CAPITAL FLIGHT AND TAX BASE IN NIGERIA

Abstract

Capital flight in the form of taxable wealth transferred to secret jurisdictions is one factor limiting the broadening of tax revenue base in oil-resource rich African countries like Nigeria. This paper, therefore, explored the determinants of capital flight, estimate the size and trend and assess the impact on tax bases in Nigeria. Using the Johansen Co-integration test, error correction mechanism (ECM) and the vector autoregressive (VAR) approach on time series data from 1981 to 2015, the study found that annual borrowing, inflation rate, interest rate differentials, capital account openness, natural resource endowment and stock of external debt are the significant determinants of capital flight from Nigeria in the short run. Annual borrowing, exchange rate, interest rate differentials, capital account openness, natural resource endowment and stock of external debt are key long-run determinants of capital flight from Nigeria. Past capital flight increases future capital flight which terminates at the fourth year for Nigeria. Capital flight impacts consumption, export, import, gross capital formation, and real per capita income in Nigeria. Also, capital flight from the trend analyses is on the rise and needs to be curbed. Therefore, capital flight is deterrent to tax base broadening in Nigeria and transparency in international business and finance. The study, therefore, recommended the use of investment incentives to prevent base erosion cum profit shifting, automatic sharing of information to prevent secrecy banking and automatic sharing of invoice data between Nigeria and her trading partners.