Determinants of Tax Compliance Behavior in Small and Medium Enterprises

Abstract

For Somaliland government, to increase the collection of different tax revenue from the various taxable citizens, it is very crucial to explore why people comply or not comply with tax rules and regulations of the country and consequently, achieve a level where people voluntarily comply with tax laws and file tax return on time without underestimating the income statement. Hence, the goal of this study was to look into the factors that influence tax compliance behavior in Burao, Somaliland, using small and medium-sized enterprises (SMEs) as a case study. The study focused on factors such as tax audit, tax rate, tax payers' perception of government spending, penalty, fairness and equity of the tax system, referent group influence, tax knowledge and awareness, and tax authority efficiency. The study employed a quantitative research approach and a descriptive study in design. The study's target population was the SMEs in Burao, which numbered 1069, according to the Ministry of Finance Development and the Ministry of Trade and Tourism, and the researcher selected a sample of 171 SMEs using stratified random sampling. Selfadministered questionnaire was used as a data collection instrument for the study. In addition to that, the author utilized both descriptive and econometric analysis; multiple regression was used as an econometric technique to determine the effect of a predictor on the predicted. The findings from the regression indicated that tax audit, tax knowledge and awareness, perception of government spending, the influence of referent groups, and the efficiency of tax authorities are the main determinants that have a statistically significant positive impact on the tax compliance behavior of the SME taxpayers in Burao City. On the other hand, it has been identified that tax rates, the fairness and equity in the tax system, and penalties/fines are found to have a statistically insignificant positive influence on the tax compliance behavior of SME taxpayers. Finally, to boost the tax compliance of the Burao SME taxpayers, the study put forward some recommendations according to the study’s findings, including enhancing the auditing/investigation capabilities of tax authorities, boosting the tax knowledge and awareness of the SME taxpayers, improving the perception of taxpayers towards government spending, and strengthening the effectiveness and efficiency of tax authorities in terms of their service delivery, enforcing laws, creating awareness, and offering consulting services to clients.