Tax Complexity and Tax Compliance in Pre and Post ...

DRAFT Tax Complexity and Tax Compliance in Pre and Post Self-Assessment System Implementation in Nigeria By 1&2

Abdulsalam Mas’ud, 1&3Yusuf Muhammed Alkali and 4Almustapha A. Aliyu 1

2 3

University Utara Malaysia

Department of Accounting, Hussaini Adamu Federal Polytechnic, Kazaure, Nigeria

Department of Accounting, Waziri Umaru Federal Polytechnic, Birnin-Kebbi, Nigeria 4

Department of Accounting, Usmanu Danfodio University, Sokoto, Nigeria

ABSTRACTS Self Assessment System (SAS) has in recent time gains global acceptability as it ensured efficiency and simplicity of tax administration. Therefore, this study examines whether or not there is a difference in tax compliance and tax complexity under pre and post-SAS full implementation in Nigeria. Data was obtained from paying taxes report issued by Price Water Coopers (PWC) for the period of 2008 to 2014. Paired samples t-test was employed for data analysis using Statistical Package for Social Sciences (SPSS) version 22. The findings revealed that tax compliance in post-SAS adoption is slightly higher than that of pre-SAS full implementation. However, such difference is not statistically significant. Similarly, tax complexity in post-SAS is slightly lower than that of pre-SAS adoption, though the difference is not statistically significant. The result implies a need for government to employ necessary strategies to enhance tax compliance. It also highlights the need for further simplification of tax compliance procedures so as to reduce the number of hours it takes to comply with tax obligations in Nigeria. Keywords: tax complexity, tax compliance, self-assessment system.

INTRODUCTION Self Assessment System (SAS) is a system of tax administration first introduced by United States in 1913 (Loo, 2006). The system received global acceptance by both developed and developing countries with Ghana embracing the system in the recent time (Cudjoy, 2012). The motive behind pioneering SAS by US and its subsequent acceptance by other countries was the desire to shift the tax computation and assessment responsibilities from the tax authority to tax payers (Barr, James, & Prest, 1977; Natrah, Muzainah, & Idawati, 2003). In SAS, taxpayer is required to assess himself/herself to tax and compute his tax liability and voluntarily paid into designated bank (Onyegbule, 2012). As the burden of tax assessment shifted from the tax authority to the taxpayer, by implication efficiency in tax administration will be improved (Loo & Ho, 2005). 1

DRAFT Thus, due to SAS influence in improving tax administration efficiency, it has now been the best practice in global tax administration of developed countries like New Zealand, UK and Australia (James & Alley, 2002) and developing nations such as Malaysia, Bangladesh, Indonesia and Pakistan (Sapiei & Kasipillai, 2013). Therefore, this study will examine whether or not there is a difference in tax compliance and tax complexity under pre and post-SAS full implementation in Nigeria. The proposed investigation necessitated the introduction of self-assessment regulation of 2011 which will pave way for full implementation of SAS in Nigeria. The remaining part of the paper is divided into four parts. The next part is a review of the literature which is followed by a third part which is research methodology. The fourth part is result and discussion. The last part is the conclusion which summarized the major research findings. LITERATURE REVIEW There are many rationales for SAS implementation around the world. Such rationales vary among countries. United States was the first country that introduced SAS in 1913. The rationale for introducing SAS was primarily to improve voluntary tax compliance and increase tax administration efficiency as well as creating awareness for taxpayers about funding of federal government expenditure (Palil, 2010). Canada also introduced SAS in 1917 (Costello, 2004). The introduction of SAS in Canada was mandated by the fact that the country considered the system as the most efficient and cost effective for tax administration (Loo, 2006). However, lot of bottlenecks were experienced during the early stage of the system implementation due to the unwillingness of the taxpayers to switch to the new system, which was later rectified (Palil, 2010). The global queue for SAS implementation was next followed by Japan in 1947 taking into consideration both individual and corporate taxpayers (Costello, 2004). The rationale for SAS introduction in Japan was the need for reform that would tackle conflict between taxpayers and tax authority, increase perception of equity and fairness and eliminate inefficiencies in Japanese tax system (Palil, 2010). Similarly, in Sri Lanka, SAS was implemented in 1972 for both individual and corporate taxpayers (Sri Lanka Inland Revenue, 2013). Similar to other regimes, the rationale for SAS adoption in Sri Lanka might have been improving tax compliance efficiency and minimizing compliance cost. Moreover, in Pakistan SAS was launched in 1979 through section 59 (1) of Income Tax Ordinance of 1979 (Pakistan Federal Board of Revenue, 2013). SAS was introduced into Pakistani tax laws to improve tax administration efficiency. Due to the weaknesses experienced in the SAS administration, in 2011 universal self-assessment and income tax ordinance was promulgated. The rationale for this amendment was to make the tax laws simpler and easier to understand both in language and in concept (Pakistan Federal Board of Revenue, 2013). In Indonesia, SAS was first implemented in 1982 for companies and subsequently in 1984 for individual taxpayers (Palil, 2010). The rationales for SAS implementation were enhancing tax administration efficiency, focusing on tax services, supervision and collection as well as improving the taxpayers’ comprehension about the tax laws (Reap, 2006). Furthermore, in Ireland, SAS was introduced in 1988 for both individual and corporate taxpayers (Palil, 2010). In Ireland, SAS was introduced to cater for self-employed individuals and income from other 2

DRAFT sources not captured in the PAYE (Irish Revenue and Custom, 2013). SAS is also known as “Pay and File”, a system which enable the taxpayer to voluntary pay his tax liability and file the outstanding tax (if any). Besides, in New Zealand, SAS was implemented in 1988 for both corporate and individual taxpayers (Jaidi, Noordin, & Kassim, 2013). Similar to other regimes, implementation of SAS in New Zealand might have been mandated by idea of administration cost saving and improving tax administration efficiency. In Australia, SAS was first implemented in 1986 for corporate taxpayers; it was further strengthened in 1987. Subsequently, in 1992 SAS implementation was extended to individual taxpayers (Palil, 2010). The rationale for Australian SAS adoption was increasing taxpayers’ perception of fairness and equity about the tax system (Costello, 2004). Furthermore, in United Kingdom, SAS was introduced into British tax laws in 1996/1997 for individual taxpayers and later extended to corporate taxpayers in 1999 (Loo, 2006). The motives behind the introduction of SAS in UK were increasing fairness and equity perceptions about UK tax laws as well as making the tax administration simpler and encouraging compliance (Lymer & Oats, 2009). In the same manner, SAS was introduced into Malaysian tax laws in 2001 for corporate taxpayers and later extended to individual taxpayers in 2004 (Loo, 2006). Similar to other developed and developing countries, SAS was introduced into Malaysian tax laws to collect tax at minimum cost, institute enforcement mechanisms and improve compliance among both corporate and individual taxpayers (Palil, 2010). Recently, in Ghana SAS was introduced into its tax laws in 2012 (Cudjoy, 2012). The aim of SAS introduction in Ghana was simplifying and modernizing the tax system, enhancing compliance as well as reducing tax administration cost (Blankson, 2012). Introduction of SAS in Nigeria The legal framework for the implementation of SAS in Nigeria can be traced to section 24 (f) of the constitution of the Federal Republic of Nigeria 1979 which provided that: “It shall be the duty of every citizen to declare his income honestly to appropriate and lawful agencies and pay his tax promptly.” Consequently, SAS was introduced into Nigerian tax laws through Finance (Taxation and Miscellaneous Provisions) Act of 1991 with an effective date of 1992. Initially, it was restricted to threshold of taxpayers but later extended to the rest in 1998 (Onyegbule, 2012). However, the introduction of SAS into the Nigerian tax laws in 1992 and 1998 for the threshold and the rest of taxpayers respectively received less compliance attention due to low enforcement effort by the government and unwillingness by taxpayers to accept the new system (Onyegbule, 2011). Thus, self-assessment regulation of 2011 was introduced to strengthen the system and make it more enforceable (Onyegbule, 2012). In addition to the legal backing received by SAS in Nigeria through provision of the constitution, laws and regulation discussed above, other laws guides the implementation of SAS in Nigeria. These include: Company Income Tax Act 2007 (Sections 52 (2) and 53); Federal Inland Revenue Service (establishment) Act 2007; Personal Income Tax Act 2011(Sections 41 and 44); Petroleum Profit Tax Act 2007(Section30); Value Added Tax Act 3

DRAFT 2007 (Sections 15 and 16). By implication, SAS covers all form of taxation in Nigeria, including company income tax, personal income tax, petroleum profit tax and value added tax. SAS regulation in Nigeria requires the taxpayer to accurately compute tax liability, pay the tax due into a bank designated for the purpose and collect the e-ticket and file the self-assessment return on or before the due date fixed for filing the return (Onyegbule, 2012). Returns filed under SAS are subjected to two types of audit. First is spot audit, which is on-the-spot preliminary check, conducted to ensure correctness, accuracy and completeness of tax returns forms submitted to the tax office. The second audit is risk-based audit. This type is not conducted to all returns; rather sample of returns are randomly selected to ensure that no attempt to underreport income, overstate expenses as well as any irregularity that would amount to tax evasion. However, where taxpayer failed to file tax return on the due date as required, tax authority can exercise power conferred upon it by law to conduct administrative assessment. Information for administrative assessment is obtained from the taxpayers’ records and the third parties (Onyegbule, 2012). Onyegbule (2012) further asserted that implementation of SAS has positively impacted Nigeria’s tax administration in a number of ways. It reduced the man-hours, usually; spend on the issuance of assessment notices and related human errors associated misplacement of files. The new system also reduced the delays in servicing assessment notice. The disputes arising from the issuance of inappropriate notice were reduced to zero as the taxpayers now assess themselves. The system also made taxpayers key stakeholders in the determination of their tax liability. Moreover, imposition of frolicsome best-of-judgment assessments without recourse to taxpayers’ records has been reduced by the new system. Taxpayers’ knowledge of the relevant tax laws ought to increase as they must possess appropriate tax knowledge to assess themselves. Therefore, it can be that introduction of SAS into the Nigerian tax laws is meant to address the tax administration weaknesses that hitherto troubling the Nigeria’s tax administration system. The new system gains laudable support ranging from constitution, laws and regulations that provide clear legal and administrative framework and structures. However, after three (3) years of full SAS implementation and issuance of SAS regulation 2011, to our knowledge there is no empirical evidence on the whether or not the new system has reduced tax complexity and improves tax compliance in Nigeria. Thus, to provide empirical evidence on whether or not there is statistically significant difference in tax complexity and tax compliance in pre and postSAS implementation the following hypotheses are developed. The hypotheses which would be tested using paired t- test are expressed in null format. H1: There is no significant statistical difference on mean values of tax compliance under pre and post-SAS adoption in Nigeria. H2: There is no significant statistical difference on mean values of tax complexity under pre and post-SAS adoption in Nigeria.

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DRAFT METHODOLOGY The methodology of the study is quantitative through the use numerical data obtained from paying taxes report issued by Price Water Coopers (PWC) for the period of 2008 to 2014. It covers three (3) years before the full adoption of SAS and three (3) years after. The three (3) years before covers 2008, 2007 and 2010, while three (3) years after covers 2012, 2013 and 2014. For the measurement of the two variables, we follow the approached adopted by Gambo, Mas’ud, Nasidi and Oyewole (2014). Tax Compliance (COMPLY), is measured by number of tax payments based on PWC (2014) data, while Tax Complexity (COMPLEX), is measured using number of hours it take to comply with the tax laws in a particular country (PWC, 2014). Paired samples t-test was performed using SPSS version 22 to measure whether or not there is a significant difference in mean tax compliance and tax complexity in pre and post-SAS adoption in Nigeria. It is asserted that paired t-test is an important tool of comparing mean of similar samples such as before and after (McDonald, 2009). It is normally tested using a null hypothesis that the mean difference between paired observations is zero. Thus, when the mean value difference is zero, it means that there is no significant statistical difference between the mean values, which indicates they are the same.

RESULTS AND DISCUSSIONS To test for the null hypotheses of the study, we run paired samples t-test. On one hand, the study examines whether there is no significant statistical difference on mean values of tax compliance under pre and post-SAS adoption in Nigeria, on the other hand, the study examines whether there is no significant statistical difference on mean values of tax complexity under pre and post-SAS adoption in Nigeria. It is important to note that under SAS regime, it is the responsibility of the taxpayer to assess him/herself to tax and pay the tax liability to a bank designated for the purpose. However, under the old regime (government assessment [GA]) it is the responsibility of the relevant tax authority to assess taxpayers to tax. It is logical to assume that the tax compliance under the two regimes can be different due to different administrative requirement. Where the assessment and payment procedures are simple and individual have a reasonable level of tax morale the new regime can witness high compliance. However, when the reserve is the case, low tax compliance can be witnessed. In the case of tax complexity, the Federal Inland Revenue Service (FIRS) issues Self-Assessment Regulation of 2011, which came-up with the procedures that guide SAS full implementation in Nigeria. Moreover, it is in the same year also some tax laws such as Personal Income Tax Act (PITA) was amended. Thus, it can be argued that these two events can affect the complexity of the tax system. When the new the regulation and the law simplify compliance procedures, the tax system can be less complex. Otherwise it can be more complex. The result of the analysis is depicted in Table 1 and 2 of this study.

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DRAFT Table 1: Paired Samples Statistics Pair 1 Pair 2

OLDCOMPLY NEWCOMPLY OLDCOMPLEX NEWCOMPEX

Mean 35.0000 41.0000 998.6667 950.0000

N 3 3 3 3

Std. Deviation .00000 6.00000 105.07775 10.39230

Std. Error Mean .00000 3.46410 60.66667 6.00000

Table 1 shows mean scores of tax compliance under the old regime (GA) and the new regime (SAS). The mean tax compliance for three (3) years under government assessment is 35 numbers of payments per hour for various taxes. This is against 41 numbers of payments per hour for various taxes under the new regime (SAS). This evidence shows that tax compliance under the SAS is higher than under GA. For tax complexity, the mean hours it takes taxpayers for recording, computation and paying taxes for three (3) years under the old regime (GA) is 998.6667 hours, this is against 950 hours under the new regime (SAS). It shows that tax complexity is lower under SAS compared to GA as hours it takes to pay taxes reduces after the introduction self-assessment regulation in 2011. However, in order to test our hypotheses of whether there is statistically significant difference on the means values of tax compliance under pre and post SAS adoption in Nigeria, and whether there is statistically significant difference on mean values of tax complexity under pre and post SAS adoption in Nigeria we run paired sample t-test based on the suggestion of McDonald (2009). The essence is to test whether the result obtained from Table 1 is statistically significant. Table 2: Paired Samples Test Paired Differences

Pair 1

OLDCOMPLY NEWCOMPLY

Pair 2

OLDCOMPLEX - NEWCOMPEX

Std. Std. Error Mean Deviation Mean -6.00000 6.00000 3.46410 48.66667 115.47005

66.66667

90% Confidence Interval of the Difference Sig. (2Lower Upper T df tailed) -16.11513 4.11513 -1.732 2 .225 -145.99904 243.33237

.730

2

.541

The results from Table 2 shows that tax compliance under the old regime is lower than that under the new regime (t= -1.732; p= 0.225) but not statistically significant. Thus, the null hypothesis that there is no significant statistical difference on the mean values of tax compliance under pre and post-SAS adoption in Nigeria is supported that is cannot be rejected. Similar finding is obtained for the second hypothesis. The result showed that tax complexity in the old regime is higher than that of the new regime (t=0.730; p=0.541), but not statistically significant. Hence, the null hypothesis that there is no significant statistical difference on mean values of tax complexity under pre and post-SAS adoption in Nigeria is supported that is cannot be rejected.

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DRAFT CONCLUSIONS The study examines whether or not there is a difference in tax compliance and tax complexity under pre and post-SAS full implementation in Nigeria. The findings of the study revealed that tax compliance in post-SAS full implementation is higher than that of pre-SAS full implementation. However, such difference is not statistically significant. While we can claims that SAS adoption in Nigeria improves tax compliance, there is still a need for the government to design necessary strategies to enhance tax compliance. Similarly, tax complexity in post-SAS is lower than that of pre-SAS adoption, though the difference is not statistically significant. The result implies that the need for further simplification of tax compliance procedures so as to reduce the numbers of hours it takes to comply with tax obligations in Nigeria.

REFERENCE Barr, N. A., James, S. R., & Prest, A. R. (Eds.). (1977). Self-Assessment for Income Tax. London: Heinemann. Blankson, G. (2012). GRA launches Self Assessment Policy Document to guide tax payers. Business New. Costello, P. (2004). Background to self assessment and the focus of the Review. Australian Tax Office. Cudjoy, L. (2012). GRA launches Self Assessment Policy Document to guide tax payers. Modern Ghana. Gambo, E.-M. J., Mas’ud, A., Nasidi, M., & Oyewole, O. S. (2014). Tax Complexity and Tax Compliance in African Self-Assessment Environment. INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH AND REVIEW, 4(5), 575-582. Irish Revenue and Custom. (2013). A Guide to Self Assessment - IT10, from http://www.revenue.ie/en/tax/it/leaflets/it10.html#section2 Jaidi, J., Noordin, R., & Kassim, A. W. M. (2013). Individual Taxpayers’ Perception Towards Self-Assessment System: A Case of Sabah. Journal of the Asian Academy of Applied Business, 2(1), 56-65. James, S., & Alley, C. (2002). Tax compliance, self-assessment and tax administration. Loo, E. C. (2006). Influence of the introduction of self assessment on the compliance behavior of individual taxpayers in Malaysia PhD Thesis, The University of Sydney Loo, E. C., & Ho, J. K. (2005). Competency of Malaysian Salaried Individuals in Relation to Tax Compliance under Self Assessment. Journal of Tax Research, 3(1), 45-62. Lymer, A., & Oats, L. (Eds.). (2009). Taxation: Policy and Practice. (16th Edition ed.). Birmingham: Fiscal Publications. McDonald, J. H. (2009). Handbook of biological statistics (Vol. 2): Sparky House Publishing Baltimore, MD. Natrah, S., Muzainah, M., & Idawati, I. (2003). The Self-Assessment and Its Compliance Cost. Paper presented at the SEMACC 2003-Research Preceedings: Issues and Challenges Confronting the Accounting Profession Today, Kangar, MalaysiA. Onyegbule, C. (2011). Achieving Voluntary Compliance Through Self-Assessment Tax Regime. Abuja: FIRS. Onyegbule, C. (2012). Self-assessment eases tax returns in Nigeria. The Tribune. 7

DRAFT Pakistan Federal Board of Revenue. (2013). Income Tax>> Income Tax Ordinance>> Ordinance,1979(Old Law). Palil, M. R. (2010). Tax knowledge and tax compliance determinants in self assessment system in Malaysia. University of Birmingham. PWC. (2014). Paying Taxes 2014: The Global Picture- Comparison of Txa System in 189 Economies World-Wide. London: PriceWaterCoopers International Limited. Reap, S. (2006). Indonesian Taxation. Combodia. Sapiei, N. S., & Kasipillai, J. (2013). Impacts of the Self-Assessment System for Corporate Taxpayers. American Journal of Economics, 3(2), 75-81. Sri Lanka Inland Revenue. (2013). Policy Changes Over the Years, from http://www.ird.gov.lk/history.html

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