Tax compliance of financial services firms: a developing economy perspective
| Pages | 14-31 |
| DOI | https://doi.org/10.1108/JMLC-01-2018-0007 |
| Published date | 07 January 2019 |
| Date | 07 January 2019 |
| Author | Doreen Musimenta,Sylvia Naigaga,Juma Bananuka,Mariam Ssemakula Najjuma |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
Tax compliance of financial
services firms: a developing
economy perspective
Doreen Musimenta
Makerere University Business School
Sylvia Naigaga
Ministry of Finance, Planning andEconomic Development, Kampala, Uganda, and
Juma Bananuka and Mariam Ssemakula Najjuma
Makerere University Business School, Kampala, Uganda
Abstract
Purpose –The purpose of thisstudy is to examine the contribution of tax morale,compliance costs and tax
complianceof financial services firms in Uganda.
Design/methodology/approach –This study is cross-sectionaland correlational and adopts firm-level
data collected using a questionnaire survey of 210 financial services firms in Uganda from which usable
questionnaireswere received from 152 financial services firms.
Findings –Tax moraleand compliance costs contribute up to 20.6 per cent of the variance intax compliance
of the financial services firms. Tax morale and tax compliance are positively and significantly associated.
Results further indicatethat compliance costs and tax compliance are positively and significantly associated.
National pride and trust in governmentand its legal systems as dimensions of tax morale independently are
significantly associated with tax compliance. Results also indicate that administration costs and specialist
costs as dimensionsof compliance costs individually are significantlyassociated with tax compliance.
Research limitations/implications –This study results should be generalized with caution, as they
are limited to the financialservices firms in Uganda.
Originality/value –Whereas therehas been a number of studies on tax compliance in both developedand
developingcountries, this is the first study on the African scene to examine the contributionof tax morale and
compliance costs on tax compliance of financial services firms in a single suite. It is unbelievable that the
financial servicesfirms, especially commercial banks which arehighly regulated by the central bank in many
developingcountries, can afford to report tax payablesyear after year.
Keywords Tax compliance, Tax morale, Compliance costs, Financial services firms
Paper type Research paper
1. Introduction and motivation
This study reports the results of the study carried out to establish the contribution of tax
morale and compliance costs on tax compliance of financial services firms in Uganda.
Uganda’s tax system is characterized with multiplicity of taxes and this has over time
attracted criticisms. Recently, economists and the business community cautioned Uganda
government againstplans to raise taxes, as it would force Ugandans to evade taxes (Mugabe
and Kulabako, 2016). Nkundabanyanga, Mvura, Nyamuyonjo, Opiso and Nakabuye (2017)
argue that government’s commitmentto deliver on its promises enhances tax compliance in
a developing country. Tax compliance involves timely reporting in form of filing returns
and timely payment of taxes due (Kamleitneret al.; 2012;Musimenta et al.,2017). During the
JMLC
22,1
14
Journalof Money Laundering
Control
Vol.22 No. 1, 2019
pp. 14-31
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-01-2018-0007
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm
1980s, structured research into tax evasion and non-compliance became widespread
following the political concerns in the USA of an increasing “tax gap”(Tanzi and Shome,
1994). This trend has continued to exist as tax compliance is a major concern for all
governments across the globe because a short fall in revenue collection often jeopardizes
governments’ability to provide services like social amenities to her citizens. In European
countries, 1000 billion euros is lost annually to tax evasion and tax fraud (European
Commission, 2015). In Uganda,cases of low tax compliance are not uncommon, for example,
Uganda Revenue Authority (URA)frequently registers revenue shortfalls like in the case of
the financial year 2013/2014 whereURA registered a revenue short fall of Uganda Shillings
475 billion (Budget speech,2014).
Extant studies provide various explanations for tax compliance for example attitude
(Alm et al.,2006), isomorphic forces (Musimenta et al.,2017), governmental effectiveness
(Nkundabanyanga et al.,2017), religiosity (Mohdali and Pope, 2014) and compliance costs
(Faiday et al., 2014;Muzainahet al.,2004;McKerchar, 2003). Kamleitneret al. (2012) suggest
perceived opportunity to evade taxes, knowledge requirements about tax and decision
framing as key explanations of tax compliance in small businesses. Fischer et al. (1992)
categorize major factors influencing individual tax compliance into four groups and these
include demographic factors; opportunity for non-compliance; perceptions and attitudes;
and tax system structure. Andreoni et al. (1998) also identified the following six families of
factors influencinghousehold tax compliance: income and tax rates; demographic and social
factors; penalties and audit probability; prior audits; objective and subjective enforcement
measures; and influence of tax practitioners. Alm et al. (2006) found that attitude (tax
morale) is a possible explanation for tax compliance in Russia. This is supported by one of
the earliest studies on tax evasion which explored a “tax mentality”concept which was
presented by Schmolders (1959). This conceptwas based on the assumption that taxpayers
have separate views with respect to looking after their self-interest as opposed to
contributing to community interests (Devos, 2014). This implies that the more positive a
taxpayer’s attitude (morale) towards paying tax and working with the tax authorities, the
greater their willingness to pay tax. More so, Alm et al.(1992) found out that compliance is
greater when the individuals perceive some benefits from a public good funded by the tax
payments. Therefore, understandingtaxpayers’motivation and developing tax policiesand
strategies that can influencecompliance brings more revenue and less administrativecost to
the tax authority (Azmi et al.,2008). However, according to the theory of reasoned action as
suggested by Ajzen and Fishbein(1980), one’s choice to pay tax depends on the morale he or
she has and for that case, may not find it difficult to incur compliance costsas long as he or
she is positive towardstax compliance.
Most of the tax compliance studies are common in the UK, USA and Asian countries,
especially in Malaysia, Pakistan and China as well as Russia (Mohdali and Pope, 2014;
Muzainah et al.,2004;Ritsatos, 2014;Schmidt et al., 2007 and Alm et al.,2006) though in the
recent past, there are compliance studies in Uganda (Musimenta et al.,2017;
Nkundabanyanga et al.,2017). For instance, Mohdali and Pope (2014) studied the influence
of religiosity on tax payers’complianceattitude using data collected from Malaysia.Ritsatos
(2014) examined tax evasion on tax compliance with emphasis on the shift from the neo
classical paradigm to behavioral economicsin the USA. Tax morale according to Alm et al.
(2006) involves social norms; trustin government in power and national pride. According to
Alm et al. (1992), different reasonssignificantly affect taxpayer decision to comply, either by
overweighting deterrence or placing utility in compliance. Taxpayers may value public
goods offered by authorities, thus making taxation the only reasonable finance method for
their own consumption of public goods (Ritsatos, 2014). As a result, taxpayers practice tax
Tax
compliance of
financial
services firms
15
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