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Tax non-compliance among SMCs in Malaysia: tax audit evidence

Nor Azrina Mohd Yusof (Faculty of Accountancy, Universiti Teknologi Mara, Shah Alam, Malaysia)
Lai Ming Ling (Faculty of Accountancy & Accounting Research Institute, Universiti Teknologi Mara, Shah Alam, Malaysia)
Yap Bee Wah (Faculty of Computer & Mathematical Sciences, Universiti Teknologi Mara, Shah Alam, Malaysia)

Journal of Applied Accounting Research

ISSN: 0967-5426

Article publication date: 2 September 2014

3791

Abstract

Purpose

The pervasiveness of tax non-compliance remains a serious concern to most tax authorities around the world. The negative impact of tax non-compliance on the economy and the evolving nature of the Malaysian corporate tax system have motivated this study. The purpose of this paper is to examine the determinants of corporate tax non-compliance among small-and-medium-sized corporations (SMCs) in Malaysia.

Design/methodology/approach

This study used economic deterrence theory to analyze and test 375 tax-audited cases finalized by the Inland Revenue Board of Malaysia in 2011.

Findings

Multiple regression results revealed that marginal tax rate, company size and types of industry exerted significant effects on corporate tax non-compliance. The services and construction industries were noted to be the predominant industries engaged in tax non-compliance. The amount of concealed income unearthed during tax audit indicates clearly that there is widespread tax non-compliance in Malaysia and the quantum of tax lost through tax non-compliance is quite high.

Research limitations/implications

This study only sampled SMCs audited in 2011, hence, care has been exercised in generalizing the findings.

Practical implications

This study affirms that marginal tax rate, company size and types of industry are the main factors influencing compliance behavior of SMCs. The findings provide important insights not only to the Malaysian tax authority, but also to tax authorities and tax researchers in other parts of the world given that tax non-compliance of SMCs is a prevalent and universal problem. For example, with regard to the finding that marginal tax rate and company size are linked to non-compliance, it can be surmised that tax authorities ought to divert resources to firms with such characteristics when conducting audits.

Originality/value

Most tax research tax examining corporate tax non-compliance used financial data from annual reports to predict tax non-compliance, which are not very accurate. This study used actual tax audit cases obtained from the tax authority which are reflective of the actual situation. This study complements the scant existing literature by empirically evaluating the factors that influenced corporate tax non-compliance in a developing country like Malaysia.

Keywords

Acknowledgements

An earlier version of this paper was presented at the 25th Annual Australasian Tax Teachers Association Conference, January 23-25, 2013, the University of Auckland, New Zealand. The funding from Accounting Research Institute, Ministry of Higher Education Malaysia (Ref: 100-RMI/ARI 16/6/2 (43/2010)) is gratefully acknowledged. The authors also thank the conference participants for their insightful comments.

Citation

Azrina Mohd Yusof, N., Ming Ling, L. and Bee Wah, Y. (2014), "Tax non-compliance among SMCs in Malaysia: tax audit evidence", Journal of Applied Accounting Research, Vol. 15 No. 2, pp. 215-234. https://doi.org/10.1108/JAAR-02-2013-0016

Publisher

:

Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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