1.0 BACKGROUND OF THE STUDY
Taxes are compulsory payment imposed on the income of individuals, families, communities, trustees, and corporate bodies by the government of the country. Taxes are levied on income and is paid by all income earners. A lot of controversies has emerged on why taxation. Majority of people look at tax as a compulsory burden they have to bear for the nation, while others view it as a contribution they have to make for the nation’s well being.
Dividends are usually paid to shareholders or owners of business at specific periods. This is apparently based on the declared earning of the company and the recommendations made by the directors, thus, if there are no profits made, dividends are not declared. But when profits are made, the company is obligated to pay corporate tax including other statutory taxes to the government. This is an essential corporate responsibility particularly profit making companies.
The taxes no doubt reduce the profits available at the disposal of the organizations, either to be retained or distributed as dividend to shareholders of the company.
However, a lot of controversies regarding taxes and dividend policy have attracted many academic interests. Financial theorists such as Brennan (1970), Masulis and True Man (1988) have stipulated that taxes affect organizational corporate dividend policy. If this speculation were true, changes in corporate dividend payout would be expected whenever the government changes its income taxes policy Wu(1996:110). However, this does not always apply especially in the banking business.
Lintner (1956:46), has asserted that “the major determinants of dividend policy are the anticipated level of future earnings and the pattern of past dividend”.
This discrepancy may have underpinned Modigliani and Miller (1961) theory, which provide a platform for the enormous debates and researches on dividend policy. The banking sector is of interest in this research because of the structure of its dividend as revealed in the study.
For decades, several postulations and assumptions have been made regarding whether the taxes paid by organizations actually affect their pattern of dividend policy. Dividend policy is therefore the trade-off between retaining earning and paying out cash or issuing new shares to shareholders. Some firms may have low dividend pay out because management is optimistic about the firms’ future, and therefore wishes to retain their earnings for further expansion. It is hard to deny that taxes are important to investors.
According to Brealey et al (1995:51), Although dividend affects the shareholders tax liability, it does not in general alter the taxes that must be paid regardless of whether the company distributes or retains its profit. Conscious of these assumptions, surrounding dividend policy, and this study is directed at evaluating the influence of taxes on the dividend policies of selected financial institutions in Uyo- Nigeria.
1.1 STATEMENT OF THE PROBLEM
Tax constitutes a potentially important consideration in firm’s financing decisions. The debate regarding dividend policies is yet unending. Academicians have postulated several theories on what an Ideal dividend policy should be. There seems to be a chasm with what is really obtainable in practice. There are extraneous factors dictating the tune of any policy to be applied by organizations.
There is also the link of taxation and the impact it exudes on the formulation of dividend policy. Financial theorist such as WU (1996:45) opined that evasion of taxes by companies is a key factor in the determination of the extent to which its dividend policy is affected”.
Miller and Scholes (1982:37), however admits that ‘taxes weigh tremendous influence on corporate dividend structure’’. In turn, there are contentions on the effect of dividend policy on company’s share price. Whether these are true has remained a matter of intense debate.
The avalanche of opinion regarding dividend policy and taxes is not only examinable but mind probing for academic research. This research is therefore poised at making further contributions by examining the theories but with specific application to the banking sector in Uyo and Nigeria as a whole.