Determinants of external tax compliance costs: Evidence from South Africa

Abstract

Small businesses tend to rely on external service providers (tax practitioners, accountants, lawyers and bookkeepers) for assistance with their tax affairs. Payments to external service providers clearly affect a small business’s tax compliance costs. This study uses multiple regression analyses to investigate the key drivers of small business external tax compliance costs. This will assist Revenue Services in understanding what factors (determinants) could increase a small business’s external tax compliance costs and might assist in managing tax compliance behaviour and contribution.

Overall, the results show that although the legal form, age, use of small business tax concessions, level of education of the respondents and the type of accounting system used are statistically significant determinants of external tax compliance costs, turnover is the greatest determinant. The results also indicate that external tax compliance costs are regressive in relation to the size of a business, confirming previous research findings in this arena.

Keywords:

• Small business
• Tax compliance burden
• Tax compliance costs
• External tax compliance costs
• Regression analysis

JEL Codes:

• H20
• H23
• H26
• H32

Acknowledgements

Special thanks is extended to the South African Revenue Service for making this research possible and for giving permission in 2015 to publish this research. Special thanks also to the World Bank (Ms J Coolidge and Mr G Kisunko) for their valuable input and assistance with the research.

Notes

1. The omission of a number ‘6’ category was purely a typing error and does not affect the results.

2. (X_Turnover = 1 until X_Turnover = 3 are all negative; thus less than X_Turnover = 7 (the reference category), and X_Turnover = 5 and X_Turnover = 6 are more than X_Turnover = 7)