Tax Costs and Tax Compliance Behaviour in Kenya

Abstract

This study examines the influence of measures of tax compliance costs on tax compliance behaviour among medium and large corporate taxpayers in Kenya. It uses a Structural Equation Modelling (SEM) technique to establish the key cost drivers built using survey data, while controlling for key attributes of the tax system as well as firm characteristics. The results indicate that tax compliance in Kenya significantly declines with increase in tax compliance costs, particularly those related to understanding of the existing complex tax laws, changes in tax rules as well as general costs of meeting the compliance and regulatory requirements. The model constructs account for about 40% of variations in tax compliance behaviour in Kenya, which is above the empirically accepted minimum for exploratory studies. From the results, the study recommends a focus by tax authority and policymakers on measures to reduce these identified tax compliance costs. In addition, greater emphasis should be put on investing in opportunities that reduce financial pressure on firms thus encouraging tax compliance.