Determinants of Tax Compliance Behavior in Ethiopia: Evidence from South Gondar Zone

This study is conducted with the main objective of analyzing the empirical relationship between tax compliance behaviour and its determinants in South Gonder Zone of the Amhara region. The study is conducted by using primary data collected from category “A” and “B” tax payers. The primary data is collected using structured questionnaire from 11 districts in the zone. The response obtained from 295 respondents (87.3% response rate) is used for the analysis. Both descriptive and econometrics approach is applied to analyze the data. In order to determine the empirical relationship between tax compliance behavior and its determinant, binary logit model is estimated. The study found that audit rate, attitude of tax payers, perception on equity of the tax system and benefit from the government as well as education are found to have statistically significant positive impact on the tax compliance behavior of category” A” and “B” tax payers in South Goder Zone. On the contrary, tax rate, audit probability, social norm, compliance cost and sex are identified as statistically significant negative determinants of tax compliance behavior in the study area. But, Penalty rate, Perception of government Spending, training to enhance tax knowledge and age of the respondent are found to have statistically insignificant effects on compliance behavior of category “A” and “B” tax payers in South Gondar zone. Finally, the study has forwarded suggestions to further strengthen audit rates, tax equity, tax education, and build the capacity of tax auditors. Moreover, the tax authority should work hard to reduce compliance costs and improve the attitudes of tax payers.


Introduction
Tax compliance is defined as the accurate reporting of income and claiming of expenses in accordance with the stipulated tax laws (Noor and Jeyapalan, 2013). According to Palil and Mustapha (2011) tax compliance can also be defined as taxpayers' ability and willingness to comply with tax laws which are determined by ethics, legal environment and other situational factors at a particular time and place. Similarly, tax compliance is also defined as the ability and willingness of taxpayers to comply with tax laws, declare the correct income and pays the right amount of taxes on time. Palil and Mustapha (2011) stated that tax compliance requires a degree of honesty, adequate tax knowledge and capability to use this knowledge, accuracy and adequate records in order to complete the tax returns and associated tax documentation.
to McKerchar and Evans (2009), addressing inequities in the exchange relationship between government and taxpayers would result in improved compliance. Citizens may not consider their relationship with the state in a vacuum where both parties are the only actors. Likewise, they may not think about their fellow citizens without considering their own relationship with the state. They may also consider how the state treats them relative to their fellow citizens. This judgment is likely to affect not only their judgment of the state, but also how they view their fellow citizens (D'Arcy, 2011). If the state treats certain groups preferentially, this may color the citizen's relationship with the state and the group receiving favors. A crucial variable is then not just what a person gets from the state, but what the person gets from the state (and how the state treats the person) relative to those who are in the person's wider national community. This social psychology model highlights the importance of equity theory in the study of compliance and taxpayer behavior. e) Political legitimacy Tayler (2006) and Kirchler et al (2008) have explained the political legitimacy theory and its effect on tax compliance. According to them tax compliance is influenced by the extent that citizens trust their government. Citizens' belief or trust on the authorities, institutions, and social arrangements to be appropriate, proper, just and work for the common good refers the legitimacy of that political situation. Political scientists have addressed how political legitimacy and civic identification are fostered. A study conducted by Persson(2008) showed that the more successful African countries upon independence are those which build national over ethnic identity than those which allowed ethnicity to become the main animus of politics.
f) Audit Rates According to Nicoleta( 2011),tax audit is one of the most effective policies to protect the behavior of tax evasion .In Self Assessment System, one of the legally provided powers for the tax authority is to review the tax declaration filed by the taxpayer within a specific period of time. Tax education is among the objectives pursued by tax audit, whereby the tax administration shows to the taxpayer the articles of the law violated leading to re-assessment of additional tax. In its report, the tax administration advises the taxpayer on the way forward to avoid future mistakes in his books of accounts. It is against this background that Kirchler (2007) confirmed that high audit rates had a significant impact on compliance rates. Despite the existence of studies which have confirmed the positive correlation between compliance and tax audit rate, Mohd (2010) on the other hand revealed that tax audit rate was not significant to influence the compliance behavior. g) Compliance Costs Compliance cost is expenditure of money in conforming to government requirements such as legislation or regulation. Compliance costs normally include all costs associated with obeying the law, including planning and administration, in addition to the direct time and money spent filing paperwork. Sandford (1981), an excessive compliance costs would make taxpayers to choose evading tax in order to compensate the cost they could incur. h) Attitudes towards taxes Attitude represents the positive or negative evaluation that an individual holds of objects (Nicoletta, 2011). Taxpayers with positive attitude towards tax evasion will tend to be less complaint, whereas taxpayers with negative attitude towards tax evasion will be more compliant.

Research Design and Methodology 3.1 Research Design
This study applied diagnostic research design approach, aiming to investigate the relationship among variables (Adams et.al, 2007). Information is collected from respondents on different variables (economic and non-economic) and logit model is applied to establish statistical relationship between the dependent and independent variables.
The population of this study is 2171 registered category A and B taxpayers found in the 11 districts and 4 town administrations of South Gonder Zone. This study used stratified random sampling technique. 11 strata are formed by merging the 4 town administrations to the nearby districts(i.e, Nefeas Mewcha with Lay Gayent,Addis Zemene with Libo kemekem,Woreta with Fogera and Mekane Eyesus with Estie) and random sampling technique is applied to select respondents from each strata. Finally, the sample required from each stratum is determined through simple probability proportionate to size approach.  Vol.11, No.5, 2020 29 portion of the population in the i th district for each category and N= total population for each category.
The samples required from each district in proportion to the total population are determined as follows.

Sample Size Determination
The sample size is determined using the formula developed by Yamane (1967) obtained from Adams et.al (2007). The formula is:

Instrument
This study used primary data using structured questionnaire to collect all the required information related to tax compliance and its determinants from category A and B registered taxpayers. In the questionnaire an indirectly phrased questions are used to capture tax compliance behavior of individuals so as to avoid direct implication of "wrong doing" by the respondent.

Model specification
In order to examine the factors that affect the probability of being compliant, a binary logit model is estimated. The probability of being compliant is defined as: Where; -Pi represents the probability of the i th taxpayer being compliant. Because TAXCOMP is a dummy variable, a value of 1 will be given if the i th taxpayer has complaint attitude and a value of 0 for non-compliant attitude. -Xi is a vector for individual level characteristics that affect tax compliance behavior which includes age, sex and education. -Yi is a vector for economic and non-economic factors that affect tax compliance behavior.
i  's are the respective coefficients.
The study finally estimated the following logit model: Age group2 age2=1 if the i th tax payer is in the age group between 46-65 and 0 otherwise age3 Age group3 age3=1 if the i th tax payer is in the age group above 65 and 0 otherwise

Data Analysis
Data collection is conducted by using 11(eleven) trained enumerators selected from 11(eleven) districts. Structured questionnaire is used after translation is made into the local language, Amharic. A total of 338 questionnaires were distributed for category A and B tax payers and 295 of them are returned with valid responses. Thus, the response rate is approximately 87.3% and analysis of the study is conducted by using data obtained from the 295 respondents.  Table 4.1 shows over 90% of the sampled respondents are male. Thus, female respondents constitute less than 10% of our sampled respondents. This evidence imply participation of females in category "A" and "B" tax payers is very less and the category is largely represented by male tax payers. As theory supports more tax compliance behavior to female tax payers, the share of tax payers with compliance behavior is expected to be less.
Number As presented in table 4.3 over 53% of the respondents are in the age category between 46-64 and less than 3% of the respondents are between 18-30 implying substantially large share of the respondents is represented by senior group of the labor force (between 46-64) followed by the adult group with a share of around 38%. The youth represent the lowest share

Econometric Analysis
Following theoretical and empirical literatures as a benchmark, the study tried to investigate the role of demographic, economic, social and political factors in determining tax compliance behavior in the study area. The research chose binary logit model due to the binary nature of the dependent variable. Finally, the logit model result is presented in the following table.

. Coefficient Value, significance level and odds ratio result of the binary Logit model
In the first step model fitness test is checked. The Likelihood ratio (LR) value in table 4.5 indicates the fitness of the specified logit model. The LR value, LR chi2 (17) =214.65[Prob > chi2 =0.0000], is a statistical evidence for the presence of good relationship between the dependant variable and combination of independent variables. The null hypothesis which states there is no difference between the model without independent variables and the model with independent variables is rejected. It, thus, show the binary logit model result with the considered independent variables can be used for further interpretation.
Based on the estimated result audit rate, audit probability, compliance cost, tax rate, attitude, equity and social norm are found statistically significant factors for tax compliance behavior. Regarding demographic factors, being female or male as well as being found in secondary and college level of education significantly determines the probability of compliance behavior. The remaining factors: Penalty rate, perception towards government spending, trainings to enhance tax knowledge and age are found to have statistically insignificant effects on the compliance behavior of category "A" and "B" tax payers in the study area.  4.5, tax rate is found to have statistically significant negative effect on the compliance behavior of Category "A"and"B" tax payers in South Gondar zone of the Amhara region. The average negative relationship shows the probability that category "A"and"B" tax payers decrease compliance behavior with high tax rate. Thus, high tax rate is one of the factors reducing tax compliance behavior in districts of South Gondar Zone. The result is consistent with previous findings of Chau and Leung (2009);Alm et al. (1995); Aliyu and Gambo (2014). The odds ratio also implies category "A"and"B" tax payers are, on average, 0.28 times less likely to be tax compliant for the shift from lower tax rate to relatively higher tax rate. The marginal effect presented in table 4.6 show tax compliance behavior decreases by approximately 4% for the shift from lower tax rate to higher tax rate category. b) Audit rate(adur): uninterrupted auditing is observed to have positive contribution(at 5% and 1% level of significance) on tax compliance behavior of category "A"and"B" tax payers in the study area. The result is consistent with the theory and most of the findings. The odds ratio show successive auditing would make the tax payer approximately 7 times more likely to have compliance behavior than compliance in the absence of successive auditing. As table 4.6 also show the shift from less audit rate to uninterrupted auditing increases the probability of compliance behavior by around 3.8%. c) Audit probability (aup): Table 4.5 also shows the probability of non-detection in tax auditing has negative relationship (at 5% and 1% level of significance) with compliance behavior. The result implies an increase in the probability of non-detection in tax auditing leads to a decrease in the compliance behavior of category "A"and"B" tax payers. The odds ratio result indicates that tax payer with non-detection experience in tax auditing is 0.04 times less likely to have compliance behavior. The marginal effect result also confers the same idea. The shift of a tax payer idea from successful detection into non-detection in tax auditing reduces the compliance probability of category "A"and"B" tax payers by around 15.6%. d) Attitude (attu): Attitude is also found as the other statistically significant factor(at both 1% and 5% level of significance) positively influencing the tax compliance behavior of category "A"and"B" tax payers in South Gondar zone. A tax payer feeling guilty in violation of the tax law is 3.5 times more likely to exhibit compliance behavior than the tax payer that doesn't feel guilty if he/she violates the tax law. As presented in table 4.6, the marginal effect of the shift from negative attitude to pay tax to positive attitude is 4% improvement to the tax compliance behavior. e) Perception of equity of the tax system (equ): tax payer perception about the tax and benefit distribution is found to have positive relationship with tax compliance behavior, but only at 10% level of significance. As table 4.5 show a tax payer with perception of equity on the tax system is 5.3 times more likely in favor of compliance behavior than the tax payer with the perception of inequity. The marginal effect measurement also shows the shift from perception of inequitable tax and benefit distribution to perception of equity would Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.11, No.5, 2020 improve compliance behavior by around 3%. f) Social norm(Snor): The tax compliance behavior of friends, relatives and neighbors do have statistically significant( at 10% level of significance) negative effect on the compliance behavior of category "A"and"B" tax payers in South Gondar zone. A tax payer with non-compliant reference is 0.3 times less likely to exhibit compliance behavior than those having compliance reference. The marginal effect result also show the shift from a reference group with compliance behavior to non-compliance reference group would decrease the compliance behavior of category "A"and"B" tax payer by an average of 4%. g) Compliance cost(Comc): Higher compliance cost is found to have statistically significant negative effect on the compliance behavior of category "A"and"B" tax payers in South Gondar zone. The odds ratio imply the shift from low compliance cost to higher compliance cost leads to approximately 0.02 times less likely to exhibit compliance behavior than tax payers with lower compliance cost. On the other hand, the marginal effect results again indicate the shift from low compliance cost to higher compliance cost could decrease the compliance behavior of the tax payer by approximately 23%. h) Sex: Sex of the tax payer is also found as an important determinant of compliance behavior. Being male is found to have an average significant negative effect on the compliance behavior of category "A"and"B" tax payers in South Gondar zone. As indicated in the odds ratio result in table 4.5, being male tax payer is 0.06 times less likely to have compliance behavior than female tax payer. The marginal effect result also shows the shift from female tax payer to male tax payer would decrease compliance behavior of the tax payer by an average of 23.7%. i) Education: level of education is found the other important significant determinant of tax compliance behavior of category "A"and"B" tax payers in South Gondar zone. Although tax payers without formal education don't have statistically significant difference in terms of compliance behavior relative to primary level completes, being in the secondary level of education as well as college and above completed do have statistically significant positive difference on the compliance behavior relative to primary level completed. The odds ratio result again indicate category "A" and "B" tax payer in the secondary level of education and college and above is 14.6 and 7.5 times, respectively, in favor of compliance behavior than primary level completed. As presented in table 4.6, the marginal effect result show the shift from primary level education to secondary level and college and above could improve compliance behavior of tax payers by approximately 9%and 11% respectively.

Conclusion and Recommendations 5.1 Conclusion
This study is conducted with the objective of identifying the most significant economic, social, fiscal and demographic factors determining the tax compliance behavior of category "A" and "B" tax payers in South Gondar zone of the Amhara region. Primary data collected from 295 respondents (approximately 87.3% response rate) from 11 districts is used. The data is collected by using structured questionnaire after translation is made into the local language, Amharic. Both descriptive and econometric analyses are used. In order to identify the significant determinants of tax compliance behavior, binary logit model is applied. The effect of various determinants on the probability of exhibiting compliance behavior is examined. Finally, the study identified:  Audit rate, attitude, perception on equity of the tax system and benefit and education are found to have statistically significant positive determinants of tax compliance behavior.  Tax rate, audit probability, social norm, compliance cost and sex are identified to have statistically significant negative effects on tax compliance behavior.  Penalty rate, Perception of government Spending, training to enhance tax knowledge and age of the respondent are identified to have statistically insignificant effects on compliance behavior of category "A" and "B" tax payers in South Gondar zone.

Recommendation
Based on the empirical findings, this study would like to forward the following recommendations:  As tax rate is in country wide, the tax law should be moderate in relation to tax rate or the government should adjust the tax rate because it is not high tax rate that generate income but evasion increases with increasing tax rate.  The capability to detect fraud or evasion is crucial to taxpayers to be compliant. Therefore, tax authority should increase audit probability because evidence of increased compliance is detected as the result of the increased probability of an expected audit.  It is natural for people whose friends pay taxes to think that the probability of audit is high and people whose friends do not pay taxes to think (realize) that the probability of audit is low. Therefore the tax authority should increase the probability of audit and should do more on tax awareness campaigns to the Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.11, No.5, 2020 community (taxpayers) about paying tax is right and appropriate.  The tax administration and/or authority should simplify the tax process as much as possible to make it easier by reducing the compliance costs. Moreover, the E-taxation process and simplification of tax laws should be given priorities in ERCA plans.  The tax authority should encouraged in relation to uninterrupted auditing because it increases the compliance of taxpayers by showing the articles of the law violated and the way forward to avoid future mistakes that will be made by taxpayers in his/her books of accounts. Moreover, tax audit means tax education and advice for taxpayers.  The tax attitude is more depends on the perceived use of the money collected and therefore are connected to tax knowledge. Therefore the tax authorities should be continuing in creating tax awareness to fill the tax knowledge gap.  Tax authorities and officers should be encouraged to treat taxpayers equally in a respectful and responsible way, because it will increase trust in the government and thus voluntary tax compliance is likely to increase on the individual, group and societal level.