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Thin Capitalization: A Strategy for Corporate Tax Avoidance by Multinational Entities in Nigeria

Bolarinwa Sehilat Abike Ph.D, Ishola Luqmon Oyetunde

Abstract

This study examined the relationship and effects of thin capitalization on corporate tax avoidance practice by listed Multinational entities in Nigeria for the period 2020 to 2023 after the legislation of the thin capitalization rule in 2019. Ex-post facto research design using panel data was employed and all the listed MNEs in Nigeria constituted the population for the study. Applying purposive sampling technique, a sample size of 30 listed MNEs was selected. Secondary data were gathered from the sampled companies’ annual reports and the data was analysed using descriptive statistics and multiple regression techniques. Findings revealed that the three joint proxies of thin capitalisation (TC) – debt-equity ratio , interest expense ratio and maximum allowable interest ratio did not have significant effect on corporate tax avoidance which was proxied by effective tax rate . The study concluded that Thin Capitalisation was not significantly practiced and used as a strategy to avoid corporate taxes by listed Multinationals. It was thus recommended that MNEs should exploit the accruing benefits in capital allowances and continue to engage in effective tax planning towards monitoring their ETRs. Similarly, FIRS should periodically conduct tax checks and tax law reviews to identify possible tax gaps and other avenues of corporate tax avoidance exploited by MNEs. Tax authorities should also ensure strict compliance with the provisions of the tax laws and Finance Acts on interest deductibility.

Keywords

Arm’s length principleCorporate Tax AvoidanceFinance Act 2019Multinational entitiesThin Capitalisation.

References

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