Income tax non-compliance of small and medium enterprises in Malaysia: determinants and tax compliance costs

This study examines the influence of tax compliance costs on non-compliance behaviour, taken together with the business characteristics and managerial perceptions of corporate taxation. The study focuses on corporate Small and Medium Enterprises (SMEs) in Malaysia under the Income Tax Self-Assessment System (SAS). This is the first study on corporate income tax compliance in the Malaysian context and among the first to integrate tax compliance costs, tax attitudes and the likely compliance behaviour of corporations, both in Malaysia and internationally. Thus it makes a significant contribution given this dearth of international literature on corporate tax compliance.The study adopts a traditional large-scale postal survey questionnaire technique that has been employed extensively by studies of both tax compliance and compliance costs studies internationally. Specifically, estimation of tax compliance costs largely follows the usual technique used by Pope, the ‘father’ of tax compliance costs studies in Australia and Asia. This estimation method was first established by Sandford, the ‘grandfather’ of modern tax compliance costs studies, and has been globally employed with some modification to the local context. On the other hand, tax attitudes and the likely compliance/non-compliance behaviour of SMEs are measured from a business managerial or respondent perspective. The above primary postal survey, as well as two additional surveys—a web survey of SMEs and a postal survey of tax professionals— have been undertaken as a measure of consistency of the primary postal survey.The income tax compliance costs for Malaysian SMEs are estimated at RM9,295 per company, amounting to RM1,084 million in aggregate for the 2006 tax year. The findings of this study demonstrate that the average income tax compliance costs of SMEs under the SAS have decreased significantly by 58 percent in absolute terms. Despite this, the increasing composition of both external costs and computational costs, by 16 and 15 percent respectively, reveals that the role of tax professionals and routine tax works have become substantially greater under the SAS regime. The figure for compliance costs relative to tax revenue of eight percent is found to be similar to a pre-SAS Malaysian study, and is also within the international range overall. As for the offsetting benefits, the value of tax deductibility is estimated to be almost RM1,700 per SME company, RM196 million in aggregate, or around 18 percent of the compliance costs, thus giving average net compliance costs of RM7,595 or RM888 million in total.The current study provides evidence of the influence of tax complexity and probability of tax audit on corporate SME tax non-compliance in Malaysia. Compliance costs, in particular, together with two business characteristics, i.e. business size and tax level, and the managerial perceptions about tax fairness and the Inland Revenue Board (IRB) relationship, are found not to influence corporate tax non-compliance. On the other hand, the effect of the remaining four variables, i.e. business length, sector, tax rate and tax incentives, is inconclusive. In terms of international comparisons, the effects of business size on previous corporate tax compliance are mixed, but the business sector was found to influence corporate tax compliance.Regarding tax compliance costs, the need to recognise the presence and regressivity of tax compliance costs upon SMEs should be, at this stage, recognised at the national level. Further, at a later stage, such issues should be systematically considered and assessed for any major change in tax policy. Findings regarding tax complexity suggest that the IRB should continue their tax simplification measures in a more comprehensive manner to significantly minimise the compliance burden for all business taxpayers, of any size. In terms of tax auditing, the IRB may want to increase substantially the magnitude of such activity, and should utilise such information effectively to lift taxpayers’ levels of awareness about the likelihood of their businesses being selected for a tax audit.Finally, it is acknowledged that there are several limitations of the current study, including those usually associated with self-reporting mail surveys, which may limit the interpretation of the current findings. Despite this, the study makes a significant contribution given the limited number of studies in the field of corporate tax compliance and tax compliance costs studies, particularly for Malaysian SMEs. Future research into this area, including several extensions of this study, could make further valuable contributions in this area

The effects of the self-assessment system on tax compliance costs of small and medium enterprises in Malaysia

This paper briefly discusses the importance of Small and Medium Enterprises (SMEs) in Malaysia. The concepts of tax compliance costs and prior compliance costs studies, both internationally and in Malaysia, are succinctly reviewed. The methodology used in the current estimates, based on the traditional postal survey questionnaire technique, is presented. The main part of the paper presents current (2006 survey year) estimates of the compliance costs of taxation of Malaysian SMEs and compares these estimates with earlier (1999) estimates. The findings clearly suggest that SME compliance costs over the period have fallen, contrary to the general presumption. The introduction of the Self-Assessment System (SAS) in 2001 and the subsequent simplification measures taken by the Inland Revenue Board are probably major explanatory factors. However, the major Asian financial crisis during the pre-SAS study may also have encouraged SMEs to significantly overstate their compliance costs at that time. The usual regressive pattern of compliance costs is confirmed, and estimates, in terms of business size andother characteristics, internal/external costs, and computational/planning costs are analysed. This research approach follows that of earlier studies in Australia (by Pope et al), Malaysia, Singapore and Hong Kong (by Ariff et al)

Gender and ethnicity differences in tax compliance

The purpose of this study is to investigate whether gender and ethnicity differences occur in relation to tax compliance attitude and behavior.Prior studies on tax compliance have focused little on gender as a predictor of compliance. In Malaysia, ethnic background of a taxpayer could be a major determinant of tax compliance. A personal interview approach is used to obtain information from taxpayers in urban towns. A t-test suggests that males and females were found to have similar compliant attitude. As for ethnicity, a similar result was observed. Results of a regression analysis indicate that gender, academic qualification, and the person preparing tax return were statistically significant as determinants of non-compliant attitude.In terms of compliant behavior, a regression analysis revealed that "attitude towards non-compliance" and "receipt of cash income" were two significant explanatory variables of tax non-compliance behavior of understating income knowingly. The findings of this study are useful for policy implications in identifying groups that require additional attention to increase voluntary tax compliance

Exploring the relationship between tax compliance costs and compliance issues in Malaysia

This study estimates the income tax compliance costs, and measures possible noncompliance behaviour, from a business managerial perspective in Malaysia.The findings reported in this paper are part of a larger nationwide mail survey into corporate Malaysian small and medium enterprises (SMEs) under the income tax self-assessment system.The findings show that a relatively greater number of SMEs are being compliant in terms of income reporting and accuracy in their deductions.The investigation into the relationship between the size of tax compliance costs and likely compliance behaviour indicates no statistical significance. Possible reasons for these findings are presented

A conceptual framework for tax non-compliance studies in a Muslim country: A proposed framework for the case of Yemen

The problem of tax noncompliance is widely described as a serious global phenomenon, especially in developing and least developing countries.Literatures indicate a number of factors that could possibly influence tax noncompliance behaviour but there is no single theory that can explain the phenomenon of tax noncompliance behaviour.Thus, researchers suggested that theories from sociology, psychology and economy could be useful in explaining tax behaviour. Perception and attitude of taxpayers are among the factors contributing towards compliance behaviour.In this regard, empirical evidence indicates that taxpayers act according to their belief and attitudes.Nevertheless, the specific attitude/view of Muslims towards tax has not been considered.Consequently, the purpose of this paper is to discuss the theoretical link between the influence of Islamic religious perspective and tax noncompliance behaviour.Furthermore, tax service quality, public governance quality and tax system structure, which are perceived as relevant to developing and least developing countries, were taken into consideration in the proposed framework.The paper concluded by urging future researchers to consider the relevancy of the Muslim-majority community in the future tax noncompliance studies

Does Muslim view on tax influence compliance behaviour?

The problem of tax noncompliance is widely acknowledged as a massive phenomenon in many countries, especially in developing and least developing countries.Previous literatures indicate a number of factors that could possibly influence tax compliance behaviour. In regards to this, perception and attitude of taxpayers are among factors contributing toward compliance behaviour.Nevertheless, the attitude/view of Muslims towards tax has not been considered. Accordingly, the purpose of this paper is to discuss the theoretical link between the influence of Islamic religious perspective and tax compliance behaviour.Empirical evidence indicates that taxpayers are acting according to their belief and attitudes.This paper provided discussion of the Islamic perspectives about tax and relevancy of few theories in tax compliance behavioural studies.The paper concluded by urging future researchers to consider Muslim attitudes towards tax in their future tax compliance studies, particularly in any Muslim-majority communit

A survey of perception towards tax evasion as a crime

This paper analyzes the perception of Malaysian citizens on the severity of tax evasion relative to other crimes and violations.Perception of tax evasion may somewhat explain the degree of non-compliance with the tax laws. Using data from a mail questionnaire survey, the results of mean and comparative analysis results show that tax evasion items were ranked as the five least serious crimes of 32 listed crimes.Tax evasions is categorised after drugs related offence, violent crimes and commercial crimes.The results also indicate significant differences on perception of tax evasion among ethnic groups, academic qualifications and employment sectors.Our results should be useful to policy makers in Malaysia and elsewhere, as we find an alarming signal that tax evasion is relatively ranked as the least serious offence which could lead to an environment where taxpayers may not be afraid of cheating on their tax returns

The Effects of Social Influence Factors on Income Tax Evasion among the Palestinian SMEs

The phenomenon of tax evasion has proved to be a common challenge across both the developing and developed countries. This may be considered a vital threat to national revenue of any government, and results in fiscal deficits. In the case of the developing countries, Palestine depends heavily on the revenue from tax and funds coming from international aids in financing the national growth plan. Hence, this study aims at examining the interrelationships among tax fairness, peer influence, corruption, and income tax evasion based on the theory of Social Influence. The procedure involved a proportionate sampling of the targeted respondents, and the data collection was achieved quantitatively by means of appropriate questionnaires. The returned questionnaires were screened and only 184 were useful for analysis. The analysis of the data was done by means of Partial Least Square (PLS) software. The outcome of the data analyses revealed that both peer influence and tax fairness had a negative but significant influence. Regarding corruption, it was insignificant though was positive in relation to the evasion of the income tax. This finding implies that the income tax administration efficiency can make a maximum gain from tax collections as well as discourages tax evasion

VAT compliance and the influence of political and business environment: a proposed framework for Nigerian SMEs

Oil producing country like Nigeria, for so long has depends largely on petroleum profit tax revenue and seem knowingly had less emphasised on taxes from non-oil sources. However, recent worldwide dropped in the oil prices, which continually lower the tax revenue, alerted the government to consider tax policy decision and administration of non-oil tax revenue. This article focuses on Value Added Tax (VAT) as the available data indicating an alarming trend about VAT noncompliance, especially the small and medium enterprises. Factors that influence compliance behaviour are numerous and derived from various theory and models However, the majority of the studies on factors determing tax compliance concentrated mainly on income tax. By utilising the economics deterrence model, this paper discusses and proposes a VAT compliance framework that incorporates the political environment and business environment as determinants of VAT compliance behaviour in the Nigerian context

The effects of deterrence factors on income tax evasion among Palestinian SMEs

Tax evasion remains an issue confronting most policy makers worldwide. Palestine, as an evolving developing country highly depends on tax revenue and funds from international aids to finance the country’s growth plan.The current study aims at examining relationships between probability of detection, tax penalty, tax rate and income tax evasion by applying the Deterrence Theory. A proportionate sampling technique was employed to collect data for the study through the use of questionnaires. The total number of useable questionnaires collected for analysis was 184. The collected data were analysed using the Partial Least Square (PLS). The result of analysed data shows that probability of detection and tax penalty were found to be negatively significant, while tax rate was positively significant in relation to income tax evasion. The implication of the findings of the current study is that income tax administration effectiveness can maximize tax collections and discourage tax evasion