FISCAL POLICY LETTER : The Effectiveness of Tax Exemptions in Cameroon

FISCAL POLICY LETTER – 07/2023

The Effectiveness of Tax Exemptions in Cameroon (Download pdf)

Introduction

Tax revenues are important resources that governments depend on to promote investment and stimulate economic growth. Taxation offers a better outlook for the country as it contributes to enhancing the economic well-being of its citizens. However, when it is high, it is a major obstacle to economic development. According to Tristram (2023), any high tax would discourage work, and restrict activities by causing economic actors to relocate their activities, thereby depriving the nation of essential resources. Thus, while the intentions of governments are commendable, the use of tax incentives as a tool in developing countries can have significant economic consequences (Parys, 2010).

In Cameroon, several tax innovations have been recorded to improve the business environment for many years. From the Growth and Employment Strategy Paper (GESP) to the new National Development Strategy 2020-2030, the state has defined a number of development program to foster the country’s economic growth. However, the COVID-19 pandemic, the security crisis in the North-West and South-West regions coupled with the Ukrainian crisis marked by sharp fluctuations in commodity prices have further complicated the government’s willingness to carry out its development projects and often forced it to resort to raising new taxes to finance development.

To ensure the implementation of its development program, Cameroon prepares and publishes an annual finance law, which authorizes the expenditure of public funds. This law indicates the tax innovations for the current year, both in terms of increases and exemptions, as well as the public deficit situation. In this regard, the 2022 Finance Law reflects the government’s intention to pursue an expansionary fiscal policy based on a sustained increase in public spending, while tax revenues are expected to decrease due to the international and domestic economic situation (CAA, 2022). In 2023, new tax exemptions were introduced, mainly for the agricultural and industrial sectors, the education and health sectors, the electricity and water sectors, the technological sector and the land ownership sector (Finance Law, 2023).

Tax exemptions have become common in Cameroon. Unfortunately, the expected effects of these exemptions on the business environment remain very limited. In literature, many authors have addressed this issue, but most of their work has been done in developed countries and therefore cannot be generalized to developing countries (Parys & James, 2010). However, the poor performance of tax administrations as well as the poor investment climate are reasons to assess the effectiveness of tax exemption policies in Cameroon.

The objective of this fiscal letter is to analyze the effectiveness of tax exemption policies in Cameroon, as well as the challenges and opportunities of the Cameroonian tax system. It is structured in five parts. The first part focuses on the economic situation in Cameroon, and the second on the strengths, weaknesses, opportunities and challenges of the Cameroonian tax system. The third part presents tax exemptions by sector of activity for the year 2023, the fourth section looks at the determinants of tax exemptions, and lastly the fifth part analyses the effects of these tax exemptions on economic growth in Cameroon.