Tax knowledge and tax compliance determinants in self assessment

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University of Birmingham Research Archive e-theses repository This unpublished thesis/dissertation is copyright of the author and/or third parties. The intellectual property rights of the author or third parties in respect of this work are as defined by The Copyright Designs and Patents Act 1988 or as modified by any successor legislation. Any use made of information contained in this thesis/dissertation must be in accordance with that legislation and must be properly acknowledged. Further distribution or reproduction in any format is prohibited without the permission of the copyright holder.
ABSTRACT Self assessment system (SAS) has become the key administrative approach for both personal and corporate taxation in developed countries including the USA, UK and Australia. This approach emphasises both the taxpayers’ responsibility to report their income and the need for them to determine their own tax liability. Central to the motivations of self assessment system introduction is an increase in the efficiency of tax collection for the tax authority; however, of more vital importance is the need to enable this without having an unacceptable detrimental effect on the other key characteristics of a well-designed tax system (equity, wider administrative efficiency etc). This requires the development of public awareness of tax laws, and improvements in voluntary compliance. According to prior studies on this topic one of the main facilitating factors in achieving these aims is the development of the level of tax knowledge among taxpayers. The objective of this study is to investigate how facilitating factors interact in the development of a suitable SAS focusing in particular on the role of tax knowledge. To explore the interaction in the real setting the country of Malaysia is used as a case tax system for this study. This country is due to chosen its fairly recent introduction of SAS enabling a specific focus on changes brought about by the move to a SAS with as little time for ‘noise’ creating factors as possible that may result from longer implemented SAS. It also enables a study of this topic in the context of a developing country where many of the prior studies in this area have had in the context of developed countries. This study focuses on the level of individual Malaysian taxpayers’ knowledge and explores how tax knowledge levels influence tax compliance behaviour in a new SAS. Data was collected through a large scale national postal survey resulting in 1,073 responses. Five stages were used to facilitate the analysis. Stage 1, using the t-test and ANOVA, focuses on the characteristics of taxpayers’ knowledge including gender, ethnicity, educational level and income level. Stage 2 attempts to describe the relationship between tax knowledge and tax compliance using multiple regressions. Stage 4 examines taxpayers’ compliance determinants more widely than tax knowledge. Nine variables were tested in Stage 4. Control variables were added in both Stage 3 and Stage 5 in order to assess whether the inclusion of control variables significantly affects tax compliance behaviour. The results suggested that tax knowledge has a significant impact on tax compliance even though the level of tax knowledge varies significantly among respondents. The results also indicate that tax compliance is influenced specifically by probability of being audited, perceptions of government spending, penalties, personal financial constraints, and the influence of referent groups. Results of this study answer such questions as which various taxpayer characteristics of tax knowledge affect compliant behaviour. The results of this study can inform policymakers on the extent to which tax knowledge is important in a self assessment system and in what ways it can affect compliance. It also provides an indicator for tax administrators of the relative importance of tax knowledge in assisting with the design of tax education programmes, simplifying tax systems and developing a ii
Page 1: TAX KNOWLEDGE AND TAX COMPLIANCE DE
Page 5 and 6: DEDICATION To my late father, fathe
Page 7 and 8: TABLE OF CONTENTS Abstract ii Dedic
Page 9 and 10: 2.6 SELF ASSESSMENT SYSTEM - A CONC
Page 11 and 12: 4.3.5.1 Age 214 4.3.5.2 Income leve
Page 13 and 14: 6.3 RESPONDENT BACKGROUND 288 6.4 I
Page 15 and 16: TO TAX ADMINISTRATORS 392 8.4 LIMIT
Page 17 and 18: LIST OF TABLES Table 2.1: SAS intro
Page 19 and 20: independent variables. Table 6.14:
Page 21 and 22: 1.1 INTRODUCTION CHAPTER 1 INTRODUC
Page 23 and 24: Efficiency refers to how the tax au
Page 25 and 26: (US) and the United Kingdom (UK) we
Page 27 and 28: and Lundstedt, 1976), gender (Vogel
Page 29 and 30: Revenue Board Malaysia (IRB). The s
Page 31 and 32: constitutional elective monarchy (f
Page 33 and 34: countries. Despite similar capitali
Page 35 and 36: development on tax compliance resea
Page 37 and 38: conclusions about what the Malaysia
Page 39 and 40: could provide new insights to the I
Page 41 and 42: ecome more aware of their tax oblig
Page 43 and 44: “ future research can explicitly
Page 45 and 46: The result of this study will contr
Page 47 and 48: and stepwise multiple regressions.
Page 49 and 50: CHAPTER 2 SELF ASSESSMENT SYSTEMS-
Page 51 and 52: Table 2.1: SAS introduction in coun
Page 53 and 54:
with postwar democratic thought (Ki
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Formal System. Table 2.2 summarises
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To reduce the possibility of taxpay
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This could be aided through continu
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of the tax system (Eriksen and Fall
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have a good and reasonable knowledg
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compliance, many taxpayers perceive
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had a low significant impact on com
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2.4 HOW SELF ASSESSMENT IS OPERATED
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keeping as well as the perceived le
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issues still remain important and c
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Table 2.4: United States’ complia
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In 1944 a new income tax system was
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assessment system, to overcome thes
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of the amounts deducted by employer
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Notes: Table 2.9 - United Kingdom-
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were quite difficult to complete. M
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In conclusion, tax development in t
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• Individual income tax has a min
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2008). E-Tax (e-filing) was also in
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Self-assessment in Japan has gradua
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administrations and their perceptio
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In terms of personal income tax, th
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Although more operations are becomi
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Table 2.16: OECD Self-assessed Coun
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it is acknowledged that wide variet
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deemed to be the amount of tax liab
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Tax and compliance costs remain a c
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) Sri Lanka Income tax in Sri Lanka
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Table 2.21: Tax development in Sri
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Table 2.23: Sri Lanka - Tax revenue
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information which is related to tax
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assessed, they represented only 67
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(d) applicable to ‘white return
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Sources: OECD (2007:124) (OECD in F
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COUNTRY Table 2.27: Aggregate Admin
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United States Table 2.28: Enforceme
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Malaysia impose a penalty percentag
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2.5.5.3 Electronic filing Table 2.3
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Table 2.31: SAS - Tax Education in
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and to speed up tax collections tha
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Peninsular Malaysia is separated fr
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ITA consolidated the three acts of
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3.4 PERSONAL INCOME TAXES IN MALAYS
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3.4.4 Basis year Section 2 of the I
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eturn (refer Appendix 4). A separat
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Table 3.1: List of deductions for Y
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c) Amount of zakat 61 payment. The
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Having discussed how personal incom
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A new system, known as the Self Ass
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igger increase in 2006 too), a sign
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1) Married woman were required to f
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Table 3.6: A brief comparison on th
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impact upon total revenue. Table 3.
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(STD) 67 audits and 4) investigatio
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Centres (RSCs) in Perak, Selangor,
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planned and implemented special tra
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sufficiently ‘educate’ taxpayer
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which netted RM226.05 million in ta
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In the next chapter, I will discuss
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compliance including age, gender, l
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isks of non-compliant behaviour the
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The wider perspective of tax compli
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Table 4.1: Approach to tax complian
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Figure 4.1: Compliance Index in Ind
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Table 4.2: Tax compliance index int
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Table 4.3: Tax compliance in transi
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Kasipillai et. al. (2003), Lewis (1
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7. GDP per capita, 8. tax system, 9
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Singapore 6.00 8.18 Slovakia 2.62 2
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Given evidence that tax knowledge a
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The result of the study suggested t
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there is insufficient knowledge abo
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taxpayers who read an objectively p
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In conclusion, after taking into co
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4.3.1.1 Tax rates This subsection d
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2008) and increasing tax rates will
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The result also evidenced that the
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4.3.1.4 Summary This subsection dis
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Roth et. al. (1989) suggested that
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simplified the range of guidance th
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potentially could help taxpayers to
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probability) using three major data
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whole population of North Carolina,
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factors in taxpayer compliance, nam
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likely to occur (Allingham and Sand
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y the government and the prices reg
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4.3.3.4 Referents groups (family an
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and referent groups. In the followi
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Table 4.5: Relationship between fin
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evading tax and the consequences of
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Table 4.6: Some previous studies on
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4.3.5.2 Income level Jackson and Mi
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Table 4.7 : Some previous studies o
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4.3.5.3 Culture Chan et. al. (2000)
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avoidance (UA) and masculinity (MAS
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are not aiming to become accountant
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2003 Hasseldine and Hite Female tax
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eferent groups) because these facto
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5.1 INTRODUCTION CHAPTER 5 RESEARCH
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Using a sample from a telephone dir
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income. However, the total of indiv
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taxpayers had gone through filing p
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2004 Ming Ling, Obid and Meera 2003
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5.2.2 The respondents Like Spicer a
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independence particularly from any
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X be chosen. Respondents are asked
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probability’ to ‘very high prob
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Loo (2006) used a mixed method appr
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questions’ approach was based on
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‘extremely good’, ‘good’,
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5.4.1.2 Data analysis technique T-t
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5.4.2.2 Hypotheses development for
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The association between tax knowled
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TNAWARE i - Tax knowledge about awa
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A. Demographics control variables (
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B. Tax background control variables
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5.4.3.3 Data analysis techniques In
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The role of Inland Revenue Board (E
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H4B- Positive perception of governm
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Besley, Preston and Ridge (1997) re
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In agreement with Spicer and Lundst
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improved through better tax knowled
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EQUITY i - Perception on equity and
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H5B - With regard to other tax comp
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used. A wider coverage of tax knowl
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6.1 INTRODUCTION CHAPTER 6 ANALYSIS
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total population of Malaysia, parti
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300 250 200 150 100 50 0 128 252 Fi
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500 400 300 200 100 0 333 1,001- 2,
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to better argue that a relationship
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6.5.1 T-tests, Mann-Whitney U. and
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familiarity with employment income
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no significant mean difference betw
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6.5.2 One-way ANOVA, post hoc test
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Non-parametric test, KW and median
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(B6) (F= 3.1113, p < 0.01) and reba
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IV IV A5 (RM) 10000 A5 (RM) 10000 A
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tax knowledge (p
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KW tests also suggested that there
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Figure 6.6 illustrates the results
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Table 6.12: Summary and relationshi
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Table 6.13: Stage 2 -Pearson correl
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Table 6.14 : Stepwise multiple regr
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The estimated coefficient of correl
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low correlation (p
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A. Dependent variable TCHYP Table 6
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TCHYP 40:60 = α + β1TNRESi + β2T
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B. Dependent variable TCDIR Table 6
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TCDIR 0 = α + β1TNRESi + β2TNEMP
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EQUITY and TOTAL were significantly
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6.8.2 Factors affecting tax complia
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GROUP i - Referent group ROLEi i -
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6.8.4 Summary results of Stage 4 Ta
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Table 6.25: Stage 5 -Pearson correl
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Note: Panel B: (Constant) 20.773 9.
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6.9.2 Dependent variable - TCDIR Ta
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Table 6.28 (Panel B) suggests that
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Notes: *** Significant at 0.01 leve
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subject matter. Most researchers vi
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ANOVA test results were sufficientl
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Table 6.33: Tax compliance direct -
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Table 6.35: Tax compliance hypothet
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Table 6.37: Results summary Results
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7.1 INTRODUCTION CHAPTER 7 DISCUSSI
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eason why the CRA emphasised the
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As this study suggested that tax kn
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and Hudson, 2002; Wearing and Heade
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up with education programmes that c
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of being audited, perceptions of go
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Braithwaite et. al. (2009). In addi
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In relation to this finding (financ
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cultivating personal awareness of c
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With regard to age, this result sup
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CHAPTER 8 CONCLUSIONS Self assessme
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This study seeks to contribute to t
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Like many countries, implementing a
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identified the tax compliance deter
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Further analysis (refer to section
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middle income earners) for tax admi
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latest information on tax regulatio
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8.4 LIMITATIONS It is acknowledged
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espondents regarding tax compliance
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Bank Negara Malaysia (2006). Annual
Page 421 and 422:
Chow, C.Y. (2004). Gearing up for t
Page 423 and 424:
Fishbein, M., and Ajzen, I. (1975).
Page 425 and 426:
Inland Revenue Board (IRB) Malaysia
Page 427 and 428:
Lempert, R. (1988). Internal Revenu
Page 429 and 430:
Moriaryty, S. (1998). Tax complianc
Page 431 and 432:
Shoven, J. (1989). The Japanese tax
Page 433 and 434:
Vogel. J. (1974). Taxation and publ
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APPENDIX 1 Section 13. General prov
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shall be deemed to be derived from
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year of assessment (the responsibil
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APPENDIX 4 FORM BE 2007 FOR INDIVID
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Name Tax Reference No. PART C : STA
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Name Tax Reference No. PART F: STAT
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for for for for for reference refer
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GENERAL INSTRUCTION. This survey is
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ii) What is the probability of comp
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The following income MUST BE INCLUD
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SECTION C (TAX COMPLIANCE) Please s
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D11. Designation (Grade for governm
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