Abstract

Tax evasion and tax avoidance are significant challenges that undermine the financial sustainability and revenue generation capacity of governments, particularly in developing economies like Cameroon. In the context of small and medium-sized enterprises (SMEs), these practices can severely impact public finances while also distorting fair competition. Understanding the determinants of tax evasion and avoidance within SMEs is essential for developing effective tax policies that can enhance compliance and boost the government’s fiscal capacity.

This study examines the factors influencing tax evasion and tax avoidance among SMEs in Buea, Cameroon. It seeks to identify the economic, social, and regulatory determinants that drive these practices within the SME sector. The research also aims to evaluate the effectiveness of the existing tax system and enforcement mechanisms in curbing tax evasion and avoidance, while proposing measures to improve compliance rates.

A mixed-methods approach is utilized, combining quantitative surveys and qualitative interviews with SME owners, tax professionals, and government tax officials. The study investigates variables such as tax rates, the complexity of the tax system, perceived fairness of the tax system, access to information, levels of financial literacy, and the role of tax authorities in promoting compliance. Additionally, the research explores the influence of socio-economic factors such as the business environment, informal sector competition, and the role of cultural attitudes towards tax compliance.

The findings reveal that high tax rates and the complexity of the tax system are among the primary drivers of tax evasion and avoidance among SMEs in Buea. Many SME owners perceive the tax burden as disproportionate relative to their income, leading them to underreport earnings or engage in informal activities to reduce their tax liabilities. The study also highlights the significant role of financial literacy and tax knowledge in shaping compliance behavior. SMEs with limited understanding of the tax system or access to professional tax advice are more likely to engage in tax avoidance or evasion due to the perceived difficulty of navigating the system.

Another key finding is the influence of the informal sector on tax compliance. The prevalence of informal businesses that do not adhere to tax regulations creates an uneven playing field, encouraging registered SMEs to evade taxes to remain competitive. The study further identifies gaps in tax enforcement, with limited resources and inadequate capacity within the tax authorities to effectively monitor and prosecute non-compliance. This lack of enforcement creates an environment where tax evasion and avoidance are perceived as low-risk activities.

On the socio-cultural front, attitudes towards tax compliance are influenced by the perception of government accountability and the use of public funds. SME owners who believe that taxes are mismanaged or that public services do not benefit their businesses are more likely to justify tax evasion and avoidance as a rational response to what they perceive as an unjust system.

The study concludes with several recommendations aimed at improving tax compliance among SMEs in Buea. These include reforming the tax system to simplify procedures and reduce compliance costs for small businesses, improving taxpayer education and support services, and enhancing enforcement mechanisms through better resourcing and capacity-building within tax authorities. The research also calls for broader efforts to formalize the informal sector and foster a culture of tax compliance by promoting transparency and accountability in the management of public finances.

Overall, this study contributes to the growing body of literature on tax compliance in developing economies, offering insights into the specific challenges faced by SMEs in Buea, Cameroon. By identifying the determinants of tax evasion and avoidance, the research provides policymakers with actionable recommendations to strengthen tax compliance and improve revenue collection in the SME sector.

Keywords: Tax evasion, tax avoidance, SMEs, Cameroon, tax compliance, informal sector, tax enforcement, financial literacy, tax system reform