Pa ge 1 Pa ge 74 American Journal of Multidisciplinary Research and Innovation (AJMRI) Tax Compliance as a Driver of Sustainability: Modeling for Medium Enterprises Jimmy Peru1* Volume 4 Issue 5, Year 2025 ISSN: 2158-8155 (Online), 2832-4854 (Print) DOI: https://doi.org/10.54536/ajmri.v4i5.5602 https://journals.e-palli.com/home/index.php/ajmri Article Information ABSTRACT Received: June 20, 2025 Accepted: July 26, 2025 Published: October 15, 2025 This study aims to investigate the interplay between the dimensions of tax compliance and the sustainability of medium enterprises in one of the commercial hubs in Northern Philippines, with the goal of filling the gap in the literature on fostering the resilience of medium enterprises to become large enterprises. A total population of 172 medium enterprises was employed in the analysis, utilizing self-reported data on taxes, profitability, investment, and net cash flows. Primary data were collected using a 45-item survey questionnaire that assessed the dimensions of tax compliance and sustainability growth indicators, with a Cronbach’s alpha of 0.980. The results of the General Linear Model Multivariate showed that progressive taxation has a significantly larger effect than revenue allocation on net cash flow, with the strongest effect on net cash flow and investment decisions, and a weaker but still significant effect on profitability. The model suggests that liquidity and reinvestment potential can promote the long-term growth of medium-sized enterprises, enabling them to thrive gradually. To achieve this, medium enterprises require support in financial management, access to capital, optimized taxation, innovation, strong governance, cost efficiency, and effective policy dialogue. The study’s findings recommend the need for collaboration among stakeholders of medium enterprises to enhance their potential for growth and expansion into larger enterprises. Recognizing the limitations of the study, research involving medium enterprises, tax stakeholders such as tax authorities, policymakers, and industry enterprises, is proposed to deepen the analysis of the relationship between tax compliance and sustainability, thereby enhancing the broader applicability of the findings. Keywords Medium Enterprises, Sustainability, Tax Compliance 1 Peru Law and Accounting Office, Philippines * Corresponding author’s e-mail: jimmperucpa@gmail.com INTRODUCTION Medium-sized companies are consistently shown by empirical research to be important drivers of economic growth, spurring job creation, GDP expansion, and innovation. Studies spanning numerous countries reveal that tiny and medium-sized enterprises (SMEs) contribute significantly to national income, especially in developing regions, and account for as much as 87% of employment in certain countries (Abdin, 2019; Houghton & Ayandibu, 2017; Pedraza, 2021). Through investment and innovation, these companies also boost local economies and directly contribute to greater revenue and regional development (Botezatu et al., 2020; Vulić, 2021). Understanding the unique role of medium-sized enterprises still has major gaps. Most studies aggregate SMEs without distinguishing between small and medium companies, thereby concealing sector-specific mechanisms (Botezatu et al., 2020; Houghton & Ayandibu, 2017). The paths of innovation by which medium-sized enterprises help foster growth remain poorly charted, and regional-specific analyses—such as Santiago City’s inventory management study—remain uncommon (Akhmetgareeva et al., 2025; Enriques et al., 2023). To address financial, infrastructural, and competitive challenges, it is essential to gather disaggregated data, conduct comparative innovation studies across firms, elucidate context-sensitive policy frameworks, and develop viable strategies (Akhmetgareeva et al., 2025; Yusuf et al., 2013). Closing these gaps is imperative for creating evidence-based strategies that maximize the role of medium enterprises in sustainable development. Empirical data consistently shows that for medium- sized companies trying to maintain competitiveness and resilience in rapidly changing market conditions, sustainability is becoming a major consideration. Apart from improving environmental, social, and financial performance, embracing sustainable methods improves corporate reputation and stakeholder relations—both of which are vital for long-term corporate success. (Machado et al., 2022; Moursellas et al., 2020; Rio-Rama et al., 2018). Adoption of sustainability is driven by internal values, such as organizational culture and leadership commitment, as well as outside pressure from suppliers, legislators, and customers—so positioning it as a strategic necessity rather than only an ethical one (Kot, 2018; Kundurpi et al., 2018; Saygili et al., 2023). Additional studies show that medium-sized businesses embracing sustainable supply chain and quality management approaches are better equipped to handle regulatory changes and market fluctuations, thereby gaining a significant competitive edge. (Kot, 2018; Litvaj et al., 2023). Positive managerial attitudes toward sustainability are prevalent, and higher degrees of sustainable practice adoption are strongly connected to Pa ge 75 https://journals.e-palli.com/home/index.php/ajmri Am. J. Multidis. Res. Innov. 4(5) 74-88, 2025 higher business performance and increased stakeholder confidence (Rio-Rama et al., 2018; Saygili et al., 2023). TA dearth of dedicated policies and inadequate resources limits the capacity of middle-sized businesses to adopt sustainability (Orengo et al., 2020; Permatasari & Gunawan, 2023). It emphasizes the need for targeted policies and related infrastructure to enable sustainable reporting and behavior within this industry. Despite the growing body of empirical data, significant research gaps remain regarding the importance of sustainability for mid-sized companies in dynamic and competitive markets. Notably, research utilizing large and varied samples as well as theoretically grounded studies is lacking, especially in non-manufacturing industries and developing countries (Lai et al., 2020; Machado et al., 2022; Orengo et al., 2020). Furthermore, existing research overlooks the influence of social and cultural contexts, personal values, and interpersonal connections within organizations (Kundurpi et al., 2018; Machado et al., 2022). Major firms often benefit from current frameworks and metrics; therefore, they are less relevant to medium-sized enterprises, which have specific limitations on funds and resources. (Machado et al., 2022; Moursellas et al., 2020; Saygili et al., 2023). Moreover, although it is recognized as a major engine of sustainability, the inclusion of technology and creativity in medium-sized companies is still relatively understudied (Kannan & Gambetta, 2025). There is also a dearth of thorough studies on sustainability reporting, cross- country comparisons, and the unique dynamics of family-owned, mid-sized businesses (Machado et al., 2022; Soverchia et al., 2019). Although managers in some regions have favorable attitudes toward sustainability, resource constraints and industry-specific challenges lead to a wide range of actual implementation (Rio-Rama et al., 2018; Saygili et al., 2023). These differences highlight the need for more context-specific, comparative, and thorough studies to inform efficient policies and programs that can help medium-sized companies adopt and implement sustainability (Kannan & Gambetta, 2025; Machado et al., 2022; Orengo et al., 2020; Moursellas et al., 2020). Empirical data indicate that taxation is a significant external force influencing the operations, profitability, and long- term sustainability of businesses. With high administrative costs and constant policy changes presenting especially challenging obstacles to their sustainability and market competitiveness (Pandey, 2025), tax rules have a direct impact on small firms, influencing their financial health, compliance obligations, and development prospects. Particularly among big, state-owned, or heavily polluting companies, environmental taxes—including carbon and protection taxes—have been found to drive corporate diversification, green innovation, and improved ESG (Environmental, Social, and Governance) performance, hence promoting sustainable development and operational flexibility (Abriam, 2023; Duan et al., 2024; Hu et al., 2024; Zhao et al., 2022). For state-owned companies, environmental taxes may have either a negative or negligible effect; for private businesses, they may initially improve financial and environmental-social performance up to a point, after which the effect reverses (Zhao et al., 2022). Highly or inappropriately designed taxes can hinder social innovation and slow down the achievement of Sustainable Development Goals in developing countries, thereby emphasizing the need for tax policies that are sensitive to local administrative capabilities and business realities (Asongu & Kouam, 2022; Ng, 2024). Moreover, tax evasion is increasingly recognized as a sustainability issue that undermines regulatory compliance and corporate integrity, suggesting that equitable tax practices are essential to long-term business and social well-being (Bird & Davis-Nozemack, 2018). Sustainability also depends on the connection between accounting and taxation, as transparent financial reporting and sensible tax policies help to ensure financial stability and responsible resource use (Băcanu, 2017; Polyatykina, 2023). Overall, empirical research indicates that well-designed, balanced tax policies can promote enterprise profitability and sustainability, whereas poorly structured or excessive taxation can hinder development and innovation (Asongu & Kouam, 2022; Duan et al., 2018; Hu et al., 2024; Pandey, 2025; Zhao et al., 2022). Empirical studies reveal several knowledge gaps regarding the impact of taxation on corporate activities, profitability, and long-term sustainability. Although research indicates that tax policies, particularly environmental and corporate taxes, can influence firm behavior, profitability, and green innovation, the consequences are often context- dependent and vary according to firm size, ownership, and industry. Environmental taxes, for instance, help to boost ESG performance and promote green innovation; however, their effects are more noticeable in big or state-owned companies; in smaller businesses, the high compliance costs and administrative burden might impede growth and sustainability, but research on how to tailor tax systems to their needs is limited (Asongu & Kouam, 2022; Cortez et al., 2024; Pandey, 2025). Tax avoidance and sustainability are underinvestigated; calls for incorporating tax justice into more comprehensive sustainability metrics and corporate responsibility frameworks are widespread (Bird & Davis-Nozemack, 2018; Ng, 2024). Furthermore, most empirical studies focus on particular regions or sectors, thereby leaving a gap in comparative, cross-country research and in understanding the long-term effects of tax changes on business resilience (Asongu & Kouam, 2022; Pandey, 2025; Soufiene et al., 2024). Finally, the generalizability of the results is further constrained by methodological flaws, including reliance on non-representative samples or a lack of longitudinal data, which highlights the need for more thorough, multidimensional research in this sector (Asongu & Kouam, 2022; Soufiene et al., 2025). Empirical studies demonstrate the numerous barriers that progressive taxation, revenue allocation, and tax compliance create for corporate sustainability, particularly for small and medium-sized enterprises (SMEs). High Pa ge 76 https://journals.e-palli.com/home/index.php/ajmri Am. J. Multidis. Res. Innov. 4(5) 74-88, 2025 administrative expenses, constant changes in tax laws, and constrained resources present significant challenges for SMEs, making tax compliance a difficult task that endangers their long-term sustainability (Emeka et al., 2021; Pandey, 2025; Thaha et al., 2023). In developing nations, multiple levels of taxation exacerbate the situation by eroding company assets and profitability, while compliance expenses pose a significant impediment to long-term development (Emeka et al., 2021; Thaha et al., 2023). Additionally, complex tax regulations, insufficient tax knowledge, and inconsistent enforcement systems can restrict compliance and efficient resource allocation, thereby lowering government revenues and undermining sustainable development projects (Akintobi et al., 2022; Silalahi, 2024). Understanding and resolving the complexities of tax compliance and revenue allocation for business sustainability still require significant research gaps. Elevated administrative expenses, intricate regulations, and constant policy shifts intensify the unequal compliance challenges faced by SMEs, thereby hindering their development and long-term viability. (Emeka et al., 2021; Pandey, 2025; Silalahi, 2024; Thaha et al., 2023). Furthermore, progressive taxation presents significant potential for promoting environmental objectives and enhancing equity; however, its effectiveness relies on rigorous enforcement, institutional integrity, and the adaptability of businesses to changing regulations (Faisal & Sugihyanty, 2025; Frein et al., 2021; Saez & Zucman, 2020). Furthermore, there is a significant lack of clarity and consistency in revenue distribution systems exacerbated by subpar administrative infrastructure and poor public awareness, which undercuts efficient tax systems and resource mobilization (Silalahi, 2024; Thaha et al., 2023). The research gaps across the literature reveal several important areas that require further study. First, though medium-sized businesses are considered major contributors to economic expansion and social advancement, many studies do not differentiate between tiny and medium firms, therefore hiding industry- specific processes and innovation paths and missing disaggregated, context-sensitive data (Akhmetgareeva et al., 2025; Botezatu et al., 2020; Enriques et al., 2023; Houghton & Ayandibu, 2017). Second, although sustainability is becoming rather important for medium- sized businesses’ competitiveness, research is limited by a lack of big, varied samples, insufficient focus on non-manufacturing industries and emerging nations, and insufficient consideration of social, cultural, and organizational aspects affecting sustainability adoption (Kundurpi et al., 2018; Lai et al., 2020; Machado et al., 2022; Orengo et al., 2020). First, because of their particular resource constraints, current systems are frequently unsuitable for medium businesses; therefore, there is a marked shortage of studies on technology integration, sustainability reporting, and the dynamics of family- owned firms (Kannan & Gambetta, 2025; Machado et al., 2022; Saygili et al., 2023). Second, in the realm of taxation, empirical research is largely context-dependent, with gaps in comparative and cross-country analysis, as well as longitudinal studies, that could clarify the long- term impacts of tax policy on business resilience and sustainability (Asongu & Kouam, 2022; Pandey, 2025; Soufiene et al., 2024). The disproportionate compliance burdens faced by SMEs, the underexplored links between tax justice and sustainability, and the need for integrated policy changes and digital tax tools, especially in emerging contexts, are all critical problems (Akintobi et al., 2022; Bird & Davis-Nozemack, 2018; Faisal & Sugihyanty, 2025). These gaps underscore the need for more sophisticated, multifaceted, and context-aware research to inform effective policies that foster resilience and sustainable growth in mid-sized companies. Hypothesis Hypothesis 1: The revenue allocation dimension has a positive effect on tax compliance Hypothesis 2: The progressive taxation dimension has a positive effect on tax compliance. Hypothesis 3: The profitability dimension has a positive effect on sustainability. Hypothesis 4: The investment decision dimension has a positive effect on sustainability. Hypothesis 5: The net cash flow dimension has a positive effect on sustainability. Hypothesis 6: Tax compliance has a positive effect on sustainability LITERATURE REVIEW Determinants of Internal and External Taxation Compliance Tax compliance among business organizations— especially small and mid-sized enterprises (SMEs)—is shaped by a complicated interaction of internal and external variables (Febrayante et al., 2025). Internal factors primarily encompass the convictions, understanding, and perspectives held by management and business proprietors. SMEs that perceive tax payment as a societal and moral duty are more likely to comply; consequently, positive attitudes regarding tax compliance, tax ethics, and patriotism significantly enhance compliance intentions (Bishagazi & Giesi, 2022; Chiyangwa et al., 2025; Hussin et al., 2023). Moreover, higher levels of tax knowledge and education empower SMEs to understand better tax rules and the significance of fulfilling tax obligations, thereby improving their compliance behavior (Alabi & Okunola, 2023; Inasius, 2019). By enabling SME managers to manage their finances effectively and fulfill tax requirements, financial literacy enhances compliance further (Akims, 2023; Mihailă et al., 2024; Thaha, 2023). Furthermore, robust internal motivators encompass perceptions of fairness and equity in tax administration and governmental expenditures; compliance among SMEs is enhanced when they perceive the tax system as just and their contributions as being utilized effectively Pa ge 77 https://journals.e-palli.com/home/index.php/ajmri Am. J. Multidis. Res. Innov. 4(5) 74-88, 2025 (Bishagazi & Giesi, 2022; Mihailă et al., 2024). Tax compliance is also significantly influenced by external factors. A powerful motivation for small businesses to follow tax rules comes from enforcement tools, including audit probability, fines, and legal penalties (Inasius, 2019; Mihailă et al., 2024). The complexity of tax laws can either inhibit or encourage compliance. Extremely complicated or ambiguous tax rules typically lower compliance, whereas simplified procedures and clearly defined instructions increase it (Chiyangwa et al., 2025; Hussin et al., 2023). Access to tax information and support services, including training and online assistance, further promotes compliance by reducing uncertainty and administrative burden (Bishagazi & Giesi, 2022; Mudzengerere et al., 2025). Peer influence and social norms also provide significant external pressure; SMEs are more likely to comply when their peer groups and referrers show compliant behavior (Alshira’h et al., 2022; Chiyangwa et al., 2025). Trust in tax authorities and institutional support, including simplified processes and public awareness efforts, improves compliance by fostering confidence in the tax system (Chiyangwa et al., 2025; Mchukwa & Mbwambo, 2024). Factors particular to the owner and the economy further complicate the tax compliance scene. Tax rates and profitability, two broad economic indicators, influence compliance choices; some data suggest that higher profits may be associated with lower compliance. Conversely, larger family sizes are related to higher compliance (Le et al., 2024; Mchukwa & Mbwambo, 2024). Characteristics of owners, including their age and family size, have shown contradictory impacts on adherence, indicating that individual situations may differently affect tax conduct (Dimuk et al., 2018; Ratnawati et al., 2024). Furthermore, the internal tax costs for SMEs constitute a significant financial burden, as demonstrated by Vietnamese firms, where expenses for internal tax compliance surpass those for external obligations (Trang, 2024). Likewise, turnover and organizational attributes, including legal structure and accounting frameworks, influence external tax compliance expenses in nations such as South Africa (Franzsen et al., 2017). Empirical data consistently show that both internal and external determinants shape tax compliance among SMEs. These internal determinants include attitudes, tax knowledge, financial literacy, and perceptions of fairness. External factors, such as enforcement, regulatory complexity, peer influence, and institutional support, also play a role. Therefore, efforts to enhance tax compliance should center on simplifying tax procedures, increasing tax education and awareness, promoting trust and fairness in tax administration, and strengthening enforcement mechanisms (Abdinur & Karcıoğlu, 2025). Such all-inclusive approaches not only encourage voluntary compliance but also help sustainable governmental revenue collection and the development of small businesses (Abdinur & Karcıoğlu, 2025; Bishagazi & Giesi, 2022; Chiyangwa et al., 2025; Hussin et al., 2023). Impact of Taxation Policies on Medium Enterprises’ Growth and Sustainability Especially by affecting profitability, tax laws have a great influence on the viability of midsized companies. High tax rates and complex tax systems increase operational costs and administrative burdens, thereby lowering profitability in emerging economies such as Nigeria and Zimbabwe (Ehis et al., 2022; Feya et al., 2025; Malatji et al., 2021). On the other hand, correctly applied tax incentives and deductions can enhance profitability by alleviating financial burdens and promoting more efficient resource management. Evidence from India and Portugal suggests that tax changes, such as the Goods and Services Tax (GST) and targeted fiscal incentives, can enhance financial performance indicators, including Return on Equity (ROE) and Return on Investment (ROI) (Bhalla et al., 2022; Malabanan et al., 2024). Studies in Nigeria also reveal that loss relief and capital allowances are positively correlated with net profit margins, suggesting that tax breaks can lead to improved financial outcomes for medium-sized businesses (Edori & Des-Wosu, 2024). Taxation policies also affect the investment decisions and development rates of medium-sized businesses. Favorable tax regulations, such as incentives and simplified compliance procedures, boost available capital for reinvestment (Ehis et al., 2022; Frein et al., 2021; The Impact of Fiscal Policies, 2022), thereby fostering competitiveness and growth. Multiple and high tax liabilities, meanwhile, reduce liquidity and raise uncertainty, therefore inhibiting investment and delaying or stopping business expansion (Ehis et al., 2022; Erosa & Gonzalez, 2019). With the tax target having a bigger impact than the tax form itself (Frein et al., 2021), for instance, progressive carbon taxes influence the timing and nature of green investments. High tax rates have been cited as restricting small businesses’ capacity to invest in infrastructure and personnel development in countries such as Malawi and Sierra Leone, thereby stifling sustainable development (Mhango & Nayagam, 2025; Ndoinjeh, 2025). Taxation policies also influence net cash flows, a key measure of the sustainability of medium-sized businesses. As seen in SMEs in Zimbabwe and Nigeria, high and complex tax obligations raise compliance costs and lower liquidity, which restricts their operating capability and working capital (Ehis et al., 2022; Feya et al., 2025; Malatji et al., 2021). Although some research indicates a clear negative link between taxation and cash flow, other studies have yielded mixed results, possibly due to questionnaire biases (Ehis et al., 2022; Sato et al., 2021). Tax changes aimed at reducing bureaucratic inefficiencies and fraud can enhance net cash positions by increasing working capital flow, as demonstrated in studies from Nigeria and India (Bhalla et al., 2022; Edori & Des-Wosu, 2024). Maintaining good cash flow for medium-sized businesses, therefore, depends on efficient tax administration and reform. When tax policies are not customized to the capabilities of medium businesses, such as their ability to pay Pa ge 78 https://journals.e-palli.com/home/index.php/ajmri Am. J. Multidis. Res. Innov. 4(5) 74-88, 2025 and administrative resources, their sustainability is compromised (Ehis et al., 2022; Feya et al., 2025; Malatji et al., 2021; Pandey, 2025). Excessive tax burdens strain profitability, discourage investment, and reduce liquidity, threatening long-term viability. To mitigate these negative impacts, effective tax management education, streamlined tax administration, and targeted tax incentives are advised to foster sustainable growth (Ehis et al., 2022; Feya et al., 2025; Pandey, 2025; The Impact of Fiscal Policies, 2022). Although there is little empirical evidence specific to the Philippines, related research suggests that business- friendly tax changes that balance government income requirements with SME capabilities can enhance the sustainability of medium-sized companies by improving profitability, investment, and cash flow (Pandey, 2025). Causal Relationships and Interaction in Tax Compliance and Sustainability Reflected in profits, investment choices, and net cash flows, empirical data from the Philippine scene and similar conditions show a clear causal link between tax compliance and the sustainability of SMEs. Studies show that well- designed tax policies—such as simplified tax systems and digital platforms—lower administrative burdens, hence encouraging SME expansion and increasing profits and sustainable cash flows (Anastasia, 2025; Thaha et al., 2023). By raising compliance levels, factors like supply chain sustainability, tax service quality, financial attitudes, and tax knowledge indirectly support sustainability (Hussin et al., 2023; Inasius, 2019; Siti et al., 2023; Supardi et al., 2024). High compliance expenses and tax obligations, conversely, can redirect resources from productive investments, putting the sustainability of SMEs at risk. Nonetheless, simplifying and reducing the costs of compliance encourages voluntary adherence and enhances financial stability (Ahmad et al., 2024; Xin et al., 2024). Within the Philippine context specifically, tax compliance among SMEs is shaped by management attitudes, ethical standards, and perceptions of regulatory burdens, all of which interact with firm sustainability indicators such as profitability, investment decisions, and net cash flows (Angeles, 2021; Santamaria et al., 2020). Mixed-methods and regression analyses demonstrate that SMEs with greater tax compliance, driven by ethical management and positive tax morale, are more likely to attract investors and partners, thereby promoting long-term sustainability and increasing profitability and investment potential through better governance and reputation (Angeles, 2021). However, the compliance cost burden—especially for smaller companies—can deplete available funds for investment and restrict net cash flows (Jabagat, 2021; Santamaria et al., 2020). The adoption of technology and understanding of regulatory developments play a crucial role in mitigating these unfavorable impacts, thereby enabling SMEs to maintain growth despite compliance challenges (Santamaria et al., 2020). External organizational elements, such as business groups that promote and track compliance, further affect the interaction effects between tax compliance and sustainability. These links help support more public infrastructure investment, which in turn benefits SME activities and cash flows (Tans, 2020). Although direct contact effects in the literature are still small, tax compliance often acts as a mediating variable between organizational elements, such as supply chain sustainability or financial controls, and overall SME sustainability results (Akintobi et al., 2024; Supardi et al., 2024). Moreover, responsible tax behavior, connected to corporate social responsibility and green capabilities, correlates with better long-term SME performance. Responsible tax behavior can enhance a company’s reputation, attract socially conscious investors, and foster a positive relationship with the community, all of which contribute to SME sustainability, albeit tax avoidance itself does not directly improve sustainability (Khan et al., 2023). Empirical evidence underscores the significance of both internal and external factors in tax compliance, which is essential for the long-term sustainability of SMEs. Internal components, such as tax understanding, business size, and record management practices, are closely linked to compliance, promoting profitability and the ability to invest (Anastasia, 2025; Akintobi et al., 2024; Xin et al., 2024). External factors, such as tax incentives, government audits, and the level of corruption, have a significant influence on compliance behavior. For instance, tax incentives can alleviate financial burdens and encourage compliance, whereas corruption and excessively complex tax filing procedures might obstruct it (Anastasia, 2024; Khan et al., 2023). It is essential to acknowledge that internal factors, including tax expertise, business scale, and record-keeping methods, are positively correlated with compliance, which in turn enhances profitability and investment potential (Anastasia, 2024; Siti et al., 2023). Consistent in the literature is the notion that taxation is a major influence on the operating context, profitability, and growth potential of medium-sized businesses (MEs)—a critical component of the MSME sector (Afuberoh, 2014; Tabet & Onyeukwu, 2019; Simiyu, 2024). Taxation plays a crucial role in funding public infrastructure and fostering economic growth; however, complicated tax structures and significant compliance expenses present substantial obstacles to the expansion of medium- sized enterprises, frequently redirecting resources from more productive investments (Mendoza, 2014; Mhango & Nayagam, 2024). Empirical research indicates that although MEs typically show greater tax compliance than smaller businesses, they still have difficulty understanding and adhering to complex tax rules, especially concerning less-known tax types (Mirrar et al., 2024; Participation of Exemption for Corporation Tax-BDO, n.d.; Vigonte et al., 2024; Wibowo et al., 2024). Moreover, business groups play a crucial role in promoting compliance and ensuring that tax revenues are properly allocated to enhance the business environment (Tans, 2020; Twamzihirwa & Mwesiga, 2024). Overall, the combination of recent research suggests that tailored, flexible tax policies, such Pa ge 79 https://journals.e-palli.com/home/index.php/ajmri Am. J. Multidis. Res. Innov. 4(5) 74-88, 2025 as differentiated tax rates and simplified schemes, can boost compliance, foster fairness, and support sustainable ME growth (Lazari & Vieru, 2023; Mhango & Nayagam, 2024). Furthermore, institutional support and education help maximize the developmental effect of taxation on medium-sized enterprises (Afuberoh, 2014; Mhango & Nayagam, 2024; Tabet & Onyeukwu, 2019; Wibowo et al., 2024). MATERIALS AND METHODS The research employed a quantitative approach suitable for investigating connections between quantifiable measures, including taxation and sustainability indices, in small and medium-sized enterprises (SMEs). Statistical analysis and generalization of results within the examined population become possible thanks to quantitative research. While also examining the strength and direction of links between these factors within a single group of respondents, the descriptive-correlational aspect focuses on describing the current state of taxation policies and sustainability initiatives among medium-sized businesses. Without drawing causal inferences (Causal-comparative design, n.d.; Lawrence, 2023), this design facilitates an understanding of how tax factors relate to sustainability outcomes. By contrasting groups with varying taxation- related features to detect variations in sustainability results, the causal-comparative design builds on the correlational design to find possible cause-effect links. Analyzing current circumstances, this design seeks to determine whether taxation impacts sustainability. It compares naturally occurring groups to determine whether taxation differs with sustainability performance (Costelo, 2023; Lawrence, 2023; Oppenheimer, n.d.; Yilmaz, 2023), thus excluding the potential for variable manipulation. When experimental manipulation is not possible or ethical, the causal-comparative technique offers preliminary evidence of causal connections. The cross-sectional survey provides the empirical basis for analysis, while the quantitative, descriptive-correlational design identifies relationships between variables. The causal-comparative design examines possible causal impacts through group comparisons, and SEM enables the complex modeling of these interactions. For studying intricate economic and organizational phenomena, this integrated method aligns with best practices in social science research (Causal-comparative Design, n.d.; Costelo, 2023; Issah & Rodrigues, 2021; Lawrence, 2023; Rahman, 2022). The survey questions used in this research were sourced from various credible sources to ensure their relevance and validity. Part I compiles important financial and demographic data to create a profile of Medium-Sized Enterprises; Part II examines respondents’ attitudes and behavior toward tax responsibilities by looking at Perceived Taxation Compliance; Part III assesses Sustainability Growth Indicators, thereby evaluating factors affecting the long-term development and performance of the companies. This entire architecture enables us to carefully analyze how corporate characteristics, perceptions of tax compliance, and outcomes of sustainable growth interact. Four parts make up the profile of Medium Enterprises. These items provide a baseline for categorizing respondents by business size and financial capacity, which is essential for examining the effects of taxation and compliance across various business types. The items below are based on commonly used financial indices found in business and economics research. Basic metrics for business profiling, often used in studies evaluating firm performance and economic effects, include annual taxes paid, profit, and net cash flow (Brigham & Ehrhardt, 2016). A common methodology in both governmental statistics, such as those from the Philippine Statistics Authority and the Bureau of Internal Revenue, as well as academic studies, involves categorizing income or financial bracket ranges to ensure data privacy, facilitate research, and enable relevant group comparisons. National company surveys, such as the Annual Survey of Philippine Business and Industry (ASPBI), as well as research on SME financial performance by the World Bank’s Enterprise Surveys, have identified these categories. The Perceived Taxation Compliance assessed using cost recovery and progressive taxation. Cost recovery consists of three subscales: cost recovery, profit, and tax. It also measures the impact of progressive taxation on tax administration, tax evasion, and tax avoidance. Standard social scientific research uses Likert-scale elements to gauge attitudes and perceptions. In terms of taxation, several studies have developed and validated scales to assess perceived compliance, confidence in tax authorities, and readiness to pay taxes (Kirchler, 2007; OECD, 2019). Many of the assertions in this section are probably drawn from established tax compliance research questionnaires (Barham & Fox, 2011; Kalleitner & Bobzein, 2024; Lignir, 2009; Omwima & Masibo, 2024; Remali et al., 2020). The items are measured using a four-point Likert scale, which enables a sophisticated assessment of attitudes toward tax compliance, capturing the degree of agreement or disagreement that is vital for statistical analysis and understanding the behavioral drivers. The metrics for sustainable development are measured in terms of net cash flow, investment choice, and profitability. The objects in this section are designed to directly link perceived taxation impacts to major business outcomes, thereby offering concrete insights for management and policy based on the assumption that taxation influences financial results and business decisions (Musgrave & Musgrave, 1989). A well-studied subject in both academic and political literature is the effect of taxation on profitability, investment, and cash flow. Many empirical investigations (Djankov et al., 2010; Lewellen & Lewellen, 2014; Nasution & Sitompul, 2020; Nur, 2023; Puryandani & Putri, 2020; Ssendagi et al., 2024; Usman et al., 2020) employ comparable questions to determine how tax policies influence business operations, investment behavior, and liquidity. The 4-point Likert scale (without a neutral option) used to measure the objects prompts participants to take a clear position, a well-established Pa ge 80 https://journals.e-palli.com/home/index.php/ajmri Am. J. Multidis. Res. Innov. 4(5) 74-88, 2025 method in survey research. The reliability statistics of the pilot testing survey questionnaire indicate excellent internal consistency across all sections, as evidenced by the high Cronbach’s alpha scores. Part II, comprising 30 items, achieved a Cronbach’s alpha of .972, while Part III, with 15 items, recorded a score of .937. The overall reliability for the entire 45-item questionnaire was .980. Since all values exceed the commonly accepted threshold of .70, these results suggest that the survey items are highly reliable and consistently measure their intended constructs. RESULTS AND DISCUSSION An exploratory analysis was conducted on a sample of 172 medium-sized enterprises in Santiago City that have been operating for at least five years. The effect of the basic dimensions of tax compliance, namely, (1) revenue allocation and (2) progressive taxation, and dimensions of sustainability growth indicators, namely, (1) profitability, (2) investment decision, and net cash flows, were analyzed applying descriptive and inferential statistics. Tax Compliance and Sustainability Growth Indicators Medium enterprises generally recognize that progressive taxation encourages legal tax avoidance while discouraging evasion, supported by ethical tax planning and effective compliance controls. However, mixed responses reveal areas for improvement, especially regarding the unacceptability of tax evasion and the clarity and burden of tax administration. These findings offer valuable insights for policymakers and tax authorities seeking to enhance compliance frameworks and support medium-sized enterprises in meeting their tax obligations effectively. The perceived tax compliance of medium enterprises is influenced by a complex interplay of internal and external factors, impacting both business sustainability and government revenue (Febrayanto et al., 2025). While medium-sized enterprises typically exhibit higher compliance rates than smaller firms, they face significant challenges due to the complexity and administrative burden of tax systems (Wibowo et al., 2024; Mendoza, 2014; Participation Exemption of Corporation Tax- BDO, n.d.). High variability in tax liabilities and financial outcomes among these firms suggests many struggle to consistently fulfill tax obligations amid intricate filing requirements and multiple tax types (Mirrar et al., 2024; Vigonte et al., 2024). This complexity increases compliance costs and diverts resources from productive investment, potentially hindering growth (Mhango & Nayagam, 2024; Ehis et al., 2022). Moreover, perceptions of fairness, tax knowledge, and trust in tax authorities significantly influence compliance behavior; equitable, transparent tax systems, coupled with education and support, improve compliance rates (Mihailă et al., 2024; Bishagazi & Giesi, 2022; Chiyangwa et al., 2025). Conversely, high tax rates and administrative inefficiencies may reduce compliance, especially for less profitable firms (Ehis et al., 2022; Malatji et al., 2021). Therefore, simplifying tax procedures, enhancing taxpayer education, and fostering institutional trust are essential policy interventions to improve compliance and support enterprise growth and public revenue (Tabet & Onyeukwu, 2019; Mhango & Nayagam, 2024; Simiyu, 2024). Medium enterprises collectively perceive taxation as a significant barrier to their sustainability and growth, negatively affecting profitability, investment decisions, and net cash flow, thereby limiting their capacity to innovate, expand, and meet financial commitments. This consensus is reflected in mean agreement scores consistently above neutral, with low to moderate variability among respondents. Such perceptions align with research showing that high tax rates and complex tax systems increase operational costs, reduce profitability, and constrain financial flexibility necessary for innovation and growth (Ehis et al., 2022; Malatji et al., 2021; Feya et al., 2025). The belief that taxes limit investments in new equipment, technology, and market expansion is supported by empirical evidence indicating that tax burdens can stifle reinvestment and delay business development (Ehis et al., 2022; Frein et al., 2021). Additionally, the strong agreement that taxation reduces operational cash and working capital corresponds with findings from emerging economies, where high and complex tax obligations restrict liquidity and hinder medium enterprises’ ability to meet financial commitments and fund capital projects (Feya et al., 2025; Ehis et al., 2022). These critical implications highlight the urgent need for policy reforms aimed at simplifying tax procedures, providing targeted incentives, and aligning tax burdens with the financial realities of medium enterprises to foster sustainable growth and resilience in this vital sector (Mhango & Nayagam, 2024; Lazari & Vieru, 2023; Tabet & Onyeukwu, 2019). Tax Compliance Dimensions The simple linear regression analysis reveals a statistically significant positive relationship between revenue allocation and tax compliance, with a coefficient of 0.997 indicating a near one-to-one correlation between progressive taxation and compliance. This finding aligns with existing literature, which emphasizes that taxpayers’ willingness to comply increases when they perceive that tax revenues are allocated effectively toward visible public goods and services (Mihailă et al., 2024; Tabet & Onyeukwu, 2019). Trust in the tax system is bolstered by investments in infrastructure, welfare, and business-friendly initiatives, which enhance compliance rates (Bishagazi & Giesi, 2022). Medium-sized enterprises (MEs) are particularly responsive to the fairness and transparency of revenue allocation, as they often advocate for public infrastructure that benefits their operations, thereby fostering a more favorable business climate and higher compliance (Tans, 2020). Furthermore, progressive taxation represents 67.3% of the variance in business sustainability; increases in profitability have a positive impact on sustainability outcomes. This highlights the significance of carefully Pa ge 81 https://journals.e-palli.com/home/index.php/ajmri Am. J. Multidis. Res. Innov. 4(5) 74-88, 2025 crafted tax regulations that align with taxpayers’ ability to pay, in promoting financial equity (Lazari & Vieru, 2023). Tailored reforms, such as reduced rates and simplified schemes for medium-sized enterprises, improve compliance and promote sustainable growth (Mhango & Nayagam, 2024). The broader implications of tax policy extend beyond compliance to influence profitability, investment capacity, and long-term sustainability (Afuberoh, 2014; Ehis et al., 2022). Policymakers are encouraged to prioritize transparent, equitable revenue allocation and institutional support—including taxpayer education and digital engagement—to build trust and enhance compliance, particularly among medium enterprises (Tabet & Onyeukwu, 2019; Mihailă et al., 2024; Simiyu, 2024; Akims, 2023; Tans, 2020; Twamzihirwa & Mwesiga, 2024). Dimensions of Sustainability Growth Indicators The regression analysis reveals that profitability, investment decisions, and net cash flow have a significant and positive influence on sustainability in medium-sized enterprises (MEs), accounting for 75.6%, 76.5%, and 84.7% of the variance, respectively. Specifically, each unit increase in investment decision and net cash flow corresponds to increases of 0.756 and 0.847 units in sustainability, highlighting net cash flow as the strongest predictor. This aligns with research emphasizing that profitability serves as a crucial driver of sustainability, thereby offering the necessary resources for reinvestment and strength (Tabet & Onyeukwu, 2019; Afuberoh, 2014). Favorable taxation policies that reduce compliance costs and administrative burdens enhance profitability and growth (Mhango & Nayagam, 2024; Ehis et al., 2022), whereas high tax rates and complexity hinder profitability and expansion, especially in emerging economies (Feya et al., 2025; Malatji et al., 2021). Investment decisions depend heavily on capital availability and a predictable business environment, with tax incentives and simplified procedures fostering reinvestment and competitiveness (Ehis et al., 2022; The Impact of Fiscal Policies, 2022). Conversely, unpredictable tax liabilities reduce liquidity and delay growth (Ehis et al., 2022; Erosa & González, 2019). Net cash flow serves as a direct measure of sustainability, enabling firms to meet obligations and invest despite revenue fluctuations (Feya et al., 2025; Ehis et al., 2022). Complex tax obligations threaten cash flow, but reforms that reduce bureaucracy enhance liquidity (Malatji et al., 2021; Sato et al., 2021). To promote sustainability, taxation policies should prioritize profitability, investment support, and cash flow protection through reduced rates, simplified compliance, and targeted incentives (Mhango & Nayagam, 2024; Edori & Des-Wosu, 2024). Institutional support, including taxpayer education and digital platforms, further reduces burdens, enabling MEs to focus on financial management and strategic investments within a stable tax environment (Simiyu, 2024; Twamzihirwa & Mwesiga, 2024; Bhalla et al., 2022; Malabanan et al., 2024). Causal Effect of Tax Compliance on Sustainability The results of the causal relationships between tax compliance and sustainability growth indicators, highlighting the effect of the subscales of tax compliance on sustainability growth indicators. The regression result in Table 1 indicates that revenue allocation has a statistically significant positive effect on tax compliance (β =.996, p=.000). The model explains 99.6% of the variance in tax compliance (adjusted R2 =.996, F(1,142) = 39067.95, p=.000). This means that for every unit increase in revenue allocation, tax compliance is expected to increase by .998 units. Table 1: ANOVA and Regression Coefficients for the Effect of Revenue Allocation on Tax Compliance ANOVA Sum of Squares df Mean Square F Sig Regression 27.757 1 27.757 39067.953 .000 Residual .101 142 .001 Total 27.858 143 Coefficients Unstanda- rdized B Coefficients Std. Error Standardized Coefficients Beta Sig. 95% Confidence Interval Lower Bound Upper Bound (Constant) -.031 .017 -1.875 .063 -.065 .002 Revenue Allocation 1.009 .005 .998 197.656 .000 .999 1.019 A multivariate general linear model (GLM) was employed to investigate the effects of revenue allocation and progressive taxation on three dependent variables: profitability, investment decisions, and net cash flow. The multivariate analysis in Table 2 revealed significant main effects for both independent variables. The intercept Pa ge 82 https://journals.e-palli.com/home/index.php/ajmri Am. J. Multidis. Res. Innov. 4(5) 74-88, 2025 effect indicates highly significant, large multivariate effects, with Pillai’s Trace (V) = 0.592, F(3, 48) = 23.237, p < 0.001, partial η² = 0.592, and observed power = 1.000. This confirms that the dependent variables have significant non-zero means when predictors are at reference levels. Revenue allocation had a significant multivariate effect on the combined dependent variables, as indicated by Pillai’s Trace (V) = .216, F(3, 48) = 4.402, p = .008, partial η² = .216, and an observed power of .846. Similarly, progressive taxation showed a significant large multivariate effect, as indicated by Pillai’s Trace (V) = 0.231, F(3, 48) = 4.819, p = 0.005, partial η² = 0.231, and an observed power of 0.879. The combined predictors explain 59.2% of the combined variance of the outcome variables. While revenue allocation explains 21.6% in the variance, progressive taxation accounted for 23.1%. The effect sizes are substantial (21.6% and 23.1%), indicating that these predictors have a meaningful influence on the outcomes when considered together. The results indicate that both perceptions of revenue allocation and progressive taxation have a significant impact on the combined set of sustainability measures (Figure 1). Table 2: Results of General Linear Model Multivariate Tests Effect Pillai’s Trace (V) F Hypothesis df Error df Sig. Partial Eta Squared Observed Power Intercept .592 23.237 3.00 48.00 .000 .592 1.00 Revenue Allocation .216 4.402 3.00 48.00 .000 .216 .846 Progressive Taxation .231 8.819 3.00 48.00 .000 .231 .879 Analysis of the between-subjects data (Table 3) reveals that both progressive taxation and revenue allocation have a significant impact on all three dependent variables. However, progressive taxation has a significantly larger effect than revenue allocation on net cash flow, F(2, 50) = 13.217, p < .001, explaining 20.9% of the variance. Similarly, the same effect was observed in the cases of investment decisions, F(2, 50) = 13.217, p < .001, and profitability, F(2, 50) = 5.093, p = .028. Progressive taxation accounted for 14.9% and 9.2% of the total tax revenue, respectively. Strongest effects are seen on Net Cash Flow and Investment Decisions (Partial Eta² ≈ .15–.21). Weaker but still significant effects are seen on Profitability (Partial Eta² ≈ .09). Figure 1: Effects of Tax Compliance Dimensions and Sustainability Growth Indicators Table 3: Result of the Tests of Between-Subjects Effects Source Dependent Variable Type III Sum of Squares df Mean Square F Sig. Partial Eta Squared Observed Power Revenue Allocation Net Cash Flow 2.009 1 2.009 11.639 .001 .189 .917 Investment Decisions 2.032 1 2.032 8.586 .005 .147 .819 Profitability .782 1 .782 4.777 .034 .087 .573 Progressive Taxation Net Cash Flow 2.282 1 2.282 13.217 .001 .209 .946 Investment Decisions 2.075 1 2.075 8.767 .005 .149 .827 Profitability .834 1 .834 5.093 .028 .092 .600 Pa ge 83 https://journals.e-palli.com/home/index.php/ajmri Am. J. Multidis. Res. Innov. 4(5) 74-88, 2025 The structural equation modeling study reveals significant causal connections between tax compliance and sustainability growth markers, indicating that the profitability, investment decisions, and net cash flows of medium enterprises are substantially influenced by both revenue allocation and progressive taxation. Revenue allocation has a nearly perfect, favorable influence on tax compliance, accounting for 99.6% of the variance in compliance, which highlights the importance of transparent and effective use of public funds in promoting voluntary compliance. Furthermore, progressive taxation has a greater influence on net cash flow and investment decisions than on profit, thereby demonstrating how fair tax systems can improve liquidity and reinvestment capacity beyond just immediate profit margins. These findings align with the literature, which emphasizes that trust in institutional fairness—such as perceived equitable revenue use and progressive tax burdens—reduces compliance costs and frees capital for sustainable growth initiatives (Mihailă et al., 2024; Tabet & Onyeukwu, 2019). The model’s high explanatory power further validates that policy interventions prioritizing transparent revenue allocation and progressivity can simultaneously improve tax compliance and financial sustainability, addressing key constraints such as liquidity shortages and inhibited investments identified in medium-sized enterprises (Ehis et al., 2022; Mhango & Nayagam, 2024). CONCLUSION It can be concluded from the results that the evident disparity in income and cash flow suggests that only a limited number of enterprises thrive due to high tax rates, complex regulations, numerous levies that affect their sustainable development, resulting in reduced profitability, restricted investment, and limited cash flow. It is undeniably significant that promoting a favorable tax environment, built on transparent policies, a straightforward taxation system, education, and support made accessible to medium enterprises, would enhance their tax compliance and sustainability. It can be inferred from the causal relationship between tax compliance and measures of sustainable growth that the dimensions of progressive taxation and revenue allocation are significant factors that impact both compliance and the financial health of medium enterprises. The model suggests that the liquidity and reinvestment potential of medium enterprises can be attributed to fair tax laws; hence, a justice-focused policy framework enhances tax compliance and alleviates financial barriers, allowing medium enterprises to thrive steadily. Limitations of the Study and Recommendations for Further Research The study is limited to medium enterprises within Santiago City, and the results may not be generalizable. Hence, expanding the sample of medium enterprises from other cities or regions would allow for a comparative analysis of different policy and economic contexts. The effects of taxation policy are highly context-dependent; therefore, incorporating the perspectives of tax authorities, policymakers, and industry associations could provide valuable insights for the broader applicability of the findings. REFERENCES Abdin, M. J. (2019). Role of micro, small and medium enterprises in economic development. 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