ABSTRACT

Understanding the factors influencing tax compliance among Small and Medium-sized Enterprises (SMEs) in Limbe Municipality is essential for policymakers and tax authorities to design effective tax policies and enforcement strategies. This study aims to explore the determinants of tax compliance within the context of SMEs in Limbe Municipality. Employing a mixed-methods approach, combining quantitative surveys and qualitative interviews, data is collected from a sample of SME owners and managers in Limbe Municipality. The research investigates various factors that may influence SMEs’ tax compliance behavior, including tax knowledge, perceptions of fairness, enforcement measures, business characteristics, and external pressures. Through statistical analysis and thematic coding of interview data, the study identifies significant determinants of tax compliance and examines their interplay in shaping SMEs’ compliance decisions. The findings reveal that factors such as tax knowledge, perceptions of fairness in the tax system, and the effectiveness of enforcement measures significantly influence SMEs’ willingness to comply with tax obligations. Moreover, business characteristics such as size, sector, and financial performance also play a role in shaping tax compliance behavior. Additionally, external pressures from stakeholders, including customers, suppliers, and competitors, influence SMEs’ tax compliance decisions. The study provides insights into the complex dynamics of tax compliance among SMEs in Limbe Municipality and offers recommendations for policymakers and tax authorities to enhance compliance through targeted interventions and taxpayer education initiatives.

Keywords: Tax compliance, Small and Medium-sized Enterprises (SMEs), Determinants, Buea Municipality, Tax policy, Enforcement strategies.

Chapter One: Introduction

1.1 Background of the Study

Like many economies in the developing world, economic activity in Cameroon operates within two frameworks the formal and informal sectors. Integrated into regional and international markets, the formal sector enables government to easily raise revenues through the traditional means of taxation. This is however not the case with the informal sector because the government is limited to the imposition of certain fee. In fact, according to the 2009 general enterprises survey conducted by Cameroon’s National institute of statistics, the informal sector employs approximately 90% of the total active population and constitutes 89% of small enterprises. The survey also reveals that more than 50% of Cameroonian entrepreneurs consider the business climate not good among the many reasons proffered taxation was the principal channel, with corruption and access to credit following in descending order giving the situation the government decided to continue with fiscal reforms, begin 2004, to improve the business climate and to finance industrial development. Worth noting is the fact that the very first set of fiscal refunds in Cameroon took place after 1994. With the devaluation of the FCFA. The aim of this initial set of reform was to increase tax revenues which has witness a rapid depletion because of falling oil and export commodity prices, as well as the need to comply with the conditions set forth with the worlds back structural adjustment program (SAP).

Taxation refers to the imposition of levies or the process through which public or governs directly or indirectly raises revenue from the public. In general, taxes can be either direct or indirect. Income taxation is a good example of a direct tax while an example of indirect tax is the value added tax (VAT) on good sold. Generally, the number of taxes vary from one country to another according to Arthur Laffer, economic advisers to former US President Ronald Reagan, there exist a limit to which an increase in taxes leads to more govern revenue. According to his thesis demonstrated by the Laffer curve “too much tax kills tax”.

In order words, there is a certain point at which a slit increase in the taxation rate will discourage private economic agents from paying taxes. That point is the optimum taxation rate in the economy. It is the point that maximizes government fiscal receipt, and, above that point, we have the emergence of fiscal mal practice, corruption and incentives for evasion. 

According to the 2016, World Bank enterprises survey tax administration and tax rate are not the significant obstacles SME’s performance in Cameroon. In fact, in 2016, only 7% of formal entrepreneur considered taxation as a barrier to the development of their activities. Informal competitors, access to finance, access to electricity and corruption are currently the top constraints. This may appear paradoxical, but it indicates that Cameroonian SME’s prefer to remain small rather than grow and must deal with the taxation burden. In the same way, the real annual sales growth of Cameroonian SME’s is increased in 2016 by about 4% compare to the average in Sub-Saharan Africa, which was less than 1%. Also, the annual employment growth in 2016 (6%) is greater than that of 2009 (4%).

Additionally, looking at the Doing Business (2018) report, the business climate is changing in Cameroon. For example, it was rank 163 over 190 in 2018: compare to 166 over 190 in 2016. Again, there is a relative stability of some indicators like the imposition rate as a percentage of a commercial profit; 18.5% since 2005.

In conclusion, we can say that taxation is not actually a major and significant obstacle to the performance of formal Cameroonian SME’s in general; and the dynamism of the private sector. However, taxation remain a huge constrain informal SME’s are facing. Also, the informal sector remains the biggest obstacle faced by Cameroonian entrepreneur. Therefore, government authorities should continue with fiscal reforms to reduce the weight of the informal sector and collect more fiscal receipts.

Taxation is one of the main concerns Cameroon, especially to worker. Most workers, including expatriates, must pay income tax. In fact, the tax rate for them ranges between 10 and 35%, depending on the yearly income threshold. Those earning more than CFA 5million per year must pay a 35% rate income tax. And the tax year starts as at the 1^st January and ends on the 31^st December.

The Cameroon tax system include different types of taxes such as;

Direct taxes: It is a tax, which is levied on the income or profits of the person who pays it, rather than on goods and services.

Corporate tax: They are direct taxes collected from companies. Also known as company tax. Here, the tax is levied on all profits or income made by companies and other corporate bodies. It is rate at 33.00%.

Personal income tax (PIT): They are taxes collected from individuals and is imposed on different sources of income like labor, pension, interest and dividends. Revenue from PIT are important source of income for the government of Cameroon. It rates stands at 35%.

• Property tax: All companies are subjected to a professional tax or business license tax at varying rates based on their turnover. For example, the sale of a company to 15% transfer duty. The property tax is levied on 0.1% of the assessed value of the property.

Indirect taxes: It is a tax levied on goods and services rather than income or profits.

Value added tax (VAT): VAT are taxes levied on natural persons or corporate bodies, including regional and local authorities and bodies governed by public law, which automatically, habitually or occasionally carry out taxable transactions falling within the scope of application of the said tax as defined. The individual is liable to VAT regardless of their legal status, their situation in relation to other taxes and the nature or form of their activities. It is rate at 19.25%.

Special tax on petroleum products: A special tax on the sale of the following petroleum products is hereby instituted: premium grade petrol and gas-oil. Refineries and oil storage enterprises using petroleum products for their own operations, or for other needs are also liable to special tax on petroleum products. The special tax on petroleum products is payable by companies which distribute taxable products. The rates of the special tax on petroleum products is as follows:

– 110 CFAF per litre of premium grade petrol

– 65 CFAF per litre of gas-oil

1. Special income tax: Subject to international tax treaties, a special tax is hereby instituted at an overall rate of 15% on income paid to natural persons or corporate bodies domiciled out of Cameroon, by firm’s establishments based in Cameroon, the State or regional and local authorities.

Para-fiscal charges: these are charges levied by public or private agencies on the production of marketing agricultural products with a view of financing activities for the benefit of the sector.

Contribution to the survey of consumers finances (SCF).

Contribution to the national employment fund

Property income, movable capital (whether assimilated or distributed by corporation to people who are not known to tax authorities).

Statement of the Problem

Tax compliance among Small and Medium-sized Enterprises (SMEs) in Buea Municipality is crucial for revenue generation and sustainable economic development. However, despite the significance of SMEs in the local economy, ensuring tax compliance remains a challenge for tax authorities and policymakers. Understanding the factors influencing tax compliance behavior among SMEs in Buea Municipality is essential for designing effective tax policies and enforcement strategies (Alm & Torgler, 2006).

SMEs in Buea Municipality operate within a dynamic socio-economic context characterized by diverse business activities, regulatory frameworks, and tax policies. Limited empirical research exists specifically addressing tax compliance among SMEs in this context, leading to a gap in understanding the determinants of tax compliance behavior in Buea Municipality (Ayyagari et al., 2011).

Therefore, the overarching problem addressed by this study is the lack of comprehensive understanding regarding the determinants of tax compliance among SMEs in Buea Municipality. Specifically, the research aims to investigate various factors influencing SMEs’ tax compliance behavior, including their level of tax knowledge, perceptions of fairness in the tax system, effectiveness of enforcement measures, business characteristics, and external pressures (Kirchler et al., 2008; Braithwaite, 2009).

Moreover, the effectiveness of tax policies and enforcement strategies implemented by tax authorities directly impacts SMEs’ compliance behavior. Simplified tax procedures, taxpayer education initiatives, and targeted enforcement efforts can enhance SMEs’ understanding of their tax obligations and promote voluntary compliance (James & Alley, 2002).

Therefore, addressing this research problem requires a comprehensive examination of the multifaceted factors influencing tax compliance among SMEs in BueaMunicipality. By identifying the determinants of tax compliance behavior, this study aims to provide valuable insights for policymakers, tax authorities, and SME owners and managers to develop targeted interventions and promote voluntary tax compliance in the region.