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52 Int'l J.L. & Mgmt. 5 (2010)

handle is hein.journals/ijlm52 and id is 1 raw text is: The current issue and full text archive of this journal is available at

Corporate tax shield or fraud?
Insight from Nigeria
Abel Ebeh Ezeoha
Department of Banking and Finance, Ebonyi State University,
Abakaliki, Nigeria, and
Ebele Ogamba
Department of Banking and Finance, University of Nigeria, Enugu, Nigeria
Purpose - The purpose of this paper is to establish whether inefficiency in a tax system and the
likely difficulty in resolving tax matters can reduce the appeal for tax shield as incentive for debt
financing, and by so doing exacerbate the cases of tax fraud.
Design/methodology/approach - A review approach/theoretical approach is adopted in the paper,
where, in addition to reviewing literature on the relationship between tax incentives and corporate
financing, the paper examines the structure of the Nigerian tax system, the gaps, and some pending
tax cases involving foreign firms in Nigeria. Based on some theoretical judgments, efforts were made
to link the rising cases of tax frauds to the dwindling appeal for tax shield as an incentive for the use
of debt.
Findings - The study reveals that, as in the case of Nigeria, an environment of multiple tax system
reduces incentives to pay tax or for voluntary compliance; that the exclusion of crucial non-debt tax
shelters such as depreciation, heightens pressure on the use of debt-based tax shelters; and that
controversies on deductibility make it difficult to distinguish between criminal and civil proceedings
in tax cases.
Research limitations/implications - The paper is only theoretical. The number of cases captured
is very limited. However, the issue of tax frauds among corporate entities in the country remains very
Originality/value - The paper is the first to examine the likelihood of an inefficient tax
environment to reduce the appeal of tax shield as an incentive to debt financing.
Keywords Tax havens, Fraud, Law, Debt financing, Nigeria, Corporate taxation
Paper type Research paper
The influence of tax on corporate management decisions remains very encompassing.
Tax affects the level and combination of financing sources a firm can explore. It is also
a major determinant of a firm's choice of investment projects and destinations
(Palomba, 2002). Dividend policies, which constitute one of the strategic functions of
financial management, are determined by the rate at which dividend income and
capital gains are taxed. According to Graham (2001), tax affects capital structure
decisions, including the choice of debt, equity, leasing, and other financing instruments
play a role in corporate risk management; and affect the form and timing of
compensation and pension policies of a firm. Due to its diminishing impact on
corporate earnings, tax payment is of very important concerns to managers. In
addition to finding out how to minimize the impact of tax payment on firm value,
corporate managers also concern themselves with the fiscal objectives of governments
in countries where they operate. This explains why value maximizing managers
normally lay strategic emphasis on the application of tax shelter instruments such as
debt, depreciation, research and development, corporate arms giving, and so on.
Essentially, debt financing provides some widely acclaimed premises for tax
shelters. According to theoretical postulations, debt has enormous tax-shield capacity

Corporate tax
shield or fraud?


International Journal of Law and
Vol. 52 No. 1, 2010
pp. 5-20
© Emerald Group Publishing Limited
DOI 10.1108/17542431011018516

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