Tax evasion is one of the biggest challenges the current government in Somalia is facing in terms of increasing its revenue, it also hinders the ability of the government to provide basic services to its citizens. This study evaluates the determinants of tax evasion in Banadir Region of Somalia. A questionnaire was used to collect information on how drivers in the region pay their taxes, 240 randomly selected drivers have successfully responded to this study. The outcome of the study demonstrates that tax system has a significant negative relationship with tax evasion. On the other hand, tax rate, corruption, income level, and also education level have a positive significant relationship with tax evasion. This study suggests that essential measures ought to be taken by the tax authorities to enhance income collection and decrease tax evasion. It is additionally recommended that crusade against corruption, public enlightenment on tax issues and correction of tax procedures should be embraced.
Keywords: Tax Evasion, Tax System, Income level, education level, tax rate, corruption, Banadir State, Somalia.
Taxes are a massively fundamental instrument and essential wellspring of incomes to a government. The revenues are expected to fund basic projects (e.g., medicinal services and education), services (e.g., legal requirements and public utilities), and infrastructures (e.g., road constructions and natural protection) which are vital to the public. As indicated by Worlu and Emeka (2012), usage of tax revenue is a basis for supporting developmental activities in underdeveloping countries. Nevertheless, it has been hard to boost tax revenue collection because of different types of tax evasion. According to Eschborn (2010), tax evasion is an issue that will exist as long as taxation exists. Tax evasion happens when individuals or associations purposely neglect to maintain their tax obligation (Simser, 2008).
Regardless of its esteems, tax evasion decreases the amount of state budget each year all around the nations. Tax evasion denies each government the tax revenue because of the system, which brings about a gap between the potential and real tax collection (Adebisi and Gbegi, 2013). Tax evasion is a worldwide phenomenon that has been rehearsed in both developed and developing nations. Challenging tax evasion is serious to conquer unlawful related money streams and close channels of corruption and wrongdoings (UN, 2007). According to Murphy (2011), the value of tax evasion overall surpasses US$3.1 trillion or 5.1% of the worldwide gross domestic product. In another example, a report from leadership (2013) demonstrates that the world top ten nations with the dominant part of unlawful money related depletions are Mexico ($476 billion), China (2.74 trillion), Malaysia ($285 billion), Saudi Arabia ($210 Billion), Russia ($152 billion), Philippine ($138 billion), Nigeria ($129 billion), India ($123 billion), Indonesia ($109 billion) and latest United Arab Emirates ($105 billion). The report additionally clarifies that around 60-65% of the sum was because of tax evasion activities from the period of 2001-2010.
In Somalia, the contribution of revenue from taxes is not encouraging because the government is heavily dependent on international grants rather than taxes and other income sources. (MOF, 2016). According to Ariyo (1997), over the reliability of a government on a source of revenue rather than taxes will result in a waiver of taxes. Ali (2017) stresses that tax evasion signifies a portion of the astounding issues confronting Somali economy. Asad (2010) contends that, whenever taxation agencies choose to impose tax laws, individuals and organizations try to avoid compliance. As indicated by the Department of Inland Revenue, Ministry of Finance, MOF 2017, 70% of the road tax revenues were not collected as expected due to several reasons, tax evasion become on the top of the reasons that caused the tax gap.
In conclusion, tax evasion is among the major societal issues restraining improvements in developing nations. This has prompted developing consideration among the policymakers, developed nations, international agencies and researchers to study the determinants of tax evasion. Studies on tax evasion have likewise been led in Kenya, Ethiopia, Tanzania and Nigeria, (see for instance Olatunde, 2007; Temipote et al., 2010; Peter and Efiafoh, 2013; Adebisi and Gbegi, 2013; Akinyomi and Okpala, 2013; Mansor and Gurama, 2016; Tesso, 2013; Levin and Widell, 2007). But in Somalia, no study has been done on tax evasion determinants which makes it so important. This study has chosen to explore tax rate (TR), tax system (TS), Corruption (CR) education level and income level as factors determining tax evasion in Somalia. These determinants have been tested previously in different countries i.e. Kenya, Ethiopia, Nigeria and Tanzania but with contradictory results. Hence, this study will incorporate these factors to see their results in the Somali context. This study has chosen the taxpayer of Banadir region with a fundamental point of concentrate the issue of a highly- populated region with a growth potential and less developed source of revenue generation. This would give a condition of correlation between the variables impacting tax evasion as indicated by the taxpayers' perceptions. Hence, the objective of this study is to examine the relationship between TS, TR, Corruption, education level and income level with tax evasion in Banadir Region.
2. Literature review
Tax evasion is a word used to depict endeavours of people and organizations to illegally reduce the tax liabilities. It has been defined by Alm and Martinez-Vazquez (2001) as an insightful and excitedly practices of not divulging comprehensive taxable income to repay lesser tax. This shows tax evasion is a criminal offense in perspective of the law. Tax evasion additionally includes citizens deliberately distorting and covering the real position of income to shrink tax payment from tax authorities. The demonstration of evading includes especially untruthful and false tax reporting by announcing of condensed income, gains and profits that really earned or overstated deductions. Kabel and Nwokah (2009) proposed that tax evasion is the false, crafty, purposefully concealment of realities and numbers in order not to pay due taxes.
1.1. Tax System (TS)
The tax system is one of the determinants that utilized as a part of different studies to test taxpayers' attitude toward tax evasion. It refers to a framework that incorporates tax organization, revenue utilization, tax policies and collection of taxes in the nation (Mughal and Akram, 2012). A few empirical studies conducted used TS as a variable trying to examine the courses and issues of the shifty conduct of the citizens in both developed and developing nations. Mughal and Akran (2012) for instance, have discovered a significant relationship between tax evasion and tax system in their study on tax evasion and tax avoidance in Pakistan. The findings of the investigation demonstrated that TS in the nation contributes positively toward taxpayers' perception and empowers evasion behaviors. The study additionally concludes that the TS will inspire taxpayers to comply or not to comply voluntarily with the tax authorities. In other studies, by Lutfi (2009) and Fakile and Uwuigbe (2013), TS has a negative relationship with tax evasion. Facile and Uwuigbe’s (2013) study on the influence of tactical tax behavior on corporate governance in Nigeria demonstrates that strong tax systems are one of the essential instruments utilized by tax authorities for having a brilliant collection.
1.2. Tax Rate
Tax rate (TR) is the amount of tax a citizen will pay as per the taxable items and guideline of tax assessment. For both developed and developing nations, a significant number of studies have been done on the relationship between tax rates and tax evasion. Their outcomes demonstrate that a positive relationship exists (Bashar et al., 2008; Lutfi, 2009; Aloys, 2010; Jayeole,2010; James and Moses, 2012; Mughal and Akram, 2012; Tijani and Mathias, 2013; Guldana, 2013; Richard, 2013; Maria and Judith, 2013; Friedrich et al., 2013). These investigations presumed that Tax rate corresponds with the capacity of the citizens in behaving positively or negatively towards the perception of tax evasion. Taxpayers are utilizing high tax rate as the chance for evading taxes and underreporting their income and revenue to the tax authorities. James and Moses (2012) in their study on the effect of tax management on government revenue in an emerging economy, concluded that a positive relationship exists amongst tax rate and tax evasion. Maria and Judith (2013) found in their study that higher tax rate debilitates a tax compliance. Mughal and Akram (2012) and Jayeole (2010) studied tax evasion and tax avoidance in Lagos state in Nigeria and their outcomes are in accordance with past studies which demonstrates that there is a positive relationship between tax rate and tax evasion. The study inferred that high tax rate draws in resistance and energizes tax evasion. However, opposing to the above outcomes, Nhano et al. (2013), Fasina and Olowokere (2013) and Adebisi et al. (2013) found that there is a negative relationship amongst tax rate and tax evasion. On the other hand, Peter and Efiafoh (2013) in their investigation on self-employed Nigerian concerning tax evasion presumed that neither negative nor positive relationship exists between tax evasion and tax rate.
Corruption is an act by a taxpayer to pay something to somebody in order to relieve the taxpayer from taking part in paying taxes or evading taxes. Some literature shows a positive relationship between tax evasion and corruption. Akinyomi and Okpala (2013) for instance, evaluate the elements impacting tax evasion and avoidance in Nigeria through a survey and found that the level of corruption has a positive relationship with tax evasion. Citizens are being rational in taking a decision about their income and reporting to the suitable authority for tax assessment. When corruption exists between tax authorities and tax collectors, then taxpayers can easily evade. However, Tijani and Mathias (2013) when investigating expert viewpoint of tax evasion in Nigeria, inferred that a negative relationship exists between corruption and tax evasion. Their respondents were tax operators, tax lawyers, tax practitioners and tax accountants. Therefore, there is a need to study corruption level in connection with tax evasion because of these mixed outcomes. This may additionally distinguish and comprehend the citizen's point of view on complying with tax laws and authorities.
1.4. Education level
Researchers have likewise utilized educational level as a factor to examine the relationship between tax evasion and attitude of taxpayers. Peter and Efiafoh (2013) examined tax evasion and avoidance of the self-employed in Nigeria and concluded that there is a positive relationship between educational level and tax evasion. The level of education of the taxpayers determines the attitude to dodge taxes. Correspondingly, Fasina and Olowekere (2013) led an examination of citizens' education in Lagos State, Nigeria and found that education level of the taxpayers is one of the key determinant variables of tax evasion. Studies have also demonstrated that citizens with low education level will probably evade taxes dues to the low awareness of the consequence of doing so (Devos, 2006; Aziah et al., 2011). Different investigations here such as Lutfi (2009) and Peter et al. (2013) discovered a negative relationship between tax evasion and education level. On the other hand, Ranjana and Robert (2009) when conducting an examination on tax evasion in New Zealand found a non- conclusive relationship between education level and tax evasion.
1.5. Income level
Income is the essential source by which citizens are taxed for financing public activities. Different modes are utilized while imposing taxes to decide how much taxpayers should pay as per their income. Some evidence from the literature sets that low-wage workers are highly occupied in the attitude of tax evasion (Johns and Slemrod, 2008). They additionally expressed