Abstract

This study investigates the effects of The Effects of Taxation Determinants on The Performance of Small Businesses in the Buea Municipality, Recognizing the pivotal role small businesses play in economic development, this study was aim at elucidate how tax policies influence their financial viability and growth potential. The primary objective was to analyse the effect of tax burden, tax structure, and tax administration on the small business’s performance. The study population includes all small businesses within Buea Municipality, with a sample size of 92 enterprises selected through purposive sampling.

Data collection was achieved using structured questionnaires quantitative methods was employed, including regression analysis to assess the relationships between tax determinants and performance indicators such as number of customers and sales volumes. Findings indicate that small businesses operating under well-structured tax regimes experience significantly better financial outcomes, characterized by enhanced profitability and competitive advantage. The study underscores the necessity for targeted tax incentives and streamlined administrative processes, recommending reforms to improve the tax environment for small businesses in Buea Municipality.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study 

Small businesses are fundamental to economic development, significantly contributing to job creation, innovation, and overall economic resilience. According to the World Bank (2021), small and medium-sized enterprises (SMEs) account for approximately 90% of all businesses and create over 50% of jobs worldwide. The performance of these enterprises is heavily influenced by the taxation determinants within which they operate. A tax regime encompasses various tax policies, structures, and administrative processes that govern taxation, affecting how businesses manage their financial resources (OECD, 2020).

The relationship between tax determinants and small business performance has gained increasing attention globally, as policymakers seek to create environments conducive to entrepreneurship. For instance, a study by the International Monetary Fund (2022) highlights that well-designed tax policies can stimulate investment and innovation, while excessive tax burdens may deter business formation and growth.

Research indicates that small businesses often face higher effective tax rates compared to larger corporations, which can stifle their ability to reinvest in growth (Tax Foundation, 2021). In the United States, small businesses represent 99.9% of all firms and employ nearly half of the private workforce (U.S. Small Business Administration, 2020). However, the complexity of the tax code, with its numerous deductions and credits, presents challenges that can hinder growth.

In Europe, the landscape of tax regimes varies widely among countries, impacting small business performance differently. For example, countries like Ireland and the Netherlands have implemented favourable tax policies that encourage entrepreneurship, leading to increased business formation and economic growth (European Commission, 2020). In contrast, countries like Italy and Greece struggle with high tax burdens and bureaucratic hurdles, which can stifle small business development (OECD, 2019). This disparity highlights the critical role that tax policy plays in shaping the business environment across diverse economic contexts.

In Africa, the situation is equally complex. Many countries face challenges related to tax evasion, corruption, and limited access to financial resources, adversely affecting small business growth. According to the African Development Bank (2020), small businesses contribute up to 60% of total employment in Africa, yet they often operate in a taxing environment that hampers their potential. Countries like Rwanda and Mauritius have made strides in reforming their tax systems to support small businesses, demonstrating that well-designed tax regimes can foster small business development (World Bank, 2019).

Focusing on Cameroon, the tax determinants for small businesses has been a topic of ongoing debate and reform. Despite some efforts to simplify tax procedures and reduce burdens, small businesses in Cameroon face high tax rates, complex regulations, and limited access to information (National Institute of Statistics, 2019). In Buea Municipality, the capital of the Southwest region, small businesses are vital to the local economy.

However, they encounter significant challenges due to the local tax environment, which includes high rates and bureaucratic inefficiencies (Buea Municipality Chamber of Commerce, 2021). A recent survey indicated that 70% of small business owners in Buea Municipality believe that tax burdens significantly hinder their growth potential (Buea Municipality Business Survey, 2022). This backdrop sets the stage for investigating how taxation determinants affect the performance of small businesses in Buea Municipality.

1.2: Statement of the Problem

The tax system in Cameroon has been widely criticized for its complexity, lack of transparency, and adverse effects on the growth and development of small businesses. In Buea Municipality, small businesses face numerous challenges stemming from the country’s taxation determinants. The high tax burden imposed on these enterprises often leads to multiple tax obligations, including corporate income tax, value-added tax (VAT), and various local levies. Entrepreneurs frequently express frustration with the intricate nature of the tax system, complicating effective planning and budgeting.

Moreover, the local tax administration is perceived as inefficient and corrupt, with small business owners reporting excessive bureaucracy, arbitrary assessments, and informal demands for payments. These issues contribute to a substantial administrative burden, diverting resources away from productive activities and exacerbating the prevalence of the informal economy. Many entrepreneurs choose to operate informally to evade the complexities and costs associated with the formal tax system, further limiting governmental revenue generation and stunting the overall development of the small business sector.

Additionally, the absence of targeted tax incentives and support mechanisms severely hampers small businesses’ ability to access crucial resources, such as credit and training. This lack of support exacerbates the negative impacts of the taxation determinants, hindering small business performance and competitiveness in an already challenging economic environment. Despite the significance of small businesses to Buea Municipality’s economy, there has been insufficient research focusing specifically on the effects of taxation determinants on their performance. This gap in the literature underscores the urgent need for a detailed investigation into how tax policies affect small business viability and growth in Buea Municipality, Cameroon.

1.3 Research Question

1.3.1 General Research Questions

What Effects does Tax determinants has on the Performance of Small Businesses in Buea Municipality?

1.3.2 Specific Research Questions

1. To what extent does tax burden affect the Performance of Small Businesses in Buea Municipality?
2. What influence does tax structure and incentives have on the Performance of Small Businesses in Buea Municipality?
3. What effect does tax administration and support has on the Performance of Small Businesses in Buea Municipality?

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