Tax Compliance Cost Among Smes: Evidence From The Southern Region Of Malaysia

Non-compliance behaviour.

A study by Pope and Abdul Jabbar (2008a) reported that tax compliance is one of the difficulties faced by SMEs. This is because the obligation to comply will results to enormous burden and costs to the taxpayers regardless of the size of the business. In another study, Pope and Abdul Jabbar (2008b) found that major tax compliance issues in Malaysia are record keeping and documentation, tax complexity and cost of compliance. In addition, Abdul Jabbar and Pope (2008) identified the two most frequently incurred non-compliance behaviour among SMEs which are the under reporting of income and the overstating of deductions. Various factors may influence non-compliance behaviour. In a study towards individual taxpayers in New Zealand, Natrah (2014) suggested that tax knowledge and tax complexity are significant determinants of tax non-compliance. Meanwhile for companies, Mohd Yusof, Ming Ling and Bee Wah (2014) concluded that marginal tax rate and size of the company are significant determinants of non-compliance behaviour. This is consistent with the findings of Mohd. Nor, Ahmad and Mohd Saleh (2010) who found a negative relationship between firm’s size and tax non-compliance. The impact of firm’s size, which is normally measured by the number of employees and the annual sales turnover, indicates that costs; either financial (annual sales turnover) or non-financial (number of employees) are important determinants of non-compliance behaviour. In addition, Mohd Noor, Nor’Azam, Norashikin, and Alizan (2009) conducted a research to identify factors that indicated tax evasion and found that revenue, liquidity and leverage are factors that have significant relationship with tax non-compliance. This is further supported by Tabandeh, Jusoh, Nor, and Zaidi (2012) who found that income of the taxpayers is the most important determinant tax non-compliance, where most taxpayers are not willing to pay the tax if their income is low.

Tax compliance costs.

Tax compliance costs are the costs incurred by taxpayers in order to oblige with the tax law (Sanford, Godwin, & Hardwick, 1989). Sanford, Godwin, and Hardwick (1981) categorised costs of compliance into three separate elements, which are monetary, time, and psychological costs. Monetary costs include the start-up costs of a company, cost of employee to maintain the records, cost of expertise to update with the changes in rules and policies, cost of submitting the returns as well as the cost of tax consultancy. Meanwhile, time costs refer to the time spent to furnish the tax return due to its complexity, including the time spent at the Inland Revenue offices. Meanwhile, psychological costs refer to the anxiety in dealing with the tax matters, and this cost is more relevant to individual taxpayers. Since the focus of this study is on SMEs, only monetary and time costs are investigated. In their study towards SMEs in Malaysia, Pope and Abdul Jabbar (2008b) found that 59 percent of the monetary cost for SMEs is computational costs, meanwhile another 41 percent is cost of planning. In a study towards bumiputera SMEs in Northern Region of Malaysia, Mansor and Hanefah (2008) found that 45% of the respondents agreed that the cost of compliance was a burden to them. The study also found that the tax compliance costs of SMEs were influence by the size of the enterprise, type of business, type of external advisors as well as the location of the business. However, Abdul Jabbar and Pope (2008) did not find any significant relationship between the size of tax compliance costs and the non-compliance behaviour. This finding is further supported by Sharoja and Kassipillai (2010) who concluded that the tax compliance costs was not a significant indicator of the underreporting of income or over-claiming of expenses.

Research sampling and data collection.

The study is conducted towards SMEs in the southern region of Malaysia, which covers three states, namely Johor, Malacca and Negeri Sembilan. 100 questionnaires were distributed based on purposive sampling. 68 responses received, however four responses have to be excluded because of the incompleteness of the responses. Hence, the response rate for this survey is only 64 percent.

The data collected in this study is primary data where the responses from the sample are gathered by using questionnaires. There are two methods of distributing the questionnaires, which are direct distribution at the taxpayers’ premises as well as online distribution via google form. However, most of the responses received are through direct distribution. Responses received through google form contributed only 3 percent of the total responses.

Research instruments and measurement of variables.

The questionnaire used in this study consists of four parts. The first part measures the demographic profile of the respondents, where the types of data is either nominal or ordinal. On the other hands, the other parts of the questionnaire measure the level of agreements of the respondents towards monetary costs, time costs, as well as perception towards tax non-compliance. All of these variables are measured by using the four point likert-scale, as being used by Dumas and Redish (1999). The use of point point likert scale is relevant in order to avoid neutral responses among the respondents. The questionnaire is adapted from various sources as follows:

Profile of the SMEs.

Based on the descriptive analysis conducted, most of the SMEs are either micro businesses (43.8%) or small businesses (40.6%). Only 15.6 percent are considered as medium enterprises. This analysis indicates that most of the SMEs are very small in size, where the size of SMEs are measured by the annual turnover or the number of employees. Micro businesses are considered as the smallest SMEs with the sales turnover of less that RM300,000 per annum and number of employees of less than 5 persons.

The descriptive analysis conducted also shows that most of the SMEs prepared their tax return on their own (46.9%). However, quite a number of them (37.5%) manage to hire professionals to do the computations for them. On the other hands, 10% of the respondents prepared the tax return with the assistant of friends. The results indicate that most of the respondents have the required knowledge to fill in the tax return, and the high percentage of preparation by tax professionals also indicates the financial capabilities of the respondent.

Relationship between tax compliance costs and tax non-compliance behaviour.

In order to examine the relationship between tax compliance costs and tax non-compliance behaviour, correlation analysis has been conducted. Spearman rho correlation coefficient has been used in this study since the data is not normally distributed. The results are depicted in the table 05 as below:

The results indicate that only the time spent due to the complexity of the system have a significant positive relationship with the tax non-compliance behaviour. In other word, the level of non-compliance is higher among the SMEs if they perceived that they have to spend more time to compute the tax due to the complexity of the tax system. This finding indicates that most of the SMEs feel that the computation of tax is complicated, hence might influence their non-compliance behaviour. However, the degree of relationship is not very strong, where the correlation coefficient is only 28.4%. This finding is consistent with Tran-Nam and Evans (2010) who found that tax complexity have significant impact towards tax compliance. The study however, did not find any significant relationship between monetary costs and tax non-compliance behaviour. The results indicate that most of the SMEs perceived that the cost incurred to oblige with the tax rules and regulations are not significantly influence their tax non-compliance behaviour. Therefore, only H2 is supported in this study, meanwhile other hypotheses are not supported.

Perceptions on the tax costs of compliance.

Beside from examining the relationship between tax costs of compliance with the tax non-compliance behaviour, the study also observed the perceptions of SMEs towards those cost of compliance. Descriptive analysis conducted indicates that most of the SMEs perceived that training add values to employees (mean: 3.19). In terms of administration and computation, most SMEs agreed that consultation with tax agents or authorities may enhances their understanding (mean: 2.95). They also agreed that tax planning will consume a lot of time (mean: 2.98). Besides, SMEs also agreed that the time spent to have accurate and sufficient records may reduce possible tax penalty. The findings of this observation are summarised in Table 06 below:

Limitation of the study.

Due to the limited sample size and areas, the findings of this study is not robust and cannot be generalised to all SMEs in other parts of Malaysia. In addition, the study also only focusing on few types of tax compliance costs and did not observe any other costs involved.

Recommendation for future research.

It is interesting to suggest that future research in this area look into other types of compliance costs that may incurred by SMEs. It is also commendable to further examine if there is any significant differences in the tax non-compliance behaviour among different types of SMEs (micro, small and medium).