SCHOOL OF GRADUATE STUDIES
DEPARTMENT OF ACCOUNTING AND FINANCE
DETERMINANTS OF LARGE BUSINESS TAXPAYERS' TAX
COMPLIANCE: IN THE CASE OF ADDIS ABEBA CITY
ETHIOPIA
Prepared By:
NEBIYU MEKONNEN WOLDTSAD
A THESIS SUBMITTED TO THE SCHOOL OF GRADUATE
STUDIES IN PARTIAL FULFILMENT FOR THE AWARD OF
DEGREE IN MASTER OF ACCOUNTING AND FINANCE OF
GAGE UNIVERSITY COLLEGE
ADVISOR: FREW A(Asst. Prof)
MAY 2024
ADDIS ABABA, ETHIOPIA
Abstract
The main purpose of this study is to assess determinants of large business taxpayer’s tax
compliance in Addis Ababa City. To achieve the objectives of the study and to answer the
basic research questions of the study, the researcher used a mixed research approach,
explanatory research design, and primary sources of data. The main data collection tools were
questionnaires and interviews. The study used large business taxpayers in Addis Ababa city
administration as the target population the researcher used the convenience sampling
technique, purposive sampling technique, and availability and random sampling techniques.
Before the main data collection, a pilot study was carried out using 10% of the total sample
size which represents 27 respondents were participated in the pilot study. Accordingly, the
composite reliability test for all measurement items used in this study is 0.890714. This means
that there is very good internal consistency among measurement items used in this study. The
main data analysis tools were descriptive statistics (mean score and standard deviation), and
Pearson correlation analysis, and multiple regression analysis. The findings of the study
indicated that Tax compliance cost is the first determinant of tax compliance of large business
taxpayers followed by the complexity of the tax system, structures of the tax system, tax
knowledge, penalty rate, and fairness tax system determine tax compliance of large business
taxpayers. The findings of the study imply that tax compliance cost, complexity of the tax
system, structures of the tax system, tax knowledge, penalty rate, and fairness tax system have
significant and positive correlations with tax compliance. The findings of the study indicated
that tax compliance cost, complexity of tax system, structures of tax system, tax knowledge,
penalty rate, and fairness tax system have positive and significant effects on tax compliance of
large business taxpayers. The findings of the study indicated that 61.4% of tax compliance is
explained by tax compliance cost, complexity of tax system, structures of tax system, tax
knowledge, penalty rate, and fairness tax system. The complexity of the tax system had the
highest effect on tax compliance. Therefore, future researchers could find other elements that
increase large business tax payer’s tax compliance.
Key Words: Tax Compliance, Tax Compliance Cost, Complexity of Tax System, Structures
of Tax System, Tax Knowledge, Penalty Rate and Fairness of Tax System
CHAPTER ONE
1.1 Background of the Study.
Taxes pays a crucial role in the budget of an economy. primary reasons for the
government to impose taxes is to generate income manage the economy and
redistribute resources.
To narrow the gap between the budgeted amount of tax to be collected and the
actually collected amount of tax it is better to understand the critical factors which
determine the level of compliance.
The core task of tax administration agencies is to assess the taxpayer's level of tax
compliance to ensure appropriate and effective behavior in tax administration
practice
Tax compliance is currently a significant issue, particularly in developing
countries, as governments at various levels seek ways to improve efficiency in tax
revenue collection to finance their budgets
Tax compliance is defined as the willingness of taxpayers to comply with tax
laws, declare their correct income, claim the appropriate deductions and
exemptions, and pay all taxes on time
Tax non-compliance by taxpayers is a serious problem for administrating business
and income tax revenue in Ethiopia, and some other developing countries (Dereje,
2020).
Tax noncompliance is a universal phenomenon that transcends cultural and
political boundaries and occurs in all societies and economic systems
To minimize tax noncompliance, understanding the determinants in a clearly
identified way helps appropriate policy conclusions to be drawn and government
and Policymakers are then in a position to design and implement strategies to
minimize the effects of non-compliance
Tax non-compliance is a dishonest practice that leads to a decrease in the
government revenue needed for the provision of public goods
Even though it is expected that a lot of studies to be done in the area, in reality, it
is only studied in high concentration in developed countries, but in Africa, a little
work has been done in the area and there is a huge gap between budgeted amount
of tax to be collected and actually collected amount of tax.
The main objective of this study is to assess the determinants of business
taxpayers’ tax compliance in Addis Ababa City.
1.2. Statement of the Problem
Tax non-compliance is a significant issue in Africa, affecting government revenue
and public goods provision. Understanding the determinants of tax non-
compliance is crucial for policymakers to design and implement strategies to
minimize its effects. The issue is primarily studied in developed countries despite
the need for more studies. There is a significant gap between budgeted tax
collection and actual collected tax in Africa. Understanding the critical factors
determining compliance is essential to narrow this gap. Tax non-compliance is a
significant problem in Ethiopia and other developing countries, and while studies
have been conducted, the issues remain unsolved and require further
research(Dereje, 2020).
Still, taxpayers do not voluntarily pay tax every year and try to evade tax by using
their secret means
Researchers like (Mihret, 2011); (Agbadi, 2011); (Berhane, 2011); (Helhel and
Ahmed, 2014), (Ahmed and Kedir, 2015); (Redae and Sekhon, 2016); (Oladipupo
and Obazee, 2016) and (Natrah, 2014) and Teklemariam (2017) and Ashenafi
(2018) conducted a study on the determinants of tax compliance.
1.3. General Objective
The main objective of the study was to assess determinants of large business
taxpayer’s tax compliance in Addis Ababa City
1.3.2. Specific Objectives
1. To investigate the determinants of large business taxpayer’s tax compliance in
Addis Ababa city
2. To examine the level of tax compliance in Addis Ababa city
3. To examine the relationship between the complexity of the tax system, tax
fairness, structure of tax system, tax knowledge, penalty rate, and tax compliance
cost and tax compliance in Addis Ababa city
4. To investigate the effects of the complexity of the tax system, tax fairness,
structure of tax system tax, tax knowledge, penalty rate, and tax compliance cost
on tax compliance in Addis Ababa city
1.4. Basic Research Questions
1. What are the determinants of large business taxpayer’s tax compliance in Addis
Ababa city?
2. What is the level of large business taxpayers in Addis Ababa city?
3. What is the relationship between the complexity of the tax system, tax fairness,
and structure of the tax system tax, tax knowledge, penalty rate, and tax
compliance cost and tax compliance in Addis Ababa city?
4. What are the effects of the complexity of the tax system, tax fairness, structure
of tax system tax, tax knowledge, penalty rate, and tax compliance cost on tax
compliance in Addis Ababa city?
1.5. Significance of the Study
Provide both theoretical and practical significance.
It will help policymakers gain a better understanding of the factors that determine
Compliance for policy interventions.
Are also used as reference sources for other researchers interested in studying the
subject in depth.
1.6. Scope of the Study
Firstly, the conceptual scope of this study incorporated the determinants of large
business taxpayer’s tax compliance in Addis Ababa city
The study also used the complexity of the tax system, tax fairness, structure of tax
system tax, tax knowledge, penalty rate, and tax compliance cost) as independent
variables and tax compliance as the dependent variable
The methodological scope of the study used an explanatory research design,
mixed research approach, questionnaires and interviews, descriptive statistics ,
Pearson correlation, and multiple regressions
1.7. Limitations of the Study
Place limits: Addis Ababa city administration large business taxpayer’s office
Human limits: represented by taxpayers and bureau heads of Addis Ababa city
administration large business taxpayers office.
Time limit: the year of 2023.
1.8. Operational definition of the key terms
Tax avoidance refers to a legal activity where taxpayers use tax laws to reduce
their tax liability, demonstrating their ingenuity in organizing their affairs
Tax fairness: refers to the perception of taxpayers that the tax system is just and
equitable in the
Tax rate: refers to the percentage of taxable income that taxpayers are required to
pay as taxes to the government
Tax knowledge refers to significantly impacts compliance behavior, with
taxpayers' education level significantly influencing their understanding of tax laws
and regulations, and a close relationship between tax knowledge and compliance
ability
Tax compliance is a behavioral requirement driven by trust, cooperation, and the
taxpayer's desire to comply with tax authorities.
1.9. Organizations of the Study
The study is organized into five chapters
CHAPTER TWO
2. Literature Review
2.1. Theoretical Review
Tax compliance is crucial for governments as it funds programs and involves
taxpayers paying taxes by laws, regulations, and court decisions, with various
factors impacting taxpayer behavior(Kirchler et al 2007).
2.1.1 Social-psychology theory
The theory suggests that personal and social norms influence taxpayer behavior,
with personal norms being deeply rooted convictions that impact tax compliance.
Social norms reflect recurring behavior judged by the populace, and the
relationship between norms and tax compliance arises from discussions among
social circles.
2.2. Tax Compliance
According to Hubbard, Tax compliance is reporting all income paid in the
complete set of tax obligations by implementing the provisions, ordinances, or
court orders(OECD, 2010).
According to Mann , tax compliance defined means the taxpayer filing a tax return
appropriately and fully fulfilling tax obligations as prescribed by tax laws and
court decisions
Tax compliance is the taxpayer’s act of complying with tax obligations fully,
voluntarily, and for the law on time Ming & Bee
2.3. Determinants of Tax Compliance
This section discusses the factors that may affect tax compliance according to the
literature
The factors discussed were divided into four main parts, namely tax compliance
cost, structure of tax system, quality service of tax authority, and transparency of
tax authority
Tax compliance from an interdisciplinary perspective which represents a wider
perspective of tax compliance determinants compared to other researchers
Tax compliance determinants into different categories and the study was based on
tax knowledge, fairness of tax, penalties, tax compliance cost, structure, and
complexity of the tax system
According to OECD , Tax compliance costs include three major components,
namely monetary costs, time costs, and psychological costs to the taxpayers
Tax compliance costs vary with tax type: business profit tax takes the largest share
of total tax compliance costs , followed by value-added tax and turnover tax
The burden of compliance costs of business profit tax and value-added tax shows
that these two taxes do have complexities that result in taxpayers incurring high
costs of compliance in terms of staff time and professional fees paid to external
assistance
The pattern of taxes found in any country depends upon many factors such as its
economic structure, its history, and the tax structures found in neighboring
countries
2.4 Empirical review
Improving compliance with taxes includes a step beyond regulation and
facilitation
States and governments will tackle the ability of the people and businesses to pay
their taxes
Penalizing taxpayers when caught encouraged taxpayers to report the real income
they earn through experimental data analyzing tax compliance determinants: a
case in which tax compliance determinants are investigated, this result shows a
positive relationship between penalty and tax compliance
Tax knowledge, penalties and tax compliance in Nigeria's small and medium-sized
enterprises
According to the major determinants of tax compliance include has an effect on
tax compliance are tax fines, and the likelihood of identification and awareness of
tax violations are assumed to have a positive effect on tax compliance behavior in
his report
The findings of the study indicated that the likelihood of being caught by tax audit,
the more positive the taxpayers’ compliance attitude of respondents
The author forwarded that the tax authority could expand its audit activities more
consistently and regularly, keeping in mind the costs associated with its minimum,
and increase tax revenue to the planned one
According to the major determinants of tax compliance include has an effect on
tax compliance are tax fines, and the likelihood of identification and awareness of
tax violations are assumed to have a positive effect on tax compliance behavior in
his report
The findings of the study indicated that the likelihood of being caught by tax audit,
the more positive the taxpayers’ compliance attitude of respondents
The author forwarded that the tax authority could expand its audit activities more
consistently and regularly, keeping in mind the costs associated with its minimum,
and increase tax revenue to the planned one
According to the major determinants of tax compliance include has an effect on
tax compliance are tax fines, and the likelihood of identification and awareness of
tax violations are assumed to have a positive effect on tax compliance behavior in
his report
The findings of the study indicated that the likelihood of being caught by tax audit,
the more positive the taxpayers’ compliance attitude of respondents
The author forwarded that the tax authority could expand its audit activities more
consistently and regularly, keeping in mind the costs associated with its minimum,
and increase tax revenue to the planned one
2.5 Research Gap
The major determinants of tax compliance include has an effect on tax
compliance are tax fines, and the likelihood of identification and awareness of tax
violations are assumed to have a positive effect on tax compliance behavior in his
report
The findings of the study indicated that the likelihood of being caught by tax audit,
the more positive the taxpayers’ compliance attitude of respondents
The author forwarded that the tax authority could expand its audit activities more
consistently and regularly, keeping in mind the costs associated with its minimum,
and increase tax revenue to the planned one
2.6 Conceptual framework of the study
Conceptual framework describes the relationship between the main concepts of a
study
Conceptual frameworks can be ‘graphical or in a narrative form showing the key
variables or constructs to be studied and the presumed relationships between them
Therefore, in this study's conceptual framework the relationship between
independent variables and dependent variable
CHAPTER THREE
3 RESEARCH METHODOLOGY
3.1. Description of the study area
These chapters will present the description of the study area, research design, type, research
approach and sources of data, Instruments of data collection, Sample and Sampling technique,
measurement of variables, methods of data analysis, validity and reliability, and ethical
consideration
3.2. Research Design
A research design is a plan or process for the research; it consists of different methods and
procedures for conducting and analyzing the data
To achieve the objectives of the study and to answer the basic research questions of the study,
the researcher utilized an explanatory research design
Explanatory research design is relatively straightforward due to clear, distinct stages and is
easier to describe than concurrent strategies
3.3. Research Approach
According to research approach is a plan that gives direction to conduct research
systematically and efficiently
The mixed research approach promotes a greater understanding of stakeholder perspectives on
the nature of the intervention
The mixed method allows incorporating different types of mixed method evaluations, like
different conceptual frameworks, different methods of data collection, different interviews,
and different times or different locations and contexts
3.4. Source of data
The primary sources are both questionnaires and interviews, which were gathered from the
large business taxpayers in Addis Ababa city administration
Primary sources are original information and not ready-made sources of data and can provide
current and factual information about the study they are fresh and these sources are original
both in time and in their space
The study used primary sources of data
3.5. Instruments of data collection
The main data collection instruments were questionnaires and interviews.
3.5.1. Questionnaires
Questionnaires were designed on a Likert scale of 1-5; with 1 representing strongly disagree, 2
disagree, 3 neutral, 4 agree and 5 strongly agree, and were administered to respondents in the
study area.
Questionnaires are divided into three sections.
The first section covers the business types, the business's legal form, the level of
education, the position of respondents, and the years of the business.
The second, section covers the determinants of large business taxpayers (tax rate,
tax fairness, structure of tax system, information on tax, tax awareness, penalty
rate, and tax compliance cost), and
The third section covers tax compliance.
3.6. Sample and Sampling Technique
To select the study area: the researcher selected Addis Ababa city administration revenue
bureau, the researcher used a convenience-sampling technique to select the research area
because of their proximity, availability, and accessibility or other ways that the researcher
decides.
To select bureau heads: to select bureau heads the researcher used purposive sampling to get
accurate information depending on his/her opinion or purpose purposive sampling is to
concentrate on people with particular characteristics who were better able to assist with the
relevant research and to look at a subject from all available angles, thereby achieving a greater
understanding.
To select large business taxpayers: - To select large business taxpayers the researcher used
availability and random sampling techniques to give an equal chance for the population being
the member of the sample.
3.7. Measurement of variables
The instrument of research that was utilized for this study was questionnaires, which were
generated and designed from various studies reviewed to capture data in line with the study
objectives
The questionnaire consists of three main parts that are part A, part B, and Part C. Part A
consists of the demographic data of the respondents while Part B consists of questions related
to
The researcher utilized a five-point Likert-type scale questionnaire which was rated ranging
from Strongly Agree = 5, Agree = 4, Neutral = 3, Disagree = 2, and Strongly Disagree =1
3.8. Methods Data Analysis
The analysis started with the respondent’s response rate followed by the profile of
respondents, descriptive statistics, Pearson correlation analysis, and multiple regression
analysis were implemented in the analysis stage
The Pearson Correlation analysis was implemented mainly to test the relationship between
and tax compliance
The multiple regression analysis was carried out mainly to determine the effects of fairness of
the tax system, structure of the tax system, tax knowledge, penalty rate, complexity of tax
system, Tax compliance cost, and tax compliance on tax compliance
3.9. Validity and Reliability
According to Bhattacherjee , reliability is a measure of consistency between different items of
the same construct
Cronbach alpha with acceptable cut-off points 0.7 demonstrates that all attributes are
internally consistent and the items are reliable
The study used content validity of instruments; initially, the instruments were prepared by the
researcher and developed under the close guidance of advisors
3.10. Ethical Considerations
Data is collected from voluntary respondents and they can withdraw from the survey without
any favorable conditions
The names of the respondents and organizations name were not asked to write to prove the
confidentiality of the information they gave
The questionnaire explains that the purpose of the research was for academic purposes and
finally the respondents were included based on their willingness
CHAPTER FOUR
4. Introduction
The study tried to assess the determinants of large business taxpayers’ tax compliance in
Addis Ababa City
This chapter deals with the presentation, analysis, interpretation, and discussion of data which
were collected through questionnaires and interviews
To answer the basic research questions of the study six determinants of large business
taxpayers’ tax compliance such as Complexity of Tax System, tax fairness, structure of tax
system tax, tax Knowledge, penalty rate, and tax compliance cost as independent variables,
and tax compliance as a dependent variable
4.1Finding and Discussion
This discussion consists of all the findings, and theoretical and empirical frameworks
270 participants out of 245 targeted participants were involved in the study
The study aimed at finding answers to objectives prescribed in chapter one
Four specific objectives were developed to support the general objective;
The first objective was to investigate the determinants of large business taxpayer’s tax
compliance in Addis Ababa city
The second objective was to examine the level of tax compliance in Addis Ababa city
The third objective was to examine the relationship between determinants of tax payer’s
compliance and tax compliance in Addis Ababa city and the fourth objective was to
investigate the effects of determinants of taxpayer’s compliance on tax compliance in Addis
Ababa city
This is supported by Complexity and ambiguity in the tax law can create uncertainty that may
reduce taxpayer perceptions of fairness in the tax system in several ways
4.1.2. Demographical of the respondent
This section summarizes the demographic characteristics of the sample, which includes age of
the respondent, gender, education level, years of establishment of the business, types of the
business and form of the business
The purpose of the demographic analysis to describe the proportion of males and females in
the sample, range of age, education level, years of establishment of the business, types of the
business and form of the business, so that the analysis could be more meaningful for readers
This implies that the majority of the respondents were matured and able to explain about
determinants of large business taxpayer’s tax compliance in Addis Ababa City
The result implies that the majority of the respondents were experienced and able to explain
about determinants of large business taxpayer’s tax compliance in Addis Ababa City
4.1.1. Questionnaires Administration
From the total questionnaires distributed to 270 or 100% of respondents a total of 248 were
returned; 245 completed and usable questionnaires representing a response rate of 90.7%
percent are used for analysis. The remaining 25 or 9% of questionnaires were not returned to
the researcher. There are 3 or 1.1% discarded questionnaire in this study. These results gave
the study a response rate of 90.7 % which was above the required threshold as suggested by
Cooper and Schindler (2011). The authors stated that a resulting study rate of 60% is
sufficient to render a study successful.
Table 4.1.1. Respondent Rate
Frequency Percentage
Distributed questionnaires 270 100
Returned questionnaires 248 91.8
Unreturned questionnaires 25 9%
Inadequate questionnaires 3 1.1%
Used questionnaires for analysis 245 90.7%
Source: SPSS Output, 2024
4.1.2. Demographical of the respondent
This section summarizes the demographic characteristics of the sample, including the
respondent's age, gender, education level, years of establishment of the business, types of the
business and form of the business. The purpose of the demographic analysis to describe the
proportion of males and females in the sample, range of age, education level, years of
establishment of the business, types of the business and form of the business, so that the
analysis could be more meaningful for readers.
Table 4.1.2.1Age of respondents in the year
Frequency Percent
21-30 37 15.1
31-40 183 74.7
41-50 25 10.2
Total 245 100.0
Source: SPSS Output, 2024
Table 4.2.1 above showed that 183(74.7%) of the respondents were between 31-40 years,
37(15.1%) were between 21-30 years and 25(10.2%) of the respondents were between 41-50
years of age. Respondents above 18 years old were represented in this study. This implies that
most of the respondents were mature and able to explain the determinants of large business
taxpayer’s tax compliance in Addis Ababa City.
Source: SPSS Output, 2024
Table above showed that 194(79.2%) of the respondents were males and 51(20.8%) were
females. Both male and female respondents were considered in the study and the majority of
the respondents were males
Table 4.1.4 level of education of respondents
Frequency Percent
Below 10 28 11.4
10-12 grades 62 25.3
First Degree 130 53.1
Masters & Above 25 10.2
Total 245 100.0
Source: SPSS Output, 2024
Concerning educational level of respondents 130(53.1%) of the respondents were first degree
holders, 62(25.3%) of the respondents were 10-12 grades, 28(11.4%) of the respondents
bellow grade 10 and 25(10.2%) of the respondents were masters in their level of education.
Therefore, the respondents educated and able to explain about determinants of large business
taxpayer’s tax compliance in Addis Ababa City
Table 4.1.5 Years of the Business
Frequency Percent
0-5 15 6.1
6-10 123 50.2
11-20 52 21.2
above 20 55 22.4
Total 245 100.0
Source: SPSS Output, 2024
Respondents were asked to indicate their opinion on the statement that says how long have
you been in the business. Accordingly, 123 (50.2%) of the respondents started work from 6-10
years, 55(22.4%) above 20 years, 52(21.2%) 11-20 years and 15(6.1%) from 0-5 years. The
result implies that most of the respondents were experienced and able to explain the
determinants of large business taxpayer’s tax compliance in Addis Ababa City.
Table 4.1.6 type of the business
Frequency Percent
Manufacturing 36 14.7
Service 129 52.7
Trade 60 24.5
Construction 20 8.2
Total 245 100.0
Source: SPSS Output, 2024
Respondents were asked to indicate their opinion on the statement that says what the type of
your business is. Accordingly, 129 (52.7%) of the respondents were engaged in service
sectors, 60 (24.5%) in trade, 36(14.l7%) in manufacturing and 20(8.l2%) in construction. the
result implies that majority of the respondents were engaged in service sector.
Table 4.1.7 Form of the Business
Frequency Percent
Partnership 25 10.2
Share Company 81 33.1
Private Limited Company 111 45.3
Sole Proprietorship 28 11.4
Total 245 100.0
Source: SPSS Output, 2024
Respondents were asked to indicate their opinion on the statement that says what the form of
your business. Accordingly,111(45.l3%) of the respondents were private limited company,
81(33.l1%) share company,28(11.l4%) sole proprietorship and 25(10.l2%) partnership. the
result impales that the majority of the respondents were formed in private limited company.
CHAPTER FIVE
Summary, Conclusions and Recommendations
5.1. Summary
The findings of the study indicated that Tax compliance cost, Complexity of tax system,
Structures of tax system, Tax Knowledge, Penalty Rate and Fairness Tax System determine
tax compliance of large business taxpayers in Addis Ababa city administration respectively
The finding of the study revealed that tax knowledge, complexity of tax system, fairness of the
tax system, structure of tax system tax, penalty rate and tax compliance cost significantly
correlated with tax compliance
the findings of the study indicate that there is a positive correlation between tax knowledge,
complexity of tax system, fairness of the tax system, structure of tax system tax, penalty rate
and tax compliance cost and tax compliance
The findings of the study indicated that 61.4% of the variation in tax compliance is explained
by the explanatory variables involved in the model that include tax knowledge, complexity of
tax system, fairness of the tax system, structure of tax system tax, penalty rate and tax
compliance cost.This indicate that the model is strong fit with the predictor variables
5.2. Conclusion
Based on the findings of the study, the researcher concluded the following points from
descriptive statistics, Pearson correlation, and multiple regression analysis
The findings of the study concluded that Tax compliance cost is the first determinant of tax
compliance of large business taxpayers in Addis Ababa city administration followed by the
complexity of the tax system, structures of the tax system, tax knowledge, penalty rate, and
fairness tax system determine tax compliance of large business tax payers
The findings of the study conclude that Tax compliance cost, Complexity of tax system,
Structures of the tax system, Tax Knowledge, Penalty Rate and Fairness Tax System has
significant and positive correlations with tax compliance
5.3. Recommendations of the study
Based on the findings of the study, the researcher forwarded the following recommendations
The city administration should give training for tax payers on new and existing tax laws and
policies to improve the knowledge of tax payers
Complexity of tax system is one of the determinants of tax payer compliance in Addis Ababa
city administration
Besides this, tax fairness also concern with procedural justice is giving a right to taxpayer to
propose an objection, postponement in paying tax and to appeal to tax review body
