An Analysis of Tax Compliance Intentions Using the Theory of Planned Behavior in Different Organization Types

An Analysis of Tax Compliance Intentions using the Theory of Planned Behavior in Different Organization Types        

A Research in fulfilment of the requirements for

Business Corporate Governance

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DE LA SALLE UNIVERSITY – MANILA

Ramon V. Del Rosario – College of Business

Submitted by:

Ali Zohaib Javed

Raymond Pacaldo

Submitted to:

Dr. Reynaldo Bautista, Jr.

August 20, 2016

1. INTRODUCTION

After the end of the World War II, it is well-quoted that Philippines per capita is second to East Asia next to Japan but it slipped down the ranking today even lagging behind the neighboring Southeast Asian countries. One identified reason is the weak performance of one of the government fiscal policy, tax policy and administration. Though tax reforms were planned and implemented, a few failed and those which succeeded were viewed partial and inefficient. Increasing concern also is the public perception of the state’s inability to deliver good services and tax the wealthy. All of these somehow impedes proper compliance to tax laws by both individuals and corporations. If taxes were not collected because taxpayers don’t pay, economic development will be hampered. It is given that there is a need to government reforms to address the problems related to administration but it must also raise tax awareness to motivate taxpayers to properly pay taxes.  

In the life blood theory of taxation, the government is a necessity and for it to continue its existence, it is therefore necessary to collect taxes all of its constituents as means to defray its expenditures. In relation to this, the question is how willing are the taxpayers to pay its share for the economic growth? Using the lenses of the Theory of Planned Behavior (TPB), the researchers want to provide insights on how perceived equity, normative expectations and legal sanctions affect the intention of the taxpayers subjected by the study to pay taxes properly. In addition, it will also consider the organization where it belongs by examining the individuals which controls organization affects firm compliance. The variable of equity will include vertical, horizontal and exchange equity, normative expectation will cover social and moral norms and legal sanctions encompasses both detection risk and penalty magnitude. Lastly, the type of taxpayers will be classified into corporate and non-corporate (sole proprietorship and partnerships).

Thesis statement

“The intention to comply with tax rules is determined by the taxpayer’s perceived equity, normative expectations, legal sanctions and the form of organization.”

1. THE ISSUE

1. History behind the issue

According to i Terme (2014) in its working paper for the International Centre for Tax Development (ICTD), after the end of the World War II it is well-quoted that Philippines per capita is second to East Asia next to Japan. But according to the World Bank’s report on 2011, the country has slipped down on the per capita rankings after Korea, Taiwan, Singapore, China, Thailand, Malaysia and almost all Latin American countries. Other than that, it also lagged behind in education and poverty reduction but high in income inequality and poverty index. The one identified reason for the weak performance is the tax policy and administration.

Philippines has low tax effort which reduces its Gross Domestic Product (GDP) ratio by 4.6 in 2011 broken down to the following; 2% due to reduction in excise tax not indexed to inflation, 1% because of corporate and income taxation, 0.4% for the reduced Value added tax (VAT) collections by exempting power transmission companies, and 1.2 % due to lower collection of Bureau of Customs (BOC) of trade taxes and smuggling (i Terme, 2014). Cited reasons for the reduction is the international movements to directly lower direct taxes for corporate and personal taxation, reduced international tariffs and barrier which shifted on the heavy collection of compensation and consumption tax (i Terme, 2014). Though Congress passed the Sin Tax bill in 2012 raising excise tax rates on alcohol and tobacco and levelling the playing field between foreign and domestic alcohol producers, it was observed not sufficient and other reductions remains unrecovered (i Terme, 2014). These reasons add up that somehow the public develops an attitude towards paying taxes which resulted to many individual taxpayers and corporations who are evading or avoiding tax. Tax evasion is one of the several problems faced by the country.

1. Challenged posed by the issue

Taxes collected from the taxpayers by the Bureau of Internal Revenue (BIR) is considered to be one of the major sources of Government Revenue (Department of Finance, 2012) Government then uses those funds to speed up economic development as well as to ensure the social welfare, defense and other development activities of the country. But due to tax evasion, the revenue collected by the government is not enough to fund it activities. Another challenge is the very complex tax system of the Philippines (Caraballo, 2015). It has lots of loopholes that could be exploited by individuals and corporations to evade their tax payments. Although the BIR has conducted several programs to raise awareness about tax compliance. Despite of all of its effort, the BIR has always fell short in collecting taxes so the tax gap (difference between the expected tax collection and actual tax collected) has been constantly increasing.

1. How the issue impacts society in general

These will adversely affect the economy of the country (Chanco, 2014). Due to the shortage in revenue collected, the government doesn’t have enough funds to invest in structural developments such as roads, transportation, bridges and industrial development. Due to tax evasion the government cannot ensure the employment opportunity. Because the government needs fund to create employment opportunity. The government won’t be able to properly provide social security to its residents. Business start-ups often seek assistance from the government to help them in establishing their new business. But due to tax evasion the government cannot supply the expected funds for investment. Hence, the Government either end up hampering their development activities or borrow money from other countries to fund their undertakings (Yalama & Gumus, 2013)