By Dr. Jean Cedric Kouam & Dr. Herve Wouapi (Download pdf version)
The Impact of Taxation on Business Development in Cameroon
In November 2019, Cameroon adopted its new National Development Strategy (NDS30). One of the government’s objectives in implementing this strategy is to create a business climate conducive to entrepreneurship. however,, according to the International Labour Organisation (ILO), more than 90% of the workforce remains concentrated in the informal sector in Cameroon (ILO, 2017). Among the factors behind this strong predominance of the informal sector is the high level of taxation. This is one of the reasons why the creation of nearly 60 000 businesses between 2010 and 2016 (Centres of Business Creation Formalities 2016) did not contribute significantly to the growth of gross domestic product (GDP). Tax revenues from these businesses have certainly increased, but this evolution remains much less proportional to the number of businesses created. Hence the need to define a tax regime that is favourable to the development of domestic enterprises. This article analyses the impact of taxation on enterprise development in Cameroon.
Overview of the Cameroon tax framework
In Cameroon, tax legislation distinguishes between three tax regimes: the flat tax regime, the simplified regime and the real regime, which vary according to the turnover, size and legal form of the company. The flat-rate tax regime applies to sole proprietorships with an annual turnover of less than CFAF francs 10 million. For a commercial or industrial enterprise subject to the final tax, the payment of the patente, the Personal Income Tax (IRPP) and the Value Added Tax (VAT) are eliminated.
The simplified regime is applied to businesses with a turnover of between CFAF 10 and 50 million. In this case, the company is required to pay monthly corporate tax (IS) and IRPP to its members. In addition to these two types of taxes, the company subject to a simplified tax regime is also required to pay on an annual basis the net income tax, the patente calculated on the basis of the turnover and a tax on land ownership. While the property tax is set at 0.1% of the value of the building, increased by 10% for the Additional Communal Cents (CAC) and payable from the moment the company is set up, new companies are exempt from the property tax for the first two years of their operation.
The real regime is applied to businesses with an annual turnover of more than CFAF 50 million. IRPP and IS are also imposed on taxpayers under this tax regime and are payable monthly. In addition to these two types of taxes, taxpayers are eligible for the patente calculated on the basis of turnover, the value-added tax, the rate of which is set at 19.25%, it is specified that this is a consumption tax levied on the expenditure of economic agents. Among the annual, direct and indirect taxes applicable to taxpayers under the real regime, the following are mainly mentioned: the annual tax on net income, the patente and the Land Tax (TPF) in the same way as companies under the simplified regime.
Similarly, the 2021 Finance Act provides for tax exemptions for certain companies, particularly those involved in the digital sector. These companies are exempt from all tax duties and fees except social security contributions when they are in their incubation phase, which cannot exceed five (05) years (Article 124ter of the 2021 Finance Act). Once out of the incubation phase, these companies are for a period of five years, subject to a special regime. Beyond this period, they are placed under a common law tax regime.
Because of Covid-19, a good number of tax benefits have also been granted to companies in the hotel sector (exemption from income tax, exemption from payment of advance payments and the minimum collection amount, obligation to file monthly returns); forestry (reduction from 4% to 3% of the felling tax rate applicable in particular to companies that can prove certification of sustainable forest management as well as agricultural companies (exemption from VAT for the purchase of certain inputs and tools); and exemption from registration fees for transfers of land and loan agreements intended to finance activities; exemption from land tax, exemption from tax and employer’s contributions on the salaries of seasonal agricultural workers by the individual farmer).
Impact of corporate tax on business development
In recent years, the Cameroon government has made significant efforts to stimulate the competitiveness of national companies. The reforms implemented aim in particular to make the existing tax systems less rigid and more adapted to the different categories of companies. Indeed, a complex and excessive tax system is detrimental to entrepreneurship and leads to losses due to the cost of tax compliance and tax avoidance(Roche, 2015). Conversely, more favourable tax regimes contribute to the broadening of the tax base by stimulating the creation, development and resilience of businesses
Between 2016 and 2021, tax revenues accounted for 55.41% of the state budget on average. Over the same period, taxes on corporate profits were estimated at 7.37% of the state budget and 13.29% of total tax revenues; with a corporate income tax rate set at 35% of profits earned, plus 10% for CACs. While it is true that Corporate Income Tax (CIT) still makes a small contribution to tax revenues in Cameroon, the resulting tax burden is borne by only 10% of companies.
Given that a company’s profit when invested as savings implies future investments, and therefore the development of entrepreneurship, the high level of corporate tax is detrimental to the sustainability of these companies. By discouraging entrepreneurship and the competitiveness of local businesses, high corporate taxes reduce future income flows that are supposed to contribute to the country’s economic development. This justifies the predominance of the informal sector.
Conclusion and policy recommendation
The objective of this paper was to analyse the impact of taxation on business development in Cameroon. Tax incentives depend on the size and nature of the business. However, these firms are required to pay a number of taxes, including taxes on their profits and revenues. In Cameroon, the tax rate on corporate profits remains relatively high and the related tax burden is borne by only 10% of companies in the formal sector, which is counterproductive for the competitiveness of these companies. A reduction in the corporate income tax rate would enhance competitiveness, encourage the transition of more companies into the formal sector, broaden the tax base and thereby promote sustainable and inclusive economic growth.
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