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International Research Journal of Nature Science and Technology (IRJNST) E-ISSN: 2581-9038
Volume: 03 Issue: 01 January to February 2021 www.scienceresearchjournals.org
© 2021, IRJNST Page 18
Tax Rate and Tax Compliance: The Africa
Experience
Dr. Gbalam Peter Eze (Fca), Perelayefa George Owota (Mnaa)
Senior Lecturer, Department Of Banking And Finance, Niger Delta University, Wilberforce Island, Bayelsa
State.
Lecturer 2, Department Of Accounting, Niger Delta University, Wilberforce Island, Bayelsa State.
Abstract
This study examines the effect the various tax rates (i.e., corporate tax, personal income tax and sales tax) have
on tax compliance in the African nations. The tax-to-GDP ratio of these countries were used as a proxy for tax
compliance and these data were obtained from the 2019 OECD revenue statistics in Africa, KPMG and trading
economic sites. SPSS version 25 was used to run the regression analysis. The result reveals that the corporate
tax rate has a negative and statistically significant effect on tax compliance level in Africa. The result also
shows that the personal income tax rate and the sales tax rate have a positive effect on tax compliance.
However, these effects are not statistically significant.The study concludes that an increase in corporate tax rate
will lead to further tax non-compliance in African nations. Therefore, the study recommends that countries
whose corporate tax rate is above the continent average of 28.21% and are experiencing non-compliance
should reduce their tax rate to the mean tax rate.
Key Words: Tax compliance, Tax rate, Personal income tax, Sales tax, tax-to-GDP
1.0 Introduction
Tax is imposed primarily to generate revenue for the government to manage the economy. The revenue
generated is used to provide incentives for certain activities, correct market failures, redistribute income and
help reduce inequality. It serves as a major revenue source for most countries. In 2018, the tax collection as a
percentage of Gross Domestic Product (GDP) for the world stood at 14.9%. The tax-to-GDP ratio of developed
countries such as the United Kingdom, France, Denmark, New Zealand and South Korea in 2018, was 33.5%,
46.1%, 44.9%, 32.7% and 28.4% respectively. The average tax-to-GDP ratio for OECD countries in 2018 was
34.2% (OECD Revenue Statistics, 2019). On the other hand, the tax-to-GDP of developing countries, such as
Nigeria, Ghana, and South Africa, in 2018 was 5.7%, 14.1% and 28.4% respectively. The average tax-to-GDP
ratio for Africa in 2018 was 17.2% (Revenue Statistics in Africa, 2019). These statistics show the importance of
the tax system as a major source of revenue for any government of both developed and developing nations.
However, the main problem is how do the government maximize the collection of this revenue and reduce the
level of non-compliance.
Developing nations are plagued with low tax revenue. They account for the lowest tax burden in the world. The
tax system of most developing nations is characterized with a relatively small tax base, inefficiency of tax
collection, high tax non-compliance behaviour, weak personal income tax/property tax, limited social security
contribution and inefficient tax system and administration(Park, 2012). These could be responsible for the
underdevelopment of these nations as lower taxes may constrain infrastructural investment to suboptimal levels
and retard industrial development. Although taxpayer's non-compliance behaviour is a continual and growing
global problem, many indications suggest that developing nations are the hardest hit (Cobham, 2005;
McKerchar & Evans, 2009; Fuest & Riedel, 2009; Ali, Fjeldstad & Sjursen, 2013) Therefore, necessitating the
need to broaden the tax bases, increase tax compliance rates and widen the role of VAT.
The taxpayer’s non-compliance behaviour can be taken as a socially destructive issue which could reduce
government revenue, distort labour market and weaken the stability of a state by feeding perception of cheating
and fraud (Gelawu, 2019 and Desta, 2010). Tax compliance can be increase if the reasons for non-compliance
are known and addressed. Thus, the relevant tax authority must understand the motivation underlying the non-
International Research Journal of Nature Science and Technology (IRJNST) E-ISSN: 2581-9038
Volume: 03 Issue: 01 January to February 2021 www.scienceresearchjournals.org
© 2021, IRJNST Page 19
compliancebehaviour of taxpayers towards voluntary compliance. This study aims to examine the effect of tax
rates on tax compliance in Africa.
Several economic theories have highlighted the relevance of tax rate on tax compliance (Allingham & Sandmo,
1972; Srinivasan, 1973). Also, the tax system structure component of Fischer’s model gave further insight that
tax rate could influence tax compliance (Fischer, Wartick & Mark, 1992). Series of studies have also been
carried out on the influence of tax rate on tax compliance producing mix results. Some Scholars found a
negative association between tax rate and tax compliance (Tanzi, 1980; Whitte & Woodbury, 1985; Torgler &
Murphy, 2004; Mas’ud, Aliyu & Gambo, 2014) others found a positive association with tax compliance
(Clotfelter, 1983; Joulfaian & Rider, 1998; Alm, 1995; Alm & Torgler, 2006) and no significant link to tax
compliance (Torgler & Schneider, 2007; Praeger & Torgler, 2007). However, most of these study focused on
developed country. Only a hand full of studies have been carried out in developing countries (i.e. Abubakari &
Christopher, 2013; Jayawardane, 2016; Torgler, 2005). Furthermore, none of these studies used cross country
data except Torgler (2005) who examined tax morale in 17 Latin American countries and Mas’ud et al. (2014)
who examine the correlation as well as the result of the tax rate on tax observance using cross-country data of 16
African country.
Following the submission of Freire-Seren and Panades (2013) that due to the mix results in the findings of prior
studies on the effect of the tax rate on tax compliance, further research should be conduct to explore the
connection. Therefore, this study is undertaken to provide more evidence on the influence of the tax rate on tax
compliance.
This study will be of benefit to stakeholders in two ways. Firstly, the study will investigate which of the tax
rates (i.e. corporate tax rate, personal income tax rate and sales tax rate) have a strong and significant influence
on tax compliance. Unlike Mas’ud et al. (2014) who only used corporate tax rate as a proxy for tax rate.
Secondly, the study will use more current cross-country data which take into consideration the various tax
reforms carried out by some countries in the study population.
2.0 Literature Review and Hypotheses Development
Tax Compliance
Tax compliance has been a major issue not only to less developed countries but also to the developed ones.
Several scholars such as Alm (1991), Jackson and Milliron (1986) and Kirchiler (2007) defined tax compliance
as the extent to which individuals willingly comply with the relevant tax laws of a state in terms of income
declaration, filing a return and a tax due on time. It is fulfilling all tax obligations as specified in the national tax
law freely and completely (Ketema, 2016). It is the goal of tax administrators to secure voluntary compliance
and reduce the tax gap between what taxpayers declared on their return and pay and that which they ought to
have paid. Following the fall in prices of commodities in the global market, most commodity-dependent
economies have started looking inwards. Tax managers have been mandated to widen the tax base and increase
the compliance rate (Mas’ud, Aliyu &Gambo,2014).
Theoretical Review
The Economic Theory of Tax Compliance
This theory was developed following the theorized economics of crime propounded by Gary Becker, a Nobel
laureate economist, in 1968 and it is credited to the works of Allingham and Sandmo (1972). They developed an
economic model (the AS model) to tackle the challenge of income tax evasion, the main source of revenue in
both developed and developing countries. The theory holds that the level of tax non-compliance depends on
three deterrent variables, which are tax rate, the detection probability and the level of punishment provided by
International Research Journal of Nature Science and Technology (IRJNST) E-ISSN: 2581-9038
Volume: 03 Issue: 01 January to February 2021 www.scienceresearchjournals.org
© 2021, IRJNST Page 20
law. Although the AS model sets the foundation for understanding taxpayers' compliance behaviour
nevertheless, it has come under heavy criticism from scholars such as Alm, Jackson and McKee (1992), Alm
(1999) and Torgler (2002), for the non-inclusion of some sociological and psychological factors that could
motivate tax compliance without enforcement. Notwithstanding, some studies have shown that tax rate has
remained an important determinant of taxpayers' compliance behaviour as highlighted in theory (Kirchler, 2007;
Abubakari& Christopher, 2013; Jayawardane, 2016). The relevance of this theory in this study is the insight it
gave on the importance of tax rate in tax compliance attitude of taxpayers.
Hypotheses Development
There are numerous factors which affect tax compliance attitude of taxpayers. Batrancea, Nichita and Batrancea
(2012), Tilahun (2018) and Deyganto (2018) examined some of these socio-psychological, political and
economic determinants which Sharpe taxpayers’ compliance attitude and underline tax rate as a key
determinant. Several pieces of research have been conducted on the influence tax rates have on tax compliance
attitude of taxpayers. However, the studies produced mixed results. For example, Whitte and Woodbury (1985)
found a rise in the marginal tax rate will likely increase more tax evasion. It was also discovered that increase in
tax rate causes high tax non-compliance (Hai & See, 2011), and strengthens taxpayers' motive to report less
income to compensate for the reduced income (Park & Hyun, 2003). Also, Torgler (2005) conducted a study of
tax morale in some Latin American nations. He found that more than 46% of his respondents perceived a high
tax burden to be the reason people refuse to pay taxes. These findings were also collaborated by those of
Mas’ud, et al. (2014). They examined the correlation, as well as the effective tax rates, have on tax compliance
in Africa. Using cross-country data from 17 African countries, they found a negative and significant relationship
between tax rate and tax compliance. However, Both Clotfelter (1983) and Joulfaian and Rider (1998) found
taxpayers' underreporting attitude to be positively correlated with a high tax rate.
In another study, Alm (1995), Praeger and Torgler (2007), Abdul-Razak and Adefula (2013) and Deyganto
(2018) got contrary results. Alm (1995) found a high tax rate to have a positive effect on tax compliance. The
study discovered taxpayers to be more responsive as the tax rate increases. Praeger and Torgler (2007) on the
other hand, found no relationship between the two variables. The evaluation study carried out by Abubakari and
Christopher (2013) on taxpayers’ attitude and its resultant effect on tax compliance decision revealed that
individual taxpayers are seriously concerned about the amount of taxes they pay. The burden of taxes paid
affects their attitudes and thus, informed their compliance decisions. However, they found a strong positive
correlation between the perceived level of the tax burden and the taxpayers' compliance decision. Also,
Deyganto (2018) discovered that taxpayers' perception of tax rate has a positive and significant association with
voluntary compliance attitude. Based on the above, the following hypotheses are formulated:
H01. The corporate tax rate does not have a positive effect on tax compliance in Africa
H02. The personal income tax rate does not have a positive effect on tax compliance in Africa
H03. The sales tax rate does not have a positive effect on tax compliance in Africa.
3.0 Methodology
The population of this study consists of all the 61 countries in Africa. The simple random sampling technique
was used to select the sample. These countries were selected base on the availability of data. All countries were
given an equal chance of being selected. However, some countries dropped because of non-availability of data
for one or all the variables under investigation, leaving us with a sample size of 26 countries. According to
Babyak (2004), this sample size is adequate to run a regression analysis. He states that 10 – 15 observations for
each predictor variables allow a good estimation of a regression model
International Research Journal of Nature Science and Technology (IRJNST) E-ISSN: 2581-9038
Volume: 03 Issue: 01 January to February 2021 www.scienceresearchjournals.org
© 2021, IRJNST Page 21
The dependent variable which is Tax Compliance (TaxCom) was measured using tax revenue collected as a
percentage to Gross Domestic Product (GDP) (tax-to-GDP) for each of the countries under review. These data
were obtained from the OECD Revenue Statistics in Africa 2019. On the other hand, the independent variable,
corporate tax rate, Personal Income Tax rate and sales tax rate were used as a proxy for Tax Rate. The data was
obtained from KPMG and Trading Economic for the year 2020.
Data collected from the sources stated above were analysed using the ordinary least square method. This
analysis wasdone using SPSS version 25. The following research model was formulated in line with the
hypotheses developed for the study:
𝑇𝑎𝑥𝐶𝑜𝑚 = 𝛽0+ 𝛽1𝐶𝑇𝑅𝑎𝑡𝑒 + 𝛽2𝑃𝐼𝑇𝑅𝑎𝑡𝑒 + 𝛽3𝑆𝑇𝑅𝑎𝑡𝑒 +𝜇……………𝐼
Where:
TaxCom is tax compliance rating for a country
CTRate is the corporate tax rate for each country
PITRate is the personal income tax rate for each country
STRate is the sales tax rate for each country
𝛽0 is constant
𝛽1,𝛽2,𝛽3 are coefficients
𝜇 is the error term
4.0 Results and Discussion
Table 4.1, descriptive statistics,depicts the minimum, maximum, mean and standard deviation of the tax
compliance and tax rates in Africa. It can be deduced that the minimum tax compliance rate and tax rates
(corporate tax, personal income tax and sales tax) in Africa for the countries surveyed are 5.70%, 15%, 15% and
7.5% respectively. The maximum rates, on the other hand, are 31.20%, 35%, 60% and 20% respectively. The
average tax compliance rate in Africa is 15.27%. The average corporate tax rate, Personal Income Tax rate and
Sales Tax rate of African countries are 28.21%, 30.91% and 16.31% respectively.
Table 4.1 Descriptive Statistics
N
Minimum
Maximum
Mean
Std. Deviation
TaxCom
26
5.70
31.20
15.2688
6.41564
CTRate
26
15.00
35.00
28.2115
4.75851
PITRate
26
15.00
60.00
30.9123
10.07519
STRate
26
7.50
20.00
16.3135
2.83138
Valid N (listwise)
26
Table 4.2depicts the Pearson correlation matrix for the dependent and independent variables.
Table 4.2 Correlations
TaxCom
CTRate
PITRate
STRate
Pearson Correlation
TaxCom
1.000
-.286
.301
.309
CTRate
-.286
1.000
.301
.206
International Research Journal of Nature Science and Technology (IRJNST) E-ISSN: 2581-9038
Volume: 03 Issue: 01 January to February 2021 www.scienceresearchjournals.org
© 2021, IRJNST Page 22
PITRate
.301
.301
1.000
.368
STRate
.309
.206
.368
1.000
Sig. (1-tailed)
TaxCom
.
.078
.068
.062
CTRate
.078
.
.068
.157
PITRate
.068
.068
.
.032
STRate
.062
.157
.032
.
N
TaxCom
26
26
26
26
CTRate
26
26
26
26
PITRate
26
26
26
26
STRate
26
26
26
26
The result from table 4.2, indicates that a relationship exists between tax compliance and tax rates in Africa.
This relationship is statistically significant at 10% (p<0.1) 1-tailed test. The correlation coefficient of -0.286 for
CTRate shows that the relationship between tax compliance and the corporate tax rate is negative. This means
that an increase in corporate tax rate will lead to a decrease in tax compliance. These findings agreed with those
of Whitte and Wood (1985) and Park and Hyun (2003), who found that increase in tax rate will most likely
encourage more tax evasion, and strengthen taxpayers’ motive to report less income. However, the findings
above contradict those of Clotfelter (1983), Joulfaian and Rider (1998) and Abubakari & Christopher (2013).
They both found taxpayers' underreporting attitude to be positively correlated with a high tax rate. Also, the
0.301 and 0.309 correlation coefficient for PITRate and STRate denote a positive relationship between tax
compliance and personal income tax rate and sales tax rate of African countries. However, these relationshipsare
low and negligible
To test for the hypothesized effect that the predictors (corporate tax rate, personal income tax rate and sales tax
rate) have on the dependent variable (tax compliance), the ordinary least square regression analysis was
conducted. The output from this analysis, a beta coefficient, provides an assessment of the significance, the
effect of the predictor variables on the dependent variable and the R square which indicates the model fitness.
The predictor variables may have a positive or negative coefficient, which describes the nature of the effect they
exert on the dependent variable. The predictor variable with negative coefficients exerts a negative impact on
the dependent variable and vice versa.
The result in table 4.3 shows that the predictor variables accounted for 31% of the variance in tax compliance
(R2 = 0.312). This implies that the predictor variables in this study can explain 31% of changes in the dependent
variable. We can infer that the variation left unexplained (69%) was caused by the exclusion of other predictor
variables from the model that affect tax compliance.This means that other factors that are not studied contribute
to the 69% variation in the tax compliance of African countries. The F-statistics of 3.328 with a p-value of 0.038
in table 4.4, which is less than 0.05, is an indication that the model is fit at 5% level of significance.
Table 4.3 Model Summary
Model
R
R Square
Adjusted R Square
Std. Error of the
Estimate
Durbin-Watson
1
.559a
.312
.218
5.67209
2.545
a. Predictors: (Constant), STRate, CTRate, PITRate
b. Dependent Variable: TaxCom
Table 4.4 ANOVAa
Model
Sum of Squares
df
Mean Square
F
Sig.
1
Regression
321.213
3
107.071
3.328
.038b
Residual
707.798
22
32.173
Total
1029.011
25
a. Dependent Variable: TaxCom
b. Predictors: (Constant), STRate, CTRate, PITRate
International Research Journal of Nature Science and Technology (IRJNST) E-ISSN: 2581-9038
Volume: 03 Issue: 01 January to February 2021 www.scienceresearchjournals.org
© 2021, IRJNST Page 23
Table 4.5 contains the results for the regression analysis conducted to examine the effect of tax rates on tax
compliance in Africa countries and to test the hypothesis formulated for this study. The result reveals that the
corporate tax rate (CTRate) has a negative coefficient of -.443 and P-value of 0.027, which is less than 5%
significant level. This implies that the corporate tax rate exerts a negative and significant effect on tax
compliance in Africa. A rise in corporate tax will lead to a decrease in tax compliance. This finding is line with
those of Mas’ud, et al. (2014) who found a negative and significant relationship between tax rate and tax
compliance. This result supports the Null hypothesis: H0. The corporate tax rate does not positively impact tax
compliance in Africa. Therefore, we accept the Null hypothesis.
Table 4.5 Coefficients
Model
Unstandardized
Coefficients
Standardized
Coefficients
t
Sig.
Correlations
Collinearity
Statistics
B
Std.
Error
Beta
Zero-
order
Partial
Part
Toleran
ce
VIF
1
(Constant)
15.318
8.616
1.778
.089
CTRate
-.597
.251
-.443
-2.375
.027
-.286
-.452
-.420
.899
1.112
PITRate
.211
.125
.332
1.690
.105
.301
.339
.299
.812
1.232
STRate
.630
.433
.278
1.453
.160
.309
.296
.257
.855
1.170
a. Dependent Variable: TaxCom
Furthermore, the coefficient of 0.332 and 0.278 for PITRate and STRate with a P-value of 0.105 and 0.160,
indicates a positive effect on tax compliance. This implies that as the tax rate increases the tax compliance will
also increase. However, this effect is not statistically significant at P≤0.05. Therefore, we reject the Null
hypothesis that personal income tax rate does not positively impact tax compliance in Africa and sales tax rate
does not positively impact tax compliance in Africa.
5.0 Conclusion, Recommendation and Limitation
The study examined the effect of the tax rate on tax compliance level in Africa. The Corporate tax rate, personal
income tax rate and sales tax of 26 African countries were examined alongside their tax to GDP ratio to
determine which of these rates significantly influence tax compliance level in Africa. Based on the hypotheses
formulated and the regression analysis performed, the following results were obtained: the corporate tax rate
(CTRate) has a negative and statistically significant effect on tax compliance (TaxCom) in Africa. The personal
income tax rate (PITRate) and sales tax rate (STRate) have a positive and statistically insignificant effect on tax
compliance in Africa. The study concludes that an increase in corporate tax rate will lead to further tax non-
compliance. Therefore, the study recommends that those African countries whose tax rate is above the continent
average of 28.21% and are experiencing non-compliance should reduce their tax rates to the mean tax rate.
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