An Empirical Analysis of the Relationship Between Corporate Tax Compliance and Firm Financial Performance Among SMEs in South West Nigeria

Tax compliance imposes costs on small and medium enterprises that may affect profitability, yet voluntary compliance also generates reputational benefits, access to government contracts, and reduced regulatory disruption that could improve financial performance. This study empirically analyses the relationship between corporate tax compliance levels and financial performance among SMEs in South West Nigeria. A sample of 200 registered SMEs across Lagos, Ogun, and Oyo States was studied over the period 2019 to 2022 using a longitudinal panel design. Tax compliance was measured through a composite index of corporate income tax filing regularity, VAT registration, PAYE remittance, and withholding tax compliance. Financial performance was assessed using revenue growth, profit margin, and return on assets derived from submitted financial statements and business survey data. Fixed effects panel regression was employed. Results indicate a statistically significant positive relationship between tax compliance and revenue growth (coefficient = 0.18, p < 0.01) and profit margin (coefficient = 0.12, p < 0.05) after controlling for sector, firm size, and year effects. High tax compliance was associated with greater access to formal credit, which partially mediates the compliance-performance relationship. The study fills an empirical gap in the Nigerian SME tax-performance literature and concludes that voluntary compliance promotion rather than enforcement-led compliance may produce better fiscal and economic outcomes. Recommendations include a tax compliance dividend incentive programme and simplified SME tax filing procedures through FIRS. Keywords: tax compliance, financial performance, SMEs, South West Nigeria, FIRS