ABSTRACT

Taxation is the bedrock on which a society is built. The amount of tax generated by the government to meet her spending depends largely on the degree of compliance and the effectiveness of the enforcement tools. This study examined the nature of tax services and tax compliance of SMEs in Bamenda.  In order to meet the objectives of this study, the researcher adopted a cross sectional research design through the administration of structured questionnaires to 323 respondents and 269 were recovered from the sampled respondents.

Descriptive statistics and regression analysis were used to analyse the data. The findings from the study results revealed that both internal tax services and external tax services have a positive significant relationship on tax compliance of the taxpayers. The following suggestions are made in light of the study’s findings. The tax authority ought to have paid periodic attention to the quality of services offered by either internal tax employees or by tax consulting firms because higher tax quality services offered tax will result in higher rates of tax compliance, and the tax administration could increase the quality of services offered by providing rewards or incentives as well seminars with ongoing training, educating taxpayers, increasing awareness, and encouraging all necessary voluntary compliance.

Key words: tax nature,  tax compliance, internal and external tax services.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The rapid growth of Small and Medium Sized Enterprises (SMEs) in the world has been shaped by various factors such as globalization, technological advancements, and economic policies.  Overtime, SMEs have been increasingly important contributors to economic growth, innovations, and job creation.  They have adapted to changes in business landscape by leveraging technology for efficiency, exploring international markets for growth opportunities, and advocating for policies that that support their development.  However, challenges such as access to finance, tax regulatory burdens, recent tax changes and competition remain a pertinent, influencing their evolution Maseko, N. &Manyani, O. (2016). Overall, SMEs continue to play a crucial role in driving economic development and fostering entrepreneurship globally. They also noted that SMEs accelerate rural development, decrease urban immigration and the problems of congestion in large cities because they have lesser competition by serving dispersed local markets. Moreover they contribute to domestic capital formation; and also play a value-adding role in mobilizing private savings.

 Small and Medium Scale Enterprises (SMEs) are said to play important role in economic development. SMEs are often described as efficient and prolific job creators, the seeds of big businesses and the fuel of national economic engines Carsamer, (2019). Empirically, studies have shown that, small and medium enterprises make up 97% of most economies In addition, Small, and Medium Enterprises (SMEs) significantly impact the economies of many countries, especially those in developing nations, as stated by the World Bank Asian Development Bank, (2020). Most firms globally are categorized as SMEs, which substantially impact employment (International Labour Organization (ILO), 2019). SMEs comprise around 90% of all enterprises and contribute to over 50% of total employment. Formal, small, and medium enterprises (SMEs) have the potential to contribute up to forty per cent of the Gross Domestic Product (GDP) in developing nations. The figure might significantly increase if informal SMEs are taken into account. Due to their substantial economic impact and extensive workforce, several governments have prioritized the examination of SMEs. SMEs may preserve their present goods’ market advantage by effectively deploying specialized marketing resources and capabilities in tandem. However, their growth is hindered by challenges in business management, financial management, human resource management as well as compliance with tax regulations.

Holban (2017) opined that taxation can contribute to development and to welfare through three sources; it must be able to generate sufficient funds for financing public services and social transfers at a high level of quality; it should offer incentive for more employment and for an efficient and lasting use of natural resources; finally, it should be able to reallocate income. But in the case of SMEs, tax authorities must take into consideration their income and need for survival in imposing the taxes. Operationally, it is expedient that enough profit is allowed them for the purpose of expanding their businesses. The tax policy must be one that will not encourage SMEs to remain in the informal sector or to evade or avoid tax payments. Significantly, the development of small and medium enterprises is greatly affected by the level of taxation, its administration and compliance: the higher the tax rate is, or the greater the efforts to fulfil taxation requirements are, as well as to check how those requirements are met, the lower the initiatives are for SMEs to perform well and off course the need for tax consultancy services.  Therefore, maintaining the balance between tax rate, non-compliance , tax administrating and economic development should be a main goal of every tax policy Stem & Barbour, (2015). Small and Medium Enterprises’ (SMEs) ability to grow depends highly on their potential to invest in innovation.

In Cameroon, after the independence of French Cameroon in January 1960, the country was not yet in the phase of advanced industrialization although there was already a beginning of development, thanks to some commercial and industrial companies specializing in import and export. More than the result of local initiative, it was the legacy of colonization. The type of Cameroonian enterprises commonly encountered was small artisanal production units or retail trade. The Investment Code at that       time did not contain any specific measures in favour of SMEs bt only in the hands of investors Missoka, P. (2013). .

In 1965, the main assistance   body resulting from Franco-Cameroonian Cooperation created organized artisans exhibitions and created several cooperatives. In 1968, concerned about the promotion of SMEs, the Cameroonian government decided, through the        Investment Code, to establish a special tax regime for SMEs consisting         of the   application of an overall rate reduced to 5% of the duties and taxes levied on the import of materials and materials directly necessary for the exploitation, production and processing of products. When SMEs were approved under the Internal Production Tax (TIP) regime, they were no longer subject to the payment of import duties and taxes on raw materials. In order to better establish its action to promote SMEs and to be able to evolve on the basis of more autonomous bases, the Cameroonian government then developed a national support structure for the SME. By Law No. 70/LF7 of 20 May 1970 Created the National Centre for Assistance to Small and Medium Enterprises (CAPME) which only became operational in August 1973 with the appointment of its first National Director  as noted by Zacharie O. et al. (2023).     In addition, by adopting Decree No. 71/DF/502 of 14 October 1971, the Government established the principle of a Credit Guarantee Fund for Small and Medium-sized Enterprises  Fund for Assistance and Guarantee of Loans to Small and Medium Enterprises (FOGAPE) under the aegis of the Cameroon Development Bank (BCD),  which had already been operating since 1960. It shows that 30% of SMEs were set up between 1960 and 1975, 56% between 1975 and 1980 and 14% between 1980 and 1985. Since 2010, Cameroon has adopted a law promoting SMEs, thus materializing the desire to regulate this key sector of our economy.

In addition to the definition,  the law set out the support mechanisms for   SMEs, inparticular, support for their creation, the        incubation strategy;     their development; support for funding and its consolidation. SMEs are subject to a number of obligations, non-compliance with which is subject to sanctions. Head of Government, in application of the provisions of the 2010 law, signed Decree No. 2020/0301/PM of 22 January 2020 which sets out the procedures for carrying out the missions of small and medium-sized enterprise incubation structures Zacharie O. et al. (2023).In line with improvement of business climate  in accordance with , the OHADA treaty and the Cameroonian legislator has, by Law No. 2016/014 of 14  December 2016, set the minimum share capital and the modalities of use of the services of the Notary in the context of the creation of a SARL (MINMPEESA). Thus, the minimum share capital at the creation of a SARL is set at 100,000CFA francs, divided into equal shares whose nominal value may not be less than five thousand (5000) CFA francs.  According to the latest General Business Census (RGE) of the National Institute of Statistics (INS), there            are 93,969 companies in Cameroon and about 99% of which are SMEs as noted in the work Prudence Missoka (2013).         

Taxation is a major source of revenue to most central governments and determinant of economic and development. This explains why tax compliance has been a matter of great concern for both tax authorities and taxpayers. Taxation is deeply rooted in history, records of taxation date back in an antiquity to the times of the earliest civilization, evidence of taxation can be found on an inscription and ancient Sumerian tablet from the city of Lagash (located in what is now Iraq) which: you can have Lord, you can have a king, but the man to fear is the tax collector.  Taxation also featured in the times of ancient Egyptians and Greeks. For instance, Scribes of the Pharoah collected tax on cooking oil, while the Athenian imposes taxes on slaves and foreigners. Also, during the Roman Empire, customs duties, land taxes, farming taxes and sales taxes all featured prominently.  In England feudal property and inheritance taxes were levied by kings and landlords Lawal (1982). The famous Domesday Book 1086 was the first recorded survey of property holding in England undertaken for the purpose of taxes.

The history of taxation in the United States begins with the colonial protest against British taxation policy in the 1760s; leading to the American Revolution. America began in the 19^th century with the imposition of income taxes to fund war efforts.  However, the constitutionality of income taxation was widely held in doubt until 1913 with the rectification of the 16^th amendment Besley, T. and Torsten P. (2019). To help pay for its war effort, Congress imposed its first personal income tax in 1861 which was part of the revenue Act of 1861 (3% of all incomes over us$800, rescinded in 1872). When assessing the evolution of work on taxation in Africa, existing studies seem to be divided into four strands. The first one analyses fiscal capacity under colonial rule as noted by Cogneau et al. (2021). A second strand sheds light on the turning point of independence and interrogates the continuities in state structures and the relevance of colonial heritage. A third one focuses on fiscal reforms during the structural adjustment programs and analyses their efficiency in increasing domestic taxation  and finally a larger set of studies focuses on contemporaneous fiscal capacity, and, in a way, takes stock of the tax reforms undertaken at the turn of the 1990s, such as the introduction of VAT; Moore et al., (2018); 

In Cameroon, during the period 1980/1 to 1985/6, Cameroon’s economy witnessed a sustained growth rate of 7.5 per cent in real terms, associated essentially with the boom in the oil sector. Increased budgetary and extra-budgetary resources generated from the oil sector helped to raise the investment rate in the economy, and to maintain a reasonable level of external indebtedness. After this period of sustained expansion, Cameroon experienced unfavourable economic development caused by a successive decline in the terms of trade that reached more than 65 per cent in the years World Bank (1994). This led to profound imbalances, notably in public finance and the external account. Faced with the unprecedented economic and financial crisis that ensued, the government initiated a series of reforms organized in the context of the structural adjustment programmes (SAPs) supported, in particular, by the IMF and the World Bank. A major component of these programmes was budgetary adjustment. Indeed, one of the conditions necessary for achieving rapid, equitable and sustainable economic growth in Cameroon and elsewhere was to introduce tax as healthy public finance system.. From this perspective, the level of tax revenue must be adequate to avoid public finance imbalances so that the spending necessary for development can be covered therefore, every government and stake holders of taxation must upheld relevant strategies to increase the rate of compliance of tax payers and one the strategy is encourage the services tax consultants in our economy.

The evolution of tax services hav been shaped by changes in tax laws, advancements in technology, globalization, and shifts in business practices.  The tax advisors profession provide solutions to society’s need for tax advice as postulated by Mangoting et al. (2019). The appeal of professionalism lies in its normative and ideological value system, which includes the image of a mutually beneficial and supportive collegial working relationship rather than hierarchical, competitive, or managerial control. Tax advisers are double agents of taxpayers who must ensure clients fulfill their tax obligations by minimizing tax liability as analysed by Mangoting et al., (2019). According to Dewi (2019), in view with legal perspective, tax advisers function as attorneys for taxpayers and must defend the interests of their clients; meanwhile, tax advisors must assist the government in ensuring that taxpayers fulfill their tax obligations under the law as failure to do so will be considered a crime; Due to the complexity of serving taxpayers and the responsibilities of tax professionals as citizens, the tax profession seems very “sexy”.

Tax services have a strategic position in the taxation system to support taxpayer compliance. This important role becomes more significant when the taxation system of a country is based on self-assessments that give full authority to taxpayers to carry out their own tax obligations, i.e. calculating, paying and reporting their tax due. Self-assessment requires taxpayers to perform tax obligations independently, voluntarily, and prioritize honesty. Independence, willingness, and honesty are difficult to achieve if the taxpayers are having difficulties in understanding the tax provisions which contain high complexity and are rapidly changing as the adaptations to the changes of business environments. .Martins, A. (2013), explained that the complexity and ambiguity of tax provisions are the obstacles in implementing self-assessment. This complexity and ambiguity will cause multiple interpretations of the articles in taxation provisions. For taxpayers, this condition will be detrimental because it causes high tax compliance costs and mistakes in calculating the tax due which then leads to sanctions and administrative fines. To overcome the difficulties in interpreting tax provisions that will provide risks for the emergence of sanctions and tax administration fines, the taxpayers use the services of a tax consultant.

Gupta, R. (2015), also described that the main reason for taxpayers to use tax services is to help them in interpreting tax provisions which are considered complicated and difficult to interpret.  Furthermore, Devos, K. (2012), explained that taxpayers need the competency of tax agents who are considered to be capable of solving the problem of uncertainty caused by the complexity of tax provisions. The important role of tax agents in the taxation system becomes complicated when the tax authorities make tax agents into partners to support quality and increase tax compliance. On a different side, the existence of an external tax agent can be influenced by the motivation of taxpayers to fulfill their tax obligations Nkundabanyanga, S (2017) who generally have the perception that tax is a burden that should be minimized. With this perception, taxpayers can actually use the competency of tax consultants to plan for tax and   tax avoidance.

The small business sector or Small and medium size enterprises (SMEs) play a significant role in sustaining local economic activity; SMEs with all of their characteristics are able to provide a large selection of economic activity is much needed by producers, consumers and governments. Meanwhile, according to Mukhlis, et al. (2015) SMEs sector can play an important role in the creation of economic activities in the development. On the other hand, it can also be explained that the existence of these SMEs can create new businesses that involve both producers and consumers. This of course can provide new opportunities for the emergence of new taxpayer or tax object in economic activity. With conditions growing SMEs, of course, an increasing number of new taxpayers who have the ability to pay taxes. Improving the ability of this tax can ultimately improve tax collections. In relation to the results of research conducted by Mukhlis, et al (2015) provided a different perspective related to tax compliance, where the education factor of taxation and tax knowledge can affect tax compliance SMEs sector businesses. He further noted that economic factors in the form of income level can play an important role in influencing public tax compliance. Both non-economic factors and economic factors that cumulatively can determine the degree of tax compliance SMEs sector businesses

1.2 Statement of the Problem

The importance of taxation in the activities of any government cannot be overemphasized. The world over, taxes is one major source of government revenue, however, not every national government have been able to effectively exploit this great opportunity of revenue generation. The willingness to pay tax, which may depend on the other aforementioned issues in tax-revenue generation, remains a key taxation-challenge in Cameroon. As noted in the work of Nora Dewi 2013, taxes are viewed in two different sides; from the taxpayer’s point of view, it is a burden that will reduce net income, while from the government side, taxes are one of the essential sources of revenue that will be used to finance state expenditures, both routine expenses, and development expenditures. However, the difference in interests between taxpayers and the government often implements tax payments unable to run correctly. This difference in interests creates a wrong perception that in collecting taxes, the tax authorities or the so-called tax authorities will try to impose as much tax as possible. Meanwhile, taxpayers will try to pay taxes as little as possible

The primary purpose of tax in the Bible  was to honor God while in the New Testament many resisted tax payment to the extent that  Jesus commanded his followers or the Pharisees  to pay taxes (Mtt 22: 15-22). In Mathew 22 verse 17, Jesus acknowledged the importance of paying taxes and complying with tax regulation as he quoted “Render to Caesar the things that are Caesar’s; and to God the things that are God’s”. This resistance indicated that the aspect of noncompliance by tax payers has been deeply rooted in history and the major reasons were because the Pharisees had inadequate awareness on tax laws. The question is not whether governments have rights to tax?  But how they should tax? How much tax laws or regulations do tax payers know? This is an indication that since in the time of Jesus Christ, the problem of tax non-compliance has been in existence. In the context of Cameroon, one of the main restrictions in implementing tax policies and procedures is lack of adequate information flow in terms of methods of accountability, knowledge of tax regulations and taxpayers’ awareness of available sanctions for non-compliance. This has brought about not accomplishing adequate degrees of consistence.

.  Daniel (2019:12) postulated that it is understood that the essential task of a Tax services agents as a competent party in taxation is to assist in tax problems faced by taxpayers in fulfilling their tax obligations (tax compliance). However, from an economic point of view, the tax acts as a burden.

Taxation is the bedrock on which a society is built. As stated by Alabede et al. (2021), “The amount of tax generated by the government to meet her spending depends largely on the degree of compliance and the effectiveness of the enforcement tools”.  Tax willingness reinforced by tax internal and external tax services may be the principle tools aimed at driving the taxpayer to pay the right amount of tax and to become compliant with the provisions of tax laws. However, this has prompted a study of this nature to examine the nature of tax services and tax compliance of SMEs in Bamenda.

1.3 Research Questions

The following research questions are going to guide the study; they are divided into main and specific research questions.

1.3.1 Main Question

What are the Nature of Tax Services and Tax Compliance of Small and Medium Size Enterprises in Bamenda?

1.3.2 Specific Questions

1. What is the relationship between Internal Tax Services and Tax Compliance of SMEs in Bamenda
2. What is the relationship between External Tax Services and Tax Compliance of SMEs in Bamenda

1.4 Main Objectives

The following research objectives are going to guide the study; they are divided into main and specific research objectives

1.4.1 Main Objective

To examine the Nature of Tax Services and Tax Compliance of Small and Medium Size Enterprises in Bamenda

1.4.2 Specific Objectives

1. To determine the relationship between Internal Tax Services and Tax Compliance of SMEs in Bamenda
2. To assess the relationship between External Tax Services and Tax Compliance of SMEs in Bamenda