxpayers and the compliance burden is a matter of mass aggravation. While

some countries claim return-free systems, they've typically achieved this by turning the

income tax into a payroll tax, like the British PAYE system.

Payroll taxes are generally used in the US and Europe to finance government run pension

systems. There are not as many measurement or matching issues as exist under income tax,

although there can be problems distinguishing the contributions of labor and of capital to the

receipts of the self-employed. Because the employer can be made the pivot point of

collection, payroll tax is generally easier to administer and collect than income tax. Many

current problems in the US system stem from a reluctance to make the hirers of independent

workers as responsible for withholding as are employers.

The US payroll tax is actually regressive, not progressive, for it is only charged on the first

$70,000 or so of each person's yearly labor income. It also dampens labor force participation

somewhat, and it provides an incentive to convert labor income into non labor income (as by

work to improve property one later sells.)

Sales taxes which fall upon consumption are favored by some theorists because they do not

depress savings or unduly burden capital (as income taxes are said to do.) They are fairly

easy to collect, because only business entities need to be monitored. They may also have the

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advantage of being "voluntary", in the sense that one can avoid the tax by not purchasing the

item.

If sales taxes are charged on business inputs in addition to household consumption, they

create major economic distortions, because the tax is effectively being charged twice (once

on business inputs, a second time on the consumed outputs.) There's general agreement that

"turnover" or "gross receipts" taxes have undesirable effects. The remedies generally

introduce significant complexity, whether they take the form of exemption certificates (as in

California sales tax), or the form of rules allowing sellers to deduct the cost of inputs or get

credit for taxes paid on inputs (a VAT.) It is also difficult to apply sales taxes to intangibles,

or to services, particularly those involving financial intermediaries. Finally, such taxes are

intrinsically non-progressive: the cash register knows nothing of the customer's ability to

pay.

Wealth taxes can be linked to ability to pay and be made quite progressive. There are at least

three common problems. First, the task of assigning values to things that are being held, not

sold, can be overwhelming. The common solution is a shortcut or arbitrary measure of

"value", such as California's Proposition 13, which equates real estate "value" to the most

recent sales price, and allows these historical values to be heritable from parent to child.

Second, these taxes create incentives for taxpayers to hide wealth by physical concealment,

to invent exotic substitutes for outright ownership, and to dissipate wealth through

conspicuous consumption or philanthropy. Finally, since wealth can be concealed and is

mobile, the job of determining tax payer wealth requires a high degree of intrusion by the

tax authorities.

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2.3 Classification of taxes

According to Manasseh (2000), taxes are classified as either direct versus indirect or

proportional versus progressive tax.

a. Direct versus indirect.

1. Direct taxes are those that affect the individuals/firms directly through a deduction from

earnings. Examples include; individual income tax, corporation tax, taxes on property and

others.

2. Indirect taxes are those taxes that are paid to government by an intermediary and then

passed on to the final user by including the tax in the final price. Examples include; export

and import duties, excise and local production, value added tax (VAT) and others.

b. Proportional versus progressive tax

On the basis of equity, taxes are classified as proportional/progressive. A tax is said to be

progressive when with increasing income the tax liability not only increases in absolute

terms but also proportionate to income.

2.4 Purpose of Taxation

According to income tax law (1997) taxation is an importance source of the government

revenue and an economic policy growth. The importance of taxation therefore arises from

debate of whether government should interfere in the operations of the market mechanism.

Income tax act further noted that taxes may be levied for other reasons but revenue remains

the prime objective of most taxes

Balunywa (1988) noted that, taxation has increased in importance not only as a tool of

raising revenue for the traditional roles but also for accelerating the economic growth and

ensuring social justice. The primary object of taxation in underdeveloped countries is not

related to stability of income and expenditure these countries face a number of problems of

insufficient savings and capital accumulation which calls for a need to promote specific

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product to fill the supply and demand gabs. It is the problem of that covers a number of

aspects the tax system has to be designed to help the economy (Bhatia 2000)

According to the Uganda economic journal resource (1973 taxes can reduce the quality of

resources consumed by the private sector. The economic journal (1973) also shows that, in

stressing consumption reducing aspect, taxes may change and help to stable the economy.

2.5 Approaches to tax administration

According to Bird (1974) tax administration refers to the identification of the tax payer

assessment of tax payable collection of taxes and enforcement of tax liability according to

Olman (1967) tax administration refers to a structure/producer of the identification of

potential tax payer collection and laws governing taxation.

RoyBahl (1988) says that much attention should be paid to critical aspects of tax

administration training, procedures; staffing, collection and use of information .the

weakness in tax administration are mainly caused by lack of relevant information about the

tax payer continued criticism of the tax and its structure. The tax structure should be simple

in order to avoid tax evasion.

2.6.1 Corporate Tax

A corporate tax is basically a tax on the accounting profits of companies. It is considered a

direct tax both in the legal sense that the company is an individual in the eyes of the law and

in the economic sense that the company is owned by its shareholders so that a tax on the

company is a tax on them (see Lipsey, 1979). Although there is a widely held view that

corporation taxes present challenges for economists, they remain an integral part of national

tax systems.

There have been a number of reasons advanced as to why corporations should be taxed.

According to Howard (2001), the corporation is a legal entity with limited liability of its

owners, implying that the corporation should be taxed separately. Second, shareholders can

15

pool their capital and promote the interest of the corporation. This implies that the

corporation should be taxed as a result of the benefits they gain from incorporation. Third,

the corporation tax is one method by which the state can appropriate part of the economic

surplus of a country. There are also arguments against corporation tax. For example,

Howard states that corporation taxes, which are too steep, can retard the development of the

corporate sector, which might not only deter firms from becoming incorporated, but in the

case of developing countries, force foreign firms to invest elsewhere.

Corporate taxes have played a significant role as a source of revenue for Government and in

the development of Ghana over the years. After personal income tax revenue, these

collections are the second largest source of direct tax revenue in Ghana and when compared

to total tax revenue categories, the proceeds from this category have been surpassed only by

three revenue components.

In addition to those expenses that are typically incurred in the operation of a business, the

corporate tax system in Ghana also provides favorable treatment for certain types of income,

for group relief and for certain types of businesses. The provision of corporate tax allows for

tax rebates on profits generated from the exports of goods and services. It allows a company

that is a part of a group to set off a loss against the profit of another company in the group.

Further, under the Small Business Development Act, an approved small business is subject

to corporation tax at the rate of 20 percent ( LH Consultants, 2002).

Companies in Ghana are divided into groups depending on their fiscal periods. A company

whose fiscal period ends at any time from January 1 to September 30 is required to pay not

later than September 15 of the calendar year in which it‟s fiscal period ends, 50 percent of

the tax payable or paid for the previous fiscal period as a prepayment tax for the current

fiscal period.

16

The remainder of the tax due for the current fiscal period should be paid when the return for

that period is filed, the deadline for such filing being March 15 of the calendar year

following the one in which the fiscal period ends.

Companies with fiscal periods ending from October 1 to December 31 are required to pay

by December 15 of the calendar in which the fiscal period ends, fifty percent of the tax

payable or paid for the previous fiscal period as a prepayment of tax for the current fiscal

period. A second prepayment is also due by March 15 of the calendar year following the one

in which the fiscal period ends. The deadline for the filing of the return for the current fiscal

period should be on June 15 of the calendar year following the one in which the fiscal

period ends, and in that return, the total tax liability for the fiscal period is determined.

2.6.2 The incidence of the corporate income tax under imperfect competition

The true burden of the corporate income tax has been controversial. The conventional

wisdom holds that owners of capital bear most of the burden of the corporate income taxes.

But the economic incidence of the corporate income tax suggests that the corporate income

tax can be shifted to various candidates including investors, workers, and consumers. In

particular, the burden of the corporate income tax can fall on labor. When faced with a

higher production costs due to the corporate income tax, firms can pass the burden of this

tax by decreasing their wage payment. Current literature suggests that the corporate income

tax is passed onto workers, although these studies mainly focus on the cross-country

evidence. It is less clear whether the burden of the corporate income tax is shifted to labor

within the country. In addition, no empirical study that investigates the incidence of

corporate income taxes in the presence of imperfect competition.

At the international level, capital is more mobile than labor. An increase in the home

countries corporate income tax rate tends to drive capital abroad. Consequently, the tax is

shifted to immobile factors such as labor. Built on this intuition, a handful of empirical

17

papers have found that labor shares a significant burden of the corporate income tax using

cross-country data. Another common feature of the existing studies is the assumption of

perfectly competitive market. To the degree that this assumption departs from reality, the

estimating equations may not be specified. As Auerbach (2006) points out, before tax

corporate profits arising from imperfect competition can respond to corporate income taxes.

Based on the Davidson and Martin (1982) general equilibrium model, we show that the

elasticity of wage with respect to corporate income tax is an increasing function of industry

concentration level. We use a first stage employment equation to correct for the potential

endogenous selection of the working sample. The second stage wage equation controls for

individual characteristics that might determine wage rates. We find a statistically significant

and negative relationship between the wage rates and corporate taxes. The relationship

between wage rates and the interaction between tax rates and concentration ratio is also

negative and statistically significant, suggesting that the degree of industry competitiveness

matters for analyzing the incidence of corporate income tax. To account for the possibility

that wage setting is only relevant for the marginal worker in the labor market, we carry out

the regression analysis at the industry level.

Estimates from the industry „level regressions further suggest that industry competitiveness

plays an important role in determining how much the corporate income tax is shifted to

labor. Tests of erogeneity of the concentration ratio support that the OLS estimates are

consistent. Labor bears a substantial burden of the corporate income tax. The estimated

labor share of the tax burden agrees with the theoretical results reported by Harberger

(2006). It is also considerably smaller than estimates from most research based on the

international experience.

18

By extending the Davidson and Martin (1985) general equilibrium model of corporate tax

incidence under imperfect competition, we show that the effect of the corporate income tax

on wages increases with the degree of imperfect competition.

2.6.3 Corporate income tax

Most industries paid different fractions of their total return to capital in corporation tax,

owing partly to differences in their relative use of debt and equity capital, partly to the

presence in some of these industries of a fringe of unincorporated enterprises, and partly to

special situations such as loss-carryovers from prior years, failure of full use of current

losses to obtain tax offsets, and so on. But these differences, in my view, are not large

enough to affect seriously the validity of the main distinction made here between the

corporate and the non-corporate. The relevance of the approach taken in this paper might

also be questioned on the ground that the capital market does not in fact work to equalize

the net rates of return on capital in different industries. If this objection is based on the idea

that the capital market might be poorly organized, or that participants in it might not be very

adept at seeking the best available net return on their invested funds, I believe it must be

rejected for the Ghana case, for in the Ghana the capital market is obviously highly

organized, and the bulk of the funds involved are commanded by able and knowledgeable

people. The objection may, however, be based on the idea that rates of return in different

industries, and perhaps on different types of obligations, will differ even in equilibrium

because of the risk premiums which investors demand for different kinds of investments. At

this point we must make clear that the “equalization” which our theory postulates is

equalization net of such risk premiums So long as the pattern of risk differentials is not itself

significantly altered by the presence of the corporation income tax, our theoretical results

will be applicable without modification and even if the pattern of risk premiums applying to

different types of activities and obligations has changed substantially as a result of the tax, it

19

is highly likely that the consequent modification of our results would be of the second order

of importance.

2.6.4 Performance of Company

For a company to adapt to it environment and cope with competition the company must be

able to free the various economic and strategic challenges to ensure its sustainability ,among

other things is to be competitive and improve its economic and financial performance. In the

world of management science, reflections on the performance have been the source of many

questions. Indeed, Lebas (1995b) considers that there is no universal and comprehensive

definitions for performance and yet every business must define the term for its internal and

external communication moreover, the criteria for evaluating performance contribute to the

lack of a universal definition. Indeed in the 60s, the measure of performance, was the size

(sales, assets) then in the 70s, it was called the net income or earnings per share to evaluate

performance. Later in the 80s, the performance evaluate is done through the company‟s

ability to generate liquidity. Recently it‟s adequate to the performance ability to create

value. So when it impregnate and creativity (the income component) and component

discipline (component cost) necessary to follow a market economy. Relative to income, the

measure of performance is more cost effective to the extent that costs are more stable.

Fryman (1999) argues that it is the measure most used by managers who can form an idea

on costs and the costs that the firm will bear. Clearly tax is a heavy cost to the company

wishing to reduce its expenses. Reducing the tax will obviously reduce business costs which

can improve its financial performance.

2.6.5 Taxation and company performance

Taxes levied on revenue are worth wide only if it can generate meaningful revenue at

acceptable rate and producers (Musgrave and Musgrave 1984) according to Gordon and

Dawson (1987) through taxation the government takes away money from the people they

20

would otherwise spend on private sector to the public sector. As a result, purchasing power

reduces per unit of production in the private sector to the public sector. They further asserted

that one of the most frequent arguments against high income tax is that it destroys the

incentives to business, peoples and employees to work harder and more efficiently.

According to the World Bank (1991), businesses carry out tax planning so as to have a

minimal tax liability and thus increasing the purchasing power. it is through taxes that the

government takes away money from people/business they would otherwise spend on

private sector this loss of purchasing power reduces the demand for units of products in the

private sector.(Gordon and Dawson 1987)

2.7 Effect of tax on Performance

Whether your business is a C corporation or a sole proprietorship, you're going to pay taxes

on the profit you make. Different decisions, such as how long you hold an investment or

where you open a store, have different tax consequences. Depending on the size of the tax

bill, picking the option with the best tax deal is tempting. In many cases, that's not the only

factor influencing the decision, but it's a significant one. When your company needs money

to expand or invest, you can raise it through equity -- selling ownership in the firm -- or

through debt. Debt has a tax advantage, because the interest on borrowed money is a

deductible business expense. There's no comparable write-off for issuing more shares in a

corporation or other equity fund-raising methods. The tax benefit from debt can be a

significant benefit for a small start-up, but it has less impact on larger companies. The more

debt a company takes on, though, the more risk of being unable to pay it off, so the tax

break shouldn't be the only consideration. Federal taxes are the same everywhere, but state

income tax rates vary across the country. The "CPA Journal" says this has a definite effect

on business decisions: Given their choice, companies prefer to locate their operations in

states that have favorable, low rates on corporate income. It's one of the things that explain

21

why retail stores sometimes cluster along the border of a low-tax state, where they can

compete for high-tax state customers without being subject to the tax bills. Tax may be a

decisive factor if all the locations in consideration provide similar benefits, such as good

transportation, skilled workers and good communications networks. If one location has a

clear edge in those categories, taxes may take a back seat.

Tax rates aren't constant. From 2010 through 2013, businesses could write off up to

$500,000 in assets -- equipment and vehicles for example -- rather than depreciate them

over several years. In 2014, the deductible amount dropped to $25,000. That gave a business

looking to buy, say, $100,000 in factory equipment a reason to do so in 2013, rather than

wait. In general, knowing a particular tax or deduction is going up or down in the next tax

year is an incentive to time investments or spending for when you can get the maximum

write-off.

Time can make a big difference to your capital gains when you sell stocks, bonds or other

investments and assets. If you hold a portfolio of stocks or some investment real estate for

less than a year, you pay short-term capital gains tax when you sell. Hold it for longer than

12 months, and you pay long-term capital gains tax. You pay tax on short-term gains at your

regular income-tax rate. When you hold it longer, the rate is often lower, though it varies

with different types of investment. This gives you an incentive to hang on rather than flip

your investments right after you buy.

As politician‟s debate raising or cutting this or that tax, the uncertainty about the outcome

can affect business decisions. Business owners who don't know how high their tax rates will

be may hold off on hiring or expanding the company for fear they won't have as much

available cash as they hope. Worries about higher taxes in dividends may influence stock

picks, and whether companies offer dividends at all. Because different experts often make

22

wildly different predictions about the tax impact, that amps up the uncertainty and worry,

giving business owners more reasons to play it safe.

2.8 Effect of tax on Investment

The findings of this paper suggest that taxes have an adverse effect on industry-level

investment. In particular, corporate taxes reduce investment by increasing the user cost of

capital. The long-run user cost elasticity of investment-to-capital ratio is estimated to vary

between -0.35 and -1.0 depending on the empirical specification. This is in line with recent

empirical studies (e.g. Hassett and Hubbard, 2002).

Many of the more recent investment models are based on the neoclassical theory where

preventative firm are maximizes its present value, i.e. the discounted value of its expected

profits. The two most commonly used theoretical investment models following this

neoclassical tradition are the theory of the user cost of capital and the Q-theory. The basic

reasoning behind the former theory, introduced by Jorgenson (1963) and Hall and Jorgenson

(1967), is that a firm weighs the costs and benefits of investment and invests when the

benefits exceed the costs. Thus, if capital inputs can be adjusted freely, the marginal Product

of capital equals the user cost for a price-taking firm. The Q-theory suggests that the firm

will invest if the market value of an additional unit of capital (the shadow value) exceeds the

cost of purchasing

It, taking into account that there are costs associated with the adjustment of capital to its

desired level. Thus, the firm‟s marginal investment decision is determined by the ratio of the

market value to the Purchase (replacement) cost of capital, called the marginal q.2 Under

certain assumptions, this ratio can be Shown to equal the ratio of the total value of the firm

to the replacement value of its total capital stock, the So-called average q which can be

measured using stock market information on the value of the firm (Hayashi, 1982).3 both

the user cost and the Q-theory can be adjusted for taxes. These tax-adjusted. Theories

23

suggest that increases in corporate taxes (capital depreciation allowances) will reduce

(increase) Investment and the capital stock.

Until recently, the standard approach of the neoclassical models was to isolate firms‟ “real”

decisions from financial concerns. This approach was based on the so-called Modigliani-

Miller theorem which states that in the absence of taxes firms‟ financial structure and policy

are irrelevant for their investment decisions (Modigliani and Miller, 1958). The necessary

assumption underlining this theorem is the existence of perfect capital markets. Under the

assumption of imperfect capital markets with adverse selection and moral hazard, using

external funds to finance investment projects becomes relatively more expensive than

financing them with internal funds (see Hubbard, 1998, for an extensive review). Several

studies have tested this assumption and found that proxies for internal funds, such as cash

flow, have explanatory power after controlling for the average q, user cost or accelerator

variables. The interpretation is that firms with low internal funds or net worth are financially

constrained and cannot carry out all profitable investment projects. In the presence of taxes

there may, thus, be an additional effect on firms‟ investment decisions beyond the user cost

and average q as taxes affect the after-tax earnings from existing projects and hence the

internal funds available to finance future investment. Furthermore, tax policies may have an

effect on the financial structure of firms by affecting the choice between debt and equity

financing.

2.9 Taxation and investment

Given the fact that there are financial institutions and mechanism for collecting the

company‟s savings and bringing them to investors, the level and patterns of investment will

be greatly influenced by taxes. This is because the investors are basically interested in

making profit yet profitability of investment can be affected through various tax measures in

the following ways;

24

i. The possibility of taxing savings themselves. If this happens, the investor will experience

a low level of savings and the overall level of investment will be low.

ii. The authorities might tax earnings from investment to an extent that it might become a

problem for the firm to raise adequate resources in the market.

iii. If the retained profits of the firm are taxed, they will not be able to depend much upon

their internal resources for expansion; instead they will borrow and invest if at all they do so

(Bhatia H.L, 2002).

2.10 The benefits and costs of Double Taxation Treaties

Double taxation is generally defined as the imposition of comparable taxes in at least two

countries on the same taxpayer with respect to the same subject matter and for identical

periods (OECD 2005). This may occur if one country claims taxing authority based on the

residence or the citizenship of the taxpayer, while another country postulates taxing

authority based on where the income originates. Another potential source of twofold

taxation could be the fact that both countries claim either a certain taxpayer as a resident or

that an income arises within its country (Doernberg 2004).

Also, different methods for the determination of the internal transfer price applied in two

states can lead to a double taxation, e.g., a company has a production facility in two

countries and delivers intermediate goods from the plant in country A to the factory in

country B. If domestic rules in B set a value of 80 USD as appropriate, but country A

ascertains a value of 100 USD, then revenues of 100 USD in the source country stand vis-à-

vis expenses of only 80 USD in the recipient country (Lang 2002).

Even though measures to prevent double taxation can be implemented unilaterally, countries

have on a very large scale resorted to the conclusion of DTTs.

By burdening economic activity in a foreign country twice, double taxation is often believed

to have a negative effect on the total amount of FDI as well as on the allocation of FDI

25

across countries. In the words of Egger et al. (2006: 902): “One of the most visible obstacles

to cross border investment is the double taxation of foreign earned income.” One major

purpose of DTTs is thus the encouragement of FDI. Tax relief to foreign investors from

double taxation is not the only purpose of DTTs, however. Another important purpose is the

exchange of information. DTTs help to combat tax evasion and tax avoidance and to prevent

double non-taxation by making information from one contracting state available to the other

contract partner. In principle, these other aspects of DTTs could discourage FDI.

In addition, also other regulations, calculation methods and definitions are harmonized in a

tax treaty, mitigating the uncertainty an investor faces when dealing with foreign fiscal

systems and lessening the administrative effort. The tax authorities of either country profit

from this harmonization, as the variety of different legislations they have to deal with is

reduced. Closely related to the anti-tax-avoidance objective of exchanging information and

setting rules for transfer-price calculation is the argument that DTTs may help to reduce

harmful international tax competition from tax havens. Even though tax treaties are an

insufficient measure (due to their bilateral character) to completely avoid harmful tax

competition (Toumi 2006), they contain some regulations to at least mitigate the problem:

the permanent establishment rule and the provisions against treaty shopping limit the circle

of beneficiaries and curb

(along with the transfer pricing restrictions) the opportunities to channel income through tax

havens (OECD 1998).3 Lastly, similar to BITs, the benefits of concluding DTTs may go

beyond any concrete treaty provision in that countries may acquire “international economic

recognition” (Dagan 2000: 32) or, in the words of Rosenbloom (1982, cited in Reese 1987:

380), a “badge of international economic respectability” with a dense network of DTTs.

Against these benefits of DTTs, there are also a number of costs to the contracting parties.

Negotiating and ratifying the contract ties up administrative resources. Given the length and

26

labor intensity of the negotiation process, and the additional effort of matching versions in

different languages, the costs can be substantial, especially, but not only, for smaller or

developing countries. The provisions in the treaty may conflict with domestic tax law which

has to be adapted as a consequence. Here, the national fiscal sovereignty is curtailed.

The most important cost factor is the potential loss of tax revenue since DTTs regularly

favor residence over source taxation.

27

CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter covers the background against which data was gathered. It discusses the

research design, study population, sampling techniques and sample size, data source and the

description of variables and measurement,

3.1 Research design

Research design is the overall plan for collecting data in order to answer the research

question. It also involves specific data analysis techniques or methods the researcher intends

to use. The importance of methodology to every research cannot be overstated if the validity

and reliability of the results are to be attained. It is also critical to ensure the replication and

generalization of the research result (Buame, 2006).The research will be based on a

correlative design to investigate the effect that corporate tax have on performance and

investment of a listed manufacturing company on the Ghana Stock Exchange using a panel

data, this is using time series data. Annual report on the manufacturing company used in

this work. The research is to find out the effect that corporate tax have on performance and

investment.

3.2 Population

Population is the entire aggregation of items from which samples can be drawn for a study.

The population of the study is all the manufacturing companies listed on the Ghana Stock

Exchange. . However, because of the lack of availability of data for the period under

consideration and in undertaking a study of this nature there is the need to choose a

reasonable number of corporate tax payers to form the target population so as a concise

research could be carried out with reasonable probability of success, the study will use only

28

one Ghanaian manufacturing company listed on the Ghana stock exchange that have all the

required data available.

3.3 Sample techniques and sample size

In this study, the researcher use purposive sampling. Is a method of sampling by which the

researcher deliberately draws a sample from the population which the researcher thinks is a

representative of the population? For the purpose of this study, one company on the Ghana

stock exchange has been selected. This sample size was assumed by the researcher to be

representative enough of the entire population. Also, the time limit within which the

research is to be completed will not permit the use of a larger sample size. In addition to

this, a larger sample in this survey will require larger financial resources which the

researcher cannot afford.

3.4 Data collection method

For the study to analyze the effects that corporate tax have on the performance and

investment of the company to be successful, the researcher gathered information from

secondary source .these data were of quantitative forms.

Under this source of data collection, the researcher considered secondary data obtained from

varied source including the websites, magazines and annual reports from the head office of

the selected company.

More importantly, published literature and journals from the internet were reviewed to

obtained relevant information which helped in the research work.

3.5 Description of Variables and Measurements

In this study, the variables were selected based on alternative theories and previous observed

studies related to the impact of corporate tax on performance and investment. In accordance

with the theory and observed studies, the independent, dependent and control variables of

29

the study were identified in order to investigate the impact that corporate tax have on

performance and investment.

3.5.1 Dependent variable

In this study, the dependent variables are variables that are used as a determinant of tax

reported in the financial statement of PZ Cussons Ghana Limited. Tax is measured by tax

over profit before tax.

3.5.2 Independent variable

In this study, the independent variables are variables that are used to determine investment

and performance reported in the financial statement of PZ Cussons Ghana Limited.

Investment is measured by the difference between the current year‟s investment and the

previous year‟s investment whiles performance is measured by return on asset and firm size.

3.5.3 Control variables

In this study, the control variables are cash and cash equivalent and expense thus

administration cost and distribution cost reported in the financial statement of PZ Cussion

Ghana Limited. Control variables are the variables that have effect on the dependent

variable.

3.5.4 Data analysis

To ensure accuracy in the data processing, the researcher did data editing and cleansing of

the data before analyzing the data. As the analyses were done electronically, it was

necessary to codify the data collected in order to make possible inputting into the data

processor. The codes were transformed into units to facilitate their description and analyses.

Diagrammatic presentation was done by means of tables and analyzed by means of

percentages. Although there were several electronic means of analyzing data, the researcher

used Stata 12 for this analysis. This is because is one of the most frequently used research

tools in the social sciences and other related field of research

30

3.5.5 Profile of the Manufacturing Companies

Manufacturing is the process of converting raw materials, components or parts into finished

goods that meet a customer's expectations or specifications. Manufacturing commonly

employs a man-machine setup with division of labor in a large scale production. A

manufacturing company is a company that converts raw materials into finished goods for

the consumer market. The criteria for listing includes capital adequacy, profitability, spread

of shares, years of operating among others.

3.5.6 PZ Cussons Ghana Limited

Mission

We are dynamic entrepreneurial company, optimizing market opportunities to enhance the

lives of our Ghanaian and other consumers with quality, value and innovation.

Vision

We are a profitable, dynamic and entrepreneurial organization, exciting our customers and

consumers by providing them with a variety of leading brands.

Corporate profile

Paterson Zochonis Ghana Limited was its original name when it was formed on May 24,

1958. It was however renamed to PZ Cussons Plc in 2002, years after the parent company

acquired the Cussons Group Ltd in 1975.

The company was temporarily listed on the Ghana Stock Exchange on November 12, 1990

and finally had its official listing on August 23, 1991. PZ Cussons Plc, UK owns 90.24% of

PZ Cussons Ghana. PZ Cussons Ghana Ltd, part of the PZ Cussons Group, is a leading

organization within the Fast Moving Consumer Goods and Electrical Goods industry, with

recognized quality international and regional brands such as Imperial Leather, Robb, Duck

Bar, Venus Hair Care, Cussons Baby Care, Nunu Milk Powder Thermo cool range of

electrical appliances.

31

3.5.7 Model Specification

The objective of this study is to find the impact that corporate tax have on performance

and investment of a listed manufacturing company. In order to attain this objective, a

functional relationship is structured and presented in form of regression equation. The

regression equation was used in determining the statistical effect that corporate tax has

on performance and investment of the listed company. Since this study is panel data in

nature, a control variable was introduced into the regression equation to cater for the

size of the selected company. The control variable introduced was the total asset

measured in+-logarithms. The logarithm is employed to normalize the data and make

them fit into the regression equation

Yit = β0 + ∑ βi X it + εit (Eq. 1)

Y itTax of a company i at fiscal year t tax (TAX)

β0: The intercept of equation,

βi: Coefficients of Xit variables,

X it: The different independent variables for Tax of a firm i at fiscal year t,

i: 7 = 1,- 7 firm,

t: Time= 1,2,3,4,5,6,7 years,

ε: The error term

However, if the researcher translates the above general least squares models into

identified variables it becomes:

TAXit=β0+β1INVit+β2ROAit+β3SIZit+β4CCAit+5EXPit + εit.......................................... (Eq. 1)

32

Table 1: MEASUREMENT OF VARIABLES

Variable Acronyms Measurement

Tax TAX Tax is measured by corporate tax/ profit

before tax

Investment INV Natural logarithms of the difference

between current year and previous year

investment

Return on asset ROA Return on Asset is measured by profit after

tax/ total asset

Firm size SIZ Natural logarithms of total asset

Cash and cash equivalent CCE Natural logarithms of cash and cash

equivalent

Expenses EXP Natural logarithms of distribution expenses

and administration expenses

3.5.8 Ethical Consideration

In conducting the study, certain principles and ethics will be observed. Information will be

obtained from the data out of their own will. There will be no deceit, compulsion,

inducement or dishonest means of ascertaining data. The confidentiality of the information

to be received and the mystery of the respondents will be protected. The information to be

obtained from the data will be used solely for this project.

33

CHAPTER FOUR

DISCUSSION AND ANALYSIS OF RESULT

4.0 Introduction

This chapter presents the descriptive statistics, correlation analysis and multiple panel linear

regression analysis of the study variables. It has three sections. The first section is the

descriptive statistics which summarizes the main features of the study variable such as

mean, maximum, minimum and standard deviation. The second section is the correlation

analysis which shows the degree of association between the study variables. The third

sections of the chapter, regression results report the ordinary least square (OLS) estimation

output of the three regression models.

4.1 Test for normality of the data distribution

Table 4.1: Shapiro-Wilk (SW) test for normality test

Variable OBS W V Z (prob.>Z)

TAX 7

0.99474 0.069 -3.062 0.99890

INV 7 0.79356 2.711 1.807 0.03535

ROA 7 0.87413 1.653 0.836 0.20163

SIZ 7 0.96497 0.460 -1.081 0.86007

CCE 7 0.76982 3.023 2.047 0.02034

EXP 7 0.92877 0.936 -0.102 0.54050

Normality test was run to see whether all related variables used in this study have fulfilled

the assumption of normality or not. As noted earlier, natural logarithm was generated for

accounting data to reduce the skewness and distribution. From table 2 above, only INV and

34

CCE, shows general problem in not fitting the normal distribution (p < 0.05) while the other

variables does not present any general problems and appears robust as testified in Shapiro-

Wilk which significant (p > 0.05), indicates that the data are not significantly different, thus

data used in this study are normally distributed. To overcome this problem, the natural

logarithm of INV and CCE was considered.

4.2 Analysis of Descriptive Statistics Results

Table 4.2: Descriptive Statistics of the Study

Variable OBS Mean Std.Deviation Minimum Maximum

TAX 7 .2128571 -0715808 .11 .33

INV 7 .3414286 -8156271 -.55 2.o6

ROA 7 .0828571 -0996183 -02 .28

SIZ 7 7.672857 -1618348 7.45 7.93

CCE 7 6.86 -3910243 6.56 7.43

EXP 7 7.131429 -2723006 6.81 7.5

Table 3 provides a summary of the descriptive statistics of the dependent and explanatory

variables. On the average, TAX was paid at .2128571 with a minimum of .11 and a

maximum of .33 The mean (average) of INV made is .3414286) This means that on average

34.14% of the manufacturing firm listed on GSE‟s profit is used to invest with a minimum

of (.55)% and a maximum of 2.06%. The firm size, determined as the natural logarithm of

total assets has a mean (median) of7.67% of the firm‟s total net asset. However this also has

a minimum of 7.45% and a maximum of 7.93%. Profitability as measured by Return on

Assets has an average of .0829% with a minimum of (.02) % and a maximum of .28%.the

company‟s cash and cash equivalent has a mean of 6.86%,a minimum of 6.56% and a

maximum of 7.43 Lastly expense as measured logarithm has a mean of 7.131429% of the

35

profit of the firm for future growth. And this also has a minimum of 6.81% and a maximum

of 7.5%.

4.3 correlation analysis

Table 4.3 correlation matrix

This section of the study presents the results and discussions of the Pearson correlation

analysis. To identify the relationship between the variables of corporate tax, financial

performance and investment. Pearson correlation coefficients were used. The correlation

coefficients show the extent and direction of the linear relationship between corporate tax

variables and performance and investment measures of the Ghanaian manufacturing

company. Table 4.3 above present correlation coefficients to show the extent and direction

of the linear relationship between variables used for the study.

Table 4.3 points out that, investment, firm size and expenses are positively with tax. On the

other hand, return on asset and cash and cash equivalent are negatively correlated with tax.

TAX INV ROA SIZ CCE EXP

TAX 1.0000

INV 0.6685 1.0000

ROA -0.0715 -

0.6442

1.0000

SIZ 0.1948 0.8307 -07418 1.0000

CCE -0.0286 -

0.1749

-01776 -

0.4267

1.0000

EXP 0.5675 0.3747 0.3132 0.1538 -

0.5707

1.0000

36

Correlation result reported in table 3, indicated that investment, return on asset, firm size,

cash and cash equivalent and expenses are 66.85 %, -07.15%, 19.48%, -02.86% and 56.75%

respectively. From this it can be understood that INV and EXP variables have relative

strong association with Tax, ROA and CCE have negative association with TAX while SIZ

has a weak association with TAX.

In order to establish whether the coefficient estimates may change in response to small

changes in the mode, repressors‟ have indicated minimal multi-collinearity among the

variables. This table also shows the linear relationships between each independent variables

and control variables used in this study.

In order to establish whether the coefficient estimates may change in response to small

changes in the mode, the correlation coefficients of the repressors‟ have shown in the table 3

above. The results show minimal multi-collineraity among the variables.

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4.4 Analysis of Variation

Table 4.4: Source of variation of the model

Source SS Df MS R-

squared

Adj R-

squared

(Prob.)

Model .030471538 5 .006094308

Residual .000271322 1 .000271322

Total .03074286 6 .00512381 0.9912 0.9470 0.1588

This table 4 provides two sources of variation; regression and residual. The regression sources of

variation are the portion of the variation in the dependent variables (TAX) that were explained

by regression model while the residual variation is what the model could not explain. A model

which is reliable will have a higher regression sum of squares than the residual sum of square.

From the table 4 the regression source of variation of .030471538 is higher than the residual

source of variation of .000271322.Thus, the regression model is able to explain larger portion of

the variations in the dependent variables (TAX) than the residual source of variation.

The table 4 yields R square figure of 0.9912 indicates that, dependence on this model will

account for 99.12% of the changes in the dependent variable (TAX). Or explanatory variables

can explain change in the dependent variable (TAX) about 99.12%.

The overall significance (prob.) of 0.1588 also indicates a significant relationship at 10% level

of significance. These results, therefore, provide evidence that the regression model is well fitted

and that the performance and investment movement of listed manufacturing firms is significantly

influenced by the tax and the size of the firms and profitability.

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4.5 Regression Results

Table 4.5: Regression table

Variable Coef t-value p>1t

INV .2152051 7.21 0.088

ROA -.1959752 -1.03 0.490

SIZ -1.044253 -5.09 0.124

CCE -.1628938 -3.25 0.190

EXP -.1079112 -1.90 0.308

CONS 10.05503 4.69 0.134

From table 4.5 above, investment has coefficient of 0.2152 with t-value of 7.21 which is

statistically significant at 10% level of significance. As firm investment in Ghana has positive

coefficient and can cause changes in tax whenever there are changes in investment. This

indicates that whenever there is one currency point increase in tax, investment increase by

21.52%. PZ Ghana, as the result indicates should endeavor to create environment which is

conducive and more profit drive which open rooms for more investment opportunities to

champion development into different segment of the industrial market.

The result also shows that ROA has a coefficient of -0.19752 with a t-value of -1.03 which is

statistical insignificant. By this result as TAX increase by one currency point, ROA decrease by

19.75% as this result conforms to theory, companies can only be able to improve it profitability

through tax avoidance. In this era of global competition, one of the ways companies can improve

profitability to avoid paying tax. The result indicates that, firm SIZ has a coefficient of -1.044253

with a t- value of -5.09 which is statistically insignificant. This indicates that as TAX increase

39

by one currency point, firm SIZ decrease by 104.43%.from the result, it will not be prudent for

companies to put their resources in asset that will not generate more profit. Because, the size of a

company can only be expanded when the company is able to generate more profit.

Also, the study reveals that, cash and cash equivalent has a coefficient of -0.1628938 with t-

value of -3.25 which is also statistically insignificant. This shows that anytime TAX increase,

cash and cash equivalent decrease by 16.29%. Companies should have enough cash and cash

equivalent to honor their tax obligation whenever it falls due.

The result showed that EXP has coefficient of -.1079112 with a t-value of -1.90 which is

statistically insignificant. This indicates that whenever there is an increment of one currency

point in TAX, EXP decreases by 10.79% therefore, to reduce tax burden, companies should

improve personal emolument and increase expenditure

40

CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

5.0 Introduction

In the final chapter to this study conclusion of the study is made which is followed by

recommendations. Directions for future research also lay down.

5.1 Summary of findings

In this thesis the study seeks to assess the impact of performance and investment in relation to

corporate tax. The study therefore reveals that, there was positive relationship between

investment and corporate tax. Which implies that the level at which the company pays tax is

influence by the investment made in the previous years.

Besides it was discover that there was a negative relationship between performance which was

measured by return on asset and tax. Therefore, there is a clear indication that as companies

makes more profit so it pays more tax to the government and other statutory obligations.

Also the study reveals that there is a negative relationship between size of the firm and tax which

suggests that as bigger a firm becomes the lesser it pay tax

The study also indicates that there is a negative relationship between cash and cash equivalent

and tax. This implies that as more and more a company pay tax, it reduces the level of liquidity

that is available for daily operations and investment.

The study also shows that there is a negative relationship between expenses and tax and this

implies that the higher expenses the companies make the lesser tax the company pays.

41

5.2 Conclusion

This study investigates the impact of corporate tax on performance and investment of companies

using PZ CUSSON a manufacturing company listed on Ghana Stock Exchange with a data set

covering seven years period from the year 2008 to 2014. Based on the results of the descriptive

statistics, correlation and regression analysis the researcher made the following conclusions.

The company‟s vehicle of investment should be driven towards profitable ventures. This will

make the firm make more profit which will make more resources available to finance other

investment project.

The study also concludes that the company should involve itself into investment that will give

them tax rebate and tax concessions that will help them to reduce their tax burden and improve

their profitability.

It is also reveals that the only way a company will grow is to expand its investment into areas of

tax holidays this will aid the companies to expansion and eventually reduce it tax liability.

Beside the study observed that more cash and cash equivalent should be available so as to honor

its tax obligation as and when it falls due

5.3 Recommendations

The researcher made the following recommendation as a way of reducing the burden of taxes on

firms.

Manufacturing firms including PZ Ghana should endeavor to create environment which

is conducive and more profit drive which open rooms for more investment opportunities

to champion development into different segment of the industrial market.

The researcher also recommends that manufacturing firms should invest their resources

in asset that will generate more profit.

42

The researcher further recommends that manufacturing firms should look for avenues to

enable them avoid tax so as to increase profit.

Finally, considering the fact that investment reduces employment deficit or short fall and

also considering firms corporate social responsibility which contribute massively to

infrastructural development, government should reduce corporate tax rate to enable firms

increase their investment.

43

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