The Nexus of Tax Education and Compliance Among Small Business Enterprises

Table of Contents

ABSTRACT

1. INTRODUCTION
1.1 Research questions

2. LITERATURE REVIEW
2.1 Small and Medium Enterprises (SME’s)
2.2 Genesis of Tax Compliance Research
2.3 Theories of Tax Compliance
2.3.1 Theory of Planned Behaviour (TPB)
2.3.2 Economic Deterrence Theory (EDT)
2.3.3 Theory of Reasoned Action (TRA)
2.4 The Fischer Model
2.4.1 Fisher Model and Major Influences of Tax Compliance
2.5 Categories of Tax Compliance
2.6 Attitudes,Tax Education and Compliance
2.7 Perceptions and individual taxpayer education and compliance
2.8 Tax knowledge, tax education and compliance

3.RESEARCH METHODOLOGY
3.1 Population
3.2 Pilot study
3.3 Sampling and sampling procedures
3.4 Validity and reliability
3.5 Ethical considerations

4. DATA ANALYSIS
4.1 Demographics
4.2 Objective One
4.3 Objective Two
4.4 Interview questions and responses
4.4.1. Do you feel that you paying a fair tax?
4.4.2 Do you believe the current tax system is complex to understand?
4.4.3 Do you think by not paying tax there is a probability of detection and penalties?
4.4.4 Do you think by not paying tax there is a probability of detection and penalties?

5. Observations from primary data
5.1 Quantitative study results
5.2 Interview opinions of SMEs on tax

REFERENCES

ABSTRACT

The issue of tax compliance from SMEs in developing countries has remained a blighting problem for a long time. Despite Tax education being diagnosed as the panacea for improving tax compliance from small business owners, the situation has not changed. A divide regarding the issue of tax education as influencing the collection of tax from SMEs still exists among researchers. Some scholars indicate a positive effect of tax education on compliance and others view tax education as a recipe for propagating tax evasion (Kwok and Yip 2018). However, for developmental projects to improve the lives of the citizenry, educating tax-payers aims to improve revenue collection from this category of business people. This study employed an exploratory concurrent mixed research approach on 98 SMEs operating within the Ojtiwarongo district.

The study set out to investigate the influence of tax education on tax compliance. The study unearthed a lacuna between tax education and tax compliance which indicated an interplay between the theories of economic deterrent, reasoned action and the theory of planned behavior. Tax non-compliance was attributed to unfairness, dishonesty by colleagues submitting incorrect tax returns, and the complexity of the tax system and tax forms.

Keywords: SMEs, tax education, tax compliance, Economic deterrent theory, Theory of reasoned action, Theory of planned behavior

1. INTRODUCTION

The reluctance to pay tax has been a phenomenon that has been in existence for a long time (Misra,2004). Tax evasion is a universal problem that affects societies and economic systems regardless of whether countries are developed or developing (Chau and Leung,2009).

Low tax compliance has been an obstacle to development and service delivery especially in many developing countries (Trawule,2017). In order to improve tax compliance strategies have been generally developed to explain its criticality by governments. Tax-payer education is one of the strategies that have been introduced to improve tax compliance and service delivery.

1.1 Research questions

The specific objectives of the study are:

- To explore the level of tax knowledge among SMEs in Ojtiwarongo
- To examine SMEs’ attitudes regarding tax compliance in Ojtiwarongo
- To come up with recommendations on improving tax compliance by SMEs in Ojtiwarongo

2. LITERATURE REVIEW

Taxation is a critical source for government revenue in meeting developmental initiatives. However, tax payments flow in many countries both developed and developing are still a concern especially from the SMEs (Aondo, 2018). According to Akinboade (2015) there is less tax compliant from the SMEs and this causes a disequilibrium in the collection of tax revenue by the government strategies to improve tax compliance have been used by governments, which includes tax education. It is felt that when the SMEs are given reasons for paying tax and how to comply with the tax returns, tax compliance would be improved (Kira 2017; Feldman et al. 2016).

2.1 Small and Medium Enterprises (SME’s)

Gunasekerant, et al. (2000) asserts that there is no universal definition of SMEs as it differs from one country to another. Researchers who have conducted studies in the field of SMEs tend to define small and medium enterprise businesses according to the characteristics obtaining in their respective countries. In most cases the definition is determined by the size and capital investments into the business.

2.2 Genesis of Tax Compliance Research

The genesis of tax compliance behavior is largely rooted in a study by Jackson and Milliron (1986) who identified 14 key factors which influence the behavior to pay taxes. Fischer et al. (1992) grouped these factors into 4 different structures in a refined model namely; demographic (which comprises of factors like age, gender and education), non-compliance opportunity (income level, income source and occupation), attitudes and perceptions (fairness of the tax system and peer), lastly the tax structure/system (the probability of detection and penalties and tax rates). As research in the area of tax compliance increased, new factors such as social and psychological aspects were added (Jackson and Millron, 1986; Bobek, 1997; Wenzel, 2004). Chan, Troutman and O’Bryan (2000) asserts that the Fisher’s Model is the only model that provides a clear conceptual framework relating to the explanation on tax compliance behaviour.

2.3 Theories of Tax Compliance

Several theories have been attributed to tax compliance. These include the theory of Planned Behaviour, Economic Deterrence Theory and the Planned Reasoned Theory.

2.3.1 Theory of Planned Behaviour (TPB)

The theory attempts to explain human behavior and what influences individuals to act in certain ways under definite factors. The theory states that an individual will have a purpose for acting in a manner propelled by reasons for doing so. Ajzen (1991) advances that a person will consider attitudes, including control before they construct their intention to comply. The behavioural intentions depend on attitude which are influenced by belief beliefs, normative beliefs and control beliefs. The theory focuses on the morals and ethics of the taxpayer who may comply even when detection is low. At variance with the economic deterrence theory which puts punitive measures where the taxpayer fails to comply, this theory tries to change individual attitudes towards the tax systems.

2.3.2 Economic Deterrence Theory (EDT)

This theory emphasizes on punitive measures for lack of tax compliance and is based on criminology. The punitive measures could involve the probability of being detected for tax evasion, tougher sanctions or the provision of better tax education or tax incentives to improve tax compliance (Frey and Feld, 2002).

The theory is against a background where people will calculate the risk of not paying tax against the gains and consequences. Factors such as tax audits and sanctions tend to influence the taxpayer to comply. The standard deterrence model holds that taxpayers (SMEs) comply with their tax obligations to avoid legal sanctions such as penalties and incarceration. When faced with such sanctions they comply to avoid the costly consequences. The justification for tax penalties would appear to motivate taxpayers to comply.

2.3.3 Theory of Reasoned Action (TRA)

This theory states that human behavior and intentions are influenced by opinion. It indicates that an individual may be subjective to social pressures resulting from other people’s expectations in complying with what others expect (Ajzen and Fishbein, 2004). Therefore, decisions to comply or not are not formed in a vacuum but are influenced by the individuals’ personal judgement. The evasion of tax may result from individuals facing personal financial pressures. The theory recognizes that in reality, attitudes and perceptions create an interplay between the need to comply with the payment of taxes.

2.4 The Fischer Model

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Figure 1: Fischer Model

Source: Fisher et al. (1992) Tax Compliance Model.

The Fischer tax compliance model gives a framework for understanding the causes or influences behind tax non-compliance decisions. Compliance refers to fulfilling all tax obligations as required by the tax laws of the country (Gitaru, 2017). In the context of the Namibian tax regulations, when a taxpayer submits tax returns at the end of the financial calendar, compliance would have been completed. A myriad of research has been conducted on tax non-compliance and researchers have proffered various factors. For example, Mohd (2010), categorises these factors as linked to age, gender, education, income, occupation or status, peers’ or other taxpayers’ influence, ethics, legal sanction, complexity, and perceived fairness of the tax system.

The perception of individual taxpayers regarding the fairness or the unfairness of the tax system is taken to be a significant factor towards influencing tax compliance characteristics of individual taxpayers. The tax system that is taken or perceived to be unfair by people in the country has the aspect of failing to succeed which means that it easily encourages the taxpayer to develop a noncompliant behaviour (Gilligan and Richardson, 2005). The attitude towards tax and tax education is viewed as a predictor towards tax compliance behaviour. The attitude of a person towards an object, or event can be favourable (positive) or unfavourable (negative) and the negative evaluation is considered the most significant feature of individual’s attitudes. This, therefore, means that taxpayers with negative or unfavourable attitudes towards tax compliance will be non-compliant (Kirchler, 2008).

Tax knowledge is taken to be the level of awareness and or sensitivity of the tax legislation. It thus remains to be argued that individuals with tax knowledge have a high obligation to fulfil their expectations though tax awareness does not mean general tax education significantly reduces tax evasion (Richardson, 2006). This sentiment is shared by Kwok and Yip (2018) who have the view that tax education tends to result in tax evasion. In Namibia, most individuals have limited knowledge regarding tax laws and thus a gap exists in terms of tax knowledge and regulations (New Era Staff Reporter,2016).

2.4.1 Fisher Model and Major Influences of Tax Compliance

Demographic variables

Demographics such as age, sex, education and income levels stand out as influencers’ to tax compliance in the Fischer model. However, in a meta survey on 111 countries conducted by Hofmann, et al. (2017) there were inconsistences relating to the demographics between compliance and age, sex, education and income levels in different countries. Hofmann et al (2017:68) further indicate that impact of demographics on compliance is rifer in Western Europe, Eastern Europe & Central Asia, and North America.

Age

Age has a positive correlation with tax compliance of tax payers (Jackson and Milliron ,1986). According to the tax compliance measurement program, TCMP shows that non-compliance is mostly among those aged below 65 years old (Andreoni et al., 1998). The younger age group are ready to take risks than the old age group. This finding is further confirmed by Ritsema et al. (2003) who concluded that age was a major factor regarding non- compliance in a study conducted in the Arkansas tax penalty amnesty program. However, other studies have indicated that their age has no relationship with tax compliance (Hofmann et al,2017).

Gender

Gender has shown that it has an influence on the tax compliance attitude. Tittle (1980) subsists that females are more tax compliant than their male counterparts. Other studies have shown congruence regarding this statement (Jackson and Milliron, 1986). Females have been identified as more conforming with regulations and laws (Houston and Tran,2001).

Tax system and structure

The tax system and structure have been noted as obstacles to tax compliance if found hard and complex to understand by SMEs. On the other hand, Fischer states that a strong and effective tax system can enable the detection of non- compliance. The cost required for filling the tax returns is high, hiring a profession to do the fillings as expensive and that the number of government bodies involved in tax collection are many and this has led to poor tax compliance.

Education

Education plays a vital role in the tax compliance and tax laws. Houston and Tran (2001) sates that educated individuals are more compliant than their un educated counterparts who will need to be sensitized about the reason for paying tax and its benefits to the social communities. The statement is also confirmed by Richardson (2006) who found that education has a positive influence on tax compliance and tax evasion. Chan et al. (2000) adds that tax compliance is more likely from individuals who have some knowledge regarding the need to pay tax.

2.5 Categories of Tax Compliance

According to Organisation for Economic Co-operation and Development (2009). there are two categories of tax compliances. The first one is the administrative compliance which pertains to procedure, payment deadlines, the preparation and filling in of tax returns. The administrative compliance speaks to the management of tax procedures. The second category is the Technical tax compliance which is adhering to the tax laws, rules and regulations imposed by tax authorities of the country.

2.6 Attitudes, Tax Education and Compliance

Taxpayer attitude is viewed as a predictor towards tax compliance behaviour. The attitude of an individual towards an object, or event can be favourable(positive) or unfavourable(negative) and the negative evaluation is considered to be the most significant feature of individual’s attitudes. This therefore means that individual taxpayers with negative feeling on tax payment are more likely to be less compliant (Kirchler, 2008). What this means is that individuals with a positive motive towards the tax system will comply with the tax laws and regulations of the country. Similarly, an individual who is likely to benefit from a type of tax is more likely to label it fair. This relates to the ethical aspect, whereby individuals with strong ethical mind are likely to have a favourable compliance attitude because they see it as an obligation on their part. However, whether these aspects of ethics, rationality and individual attitudes to tax evasion are applicable in tax knowledge towards tax education and compliance remains to be researched on in Namibia.

2.7 Perceptions and individual taxpayer education and compliance

Tax education has generally been associated with an improvement in tax compliance (Mathieu et al., 2010). However, other studies have countered this phenomenon and argue that tax education equips taxpayers to avoid paying tax (Kwok and Yip,2016).

The perception of individual taxpayers regarding the fairness or the unfairness of the tax system is taken to be a significant factor towards influencing tax compliance characteristics of individual taxpayers. The tax system that is taken or perceived to be unfair by citizens in the country has high propensity of failing, which means that it easily encourages the taxpayer to develop a noncompliant behaviour (Gilligan and Richardson, 2005). Meanwhile some individual researchers have conceptualized fairness of the tax as either procedural justice, distributive justice and or redistributive justice (Kirchler, 2007).

2.8 Tax knowledge, tax education and compliance

Tax revenue is a powerful resource to funding public payments of developed, developing and underdeveloped countries. Governments depend on the revenue from taxes for expenditure programs, but the amount of taxes are influenced by the tax compliance of taxpayers. Tax education is often the “key” to tax compliance. Azubike (2009) advances that the lack of information and education affects tax compliance mostly in developing countries. When citizens are enlightened on the provisions of tax laws and the importance of paying tax, compliance will result.

Tax knowledge is taken to be the level of awareness and or sensitivity of the tax legislation. It thus remains to be argued that individuals with tax knowledge have a high obligation to fulfil their expectations though tax awareness does not mean general tax education significantly reduces tax evasion (Richardson, 2006).

Owing to the global economic challenges faced by many governments there has been a sharp rise in awareness programs towards tax compliance to increase revenue collection as well as create capital markets and improve financial reporting and firm valuation (Frank, Lynch and Rego, 2009). This is because the implementation of the self-assessment system which requires voluntary compliance among taxpayers has generally failed, including in countries such as the New Zealand (Saad,2012). According to Aksnes (2011) some of the reasons for non-tax compliance include the flexible tax morale, the complicated tax rules , the low tax-education, the manipulatable tax activities that permit tax evasion, the belief that one can escape a harsh punishment even when caught and the existnece of the culture of corrupion among citizens.

3.RESEARCH METHODOLOGY

The mixed research approach can be categorized into concurrent, explanatory, exploratory and convergent mixed methods.

The exploratory concurrent mixed methods design also referred to as an embedded or nested design. In an embedded mixed methods design, a small amount of either qualitative data or quantitative data are included within a larger qualitative or quantitative study. For example, including open-ended questions to collect qualitative data in a larger quantitative survey is an example of an embedded mixed methods design. Convergent mixed methods designs are a type of concurrent mixed methods research design. In this design, qualitative and quantitative data were gathered at the same time, but separately from one another, analysed separately, then the results are compared. Explanatory mixed methods designs are the second type of sequential mixed methods research design. The goal of this design is to use qualitative methods to explain earlier quantitative findings. Specifically, quantitative data are collected and analysed prior to the collection and analysis of qualitative data. Exploratory mixed methods designs are a type of sequential mixed methods design in which traditional qualitative methods are used to inform a subsequent quantitative study.

The concurrent mixed methodology was used for the study in order to strengthen the validity of the findings by using both quantitative and qualitative research approaches. A triangulated research approach enables deeper understanding of the topic and offsets the shortcomings of using one approach (Creswell and Clark, 2011).

3.1 Population

Gay (2005:125) defines a population as the original set of elements from which a sample is selected to participate in the study. The population for this study is estimated to be 500 SMEs operating in the Otjiwarongo district.

3.2 Pilot study

Cooper, Schindler and Sharma (2012:99) asserts that a pilot study tests the research instrument on its reliability and validity towards the data collection. A pilot study was carried out to test if the respondents would understand the contents and requirements of the questionnaire. The researcher selected 10 SMEs randomly to test the questionnaire. There were no adjustments made to the instrument. The ten SMEs who were selected for the pilot study did not form part of the main study. Dikko (2016:522) states that the pre-testing of the data collection can be achieved on a smaller number of participants with the same characteristics as in the main study.

3.3 Sampling and sampling procedures

Sampling is the process of selecting units from the target population in order to make an inference about the whole population. Saunders, Lewis and Thornhill, (2009: 225-230) states that the researcher is able to make generalizations of findings by studying the sample. Random sampling was used to select participants. The advantage of using random sampling is that it eliminates bias and provides an accurate representation of the population.

3.4 Validity and reliability

Cooper (2011) defines validity as the extent by which what is intended to be measured, is captured. Reliability pertains to the consistency of findings if the study methodology is replicated by other researchers (Saunders, Lewis and Thornhill, 2012: 680). Cronbach coefficient alpha was conducted to test the questionnaire items for internal consistency and a widely advocated level of adequacy for coefficient alpha is at least 0.7 (Cronbach, 1951). On the other hand, Sekeran and Bougie (2013) argues that reliabilities which are less than .60 are poor. The score for tax education variables and tax compliance variables were .896 and .648 respectively. The research instrument was deemed reliable.

3.5 Ethical considerations

Ethical considerations were applied in this study, whereby the purpose of the study was explained and consent to participate in the study sought before the questionnaires were handed to the prospective participants. Confidentiality was assured to the participants that they would not be identified by name when reporting the study findings.

4. DATA ANALYSIS

Cooper, Schindler and Sharma (2012: 100) refer to data analysis as the process of reducing the collected data to a manageable size in order to facilitate the drawing of summaries and observing trends in the data.

4.1 Demographics

Out the 98 respondents, 45 males and 53 were females. This shows that there were more females who are SMEs. Relating to their age groups it was found that the majority of the concentration was between 21-30 years’ old who represented 56%. Regarding marital status, there were more married people than single individuals who represented 52% and 43% respectively. Only a few were divorced and only one was living with a partner. Pertaining to the period the participants had been operating their businesses,32% had been in business for more than 5 years with a few 16.3% having been in business for less than a year.

The highest number of employers were 13 representing those who employed more than 10 scoring 13.3%, followed by those whose employ compliment totaled 5-10 representing 23.5%. The majority employed between 1-4 employees.

Relating to the education levels of the participants, the majority were degree holders representing 33.7% followed by diploma holders and certificate holders representing 26.5% respectively.

These findings indicate that most of the SMEs were literate. This means that where this category of SMEs finds the tax system and forms complex, it is evident enough for the ministry of finance to simplify them to encourage tax compliance.

4.2 Objective One

To explore the level of tax education among SMEs in Windhoek

Table 1: Descriptive Statistics

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The highest mean on tax education was 2.08 and the lowest was 1.76. On a 5 point Likert scale the mid - point is 3. These scores indicate that there was no convergence in the participants scores who disagreed with the statements TLN- I am aware of the tax laws of Namibia (1.76);OBT- I know the obligations of a taxpayer (2.06); ROT- I know the rights of a taxpayer (2.08); BPT- I am aware of the benefits of paying tax (2.04); CNP- I am aware of the consequences of not paying tax (1.91). The highest standard deviation was .950 and the lowest .787 confirming the divergence in the scores. This implies that there is need for tax education as not all SMEs understand tax systems.

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