CHAPTER ONE

INTRODUCTION

1.1 Background of the study

With reference to Article 2 to 4 of the general tax code, corporate taxes are applied on the profits realized by companies or corporate institutions and other moral persons. It is therefore a pecuniary contribution which must be paid to the state authorities in order to cover public expenditures and as a matter of fact, all corporate bodies under the standard system must declare their profit for taxation before proceeding to the sharing of the balance if need be.

The impact of corporate tax on the establishment and growth of corporate institutions is a topic of significant relevance in today’s global economy. Corporate taxes, levied on the profits of corporations, play a critical role in shaping business environments and influencing investment decisions. Globally, the trend has been towards increasing scrutiny of corporate tax policies, with many nations revisiting their tax structures to either incentivize investment or ensure fair taxation. The Organization for Economic Co-operation and Development (OECD) has been at the forefront of this discussion, advocating for tax reforms that address issues such as base erosion and profit shifting (OECD, 2020). This global perspective underscores the importance of corporate taxation in fostering a conducive environment for business creation and growth.

In the African context, the relationship between corporate tax and institutional development is particularly pronounced. Many African countries are grappling with the dual challenge of attracting foreign direct investment (FDI) while ensuring that domestic companies thrive. The African Union has recognized the necessity for sound fiscal policies that can stimulate economic growth and enhance institutional capacities (African Union, 2018). However, high corporate tax rates can determine potential investors, leading to a paradox where governments seek to maximize revenue but inadvertently stifle growth. This dynamic is crucial in understanding how corporate tax policies can either promote or hinder the establishment of corporate institutions across the continent.

Focusing on Cameroon, the corporate tax landscape reflects broader regional trends while also exhibiting unique national characteristics. Cameroon has implemented various reforms aimed at improving the business climate, including adjustments to its corporate tax rates and incentives for specific sectors. The Cameroonian government recognizes that a favorable tax regime is essential for attracting investment and fostering entrepreneurship (World Bank, 2021). However, challenges remain, including bureaucratic hurdles and issues related to tax compliance. These factors complicate the relationship between corporate taxation and institutional growth, necessitating a closer examination of how tax policies are perceived by businesses and their actual impact on corporate creation.

Within the Bamenda, located in the Northwest Region of Cameroon, the implications of corporate tax on institutional development become even more pronounced. The region is characterized by a mix of small and medium-sized enterprises (SMEs) and larger corporations, each facing different challenges related to taxation. SMEs often struggle with high effective tax rates relative to their profit margins, which can limit their ability to reinvest in growth or innovation (Ngwa  Ngu, 2022). Conversely, larger corporations may benefit from tax incentives designed to attract substantial investments. Understanding how these dynamics play out in Bamenda is critical for policymakers aiming to create a balanced approach that fosters both small business growth and larger corporate institutions.

Moreover, the socio-economic context of Bamenda adds another layer of complexity to the study. The region is marked by a vibrant entrepreneurial spirit, yet it also faces challenges such as infrastructural deficits and limited access to finance. These factors can exacerbate the effects of corporate taxation on business formation and sustainability. Local businesses often navigate a landscape where high taxes combined with operational challenges can lead to reduced competitiveness (Tchamyou, 2019). Therefore, examining the interplay between corporate tax policies and institutional development in this specific context provides valuable insights into how local conditions influence broader economic trends.

This study aims to explore the multifaceted effects of corporate tax on the creation of corporate institutions in Bamenda. By situating this investigation within a global framework and considering regional specifics, it seeks to contribute to a deeper understanding of how tax policy can serve as both a catalyst for growth and a potential barrier to entrepreneurship. The findings will not only inform local stakeholders but also provide lessons for policymakers seeking to enhance the business environment in Cameroon and beyond.

1.2 Statement of the problem

The development and expansion of corporate entities are vital for economic progress, job creation, and innovation. In Bamenda Cameroon, the relationship between corporate tax policies and the establishment of corporate institutions poses a significant challenge. While corporate taxes are crucial for generating government revenue and supporting public services, they can also discourage business formation, especially among small and medium-sized enterprises (SMEs) that play a key role in local economies. The core issue is to understand how corporate tax rates, compliance requirements, and incentives affect entrepreneurial activities and institutional growth in this region.

To begin, the elevated corporate tax rates in Cameroon may dissuade entrepreneurs from launching new businesses. Entrepreneurs typically assess the potential returns on investment against the costs of operating a business, including taxes. In areas like the Bamenda, where economic conditions can be unstable, a heavy tax burden may lead potential business owners to shy away from the risks associated with starting a new venture..

Also, the costs of complying with corporate taxes can be especially challenging for small and medium-sized enterprises (SMEs) in the Bamenda. These companies often do not have the necessary resources to navigate complicated tax laws, which can result in unintentional violations or higher operational expenses. The time and money required for tax compliance can divert attention from essential business functions, hindering growth and innovation. Additionally, the anxiety over audits and penalties may deter entrepreneurs from formalizing their businesses, forcing them into the informal sector where they are less likely to contribute to the economy through taxes or job creation. This situation creates a cycle that maintains a low level of institutional development and restricts economic growth potential in the area.

The socio-economic environment in Bamenda adds complexity to the connection between corporate tax policies and institutional development. The region boasts a strong entrepreneurial culture, but it also grapples with significant issues such as inadequate infrastructure, limited access to funding, and socio-political instability. These challenges can worsen the adverse effects of high corporate taxes on business creation and sustainability. Entrepreneurs in Bamenda must deal not only with the intricacies of taxation but also with the broader economic conditions that can impede their efforts to establish and expand corporate institutions. The interaction between these external factors is critical to understanding the overall business landscape.

Despite the government’s efforts to streamline tax processes and offer incentives, there is a pervasive negative perception of taxation among business leaders and the general populace in Cameroon, including Bamenda. This perception is rooted in several issues like; high tax burden and “confiscatory” nature A significant majority of business leaders (81%) perceive the tax burden in Cameroon as high, with some describing the corporate tax system as “confiscatory” (Business in Cameroon, 2024). This perception, irrespective of whether the actual tax-to-GDP ratio is lower than the African average, discourages entrepreneurial activity and the formalization of businesses. Potential entrepreneurs in Bamenda may view the tax environment as overly punitive, leading them to either avoid formal registration or opt for informal business structures to minimize perceived tax liabilities. This informalization further constrains the growth potential of businesses, limits their access to financing, and perpetuates a cycle of underdevelopment.

Beyond negative perceptions, a significant challenge lies in the widespread ignorance or lack of comprehensive understanding of Cameroon’s tax system, its various components, and available incentives. This knowledge deficit exacerbates the negative perceptions and hinders informed decision-making regarding corporate institution creation. It is therefore based on the above problems that the researcher decided to do a research on the effects of corporate tax rate on the creation of corporate institutions.

1.3 Research Questions

The research questions to this study are divided in two namely main and specific research questions;

1.3.1 Main Research Question

The main research question of this study is

-How corporate tax in Cameroon effects the creation of corporate institutions in the Bamenda?

1.3.2 Specific Research Question

The specific research questions of this study are;

-To what extent does the corporate tax rate influence the decision to create corporate institutions in the Bamenda?

-What is the effect of taxable income on the creation of corporate institutions in the Bamenda?

1.4 Objectives of the Study

The objectives to study are divided in two namely main and specific research objectives;

1.4.1 Main Research Objectives

The main research objective is to investigate how corporate tax affects the creation of corporate institutions in the Bamenda.

1.4.2 Specific Research Objectives

The specific objective are;

-To assess the extent to which corporate tax rate influence the decision to create corporate institutions in the Bamenda.

-To analyze the effect of taxable income on the sustainability of corporate institutions in Bamenda.