Tax Compliance: Factors that Influence Taxpayer Invoice Requests in Portugal.
| Autor | Pinheiro, Joao Minas |
I Introduction
Taxes are undoubtedly the most important source of revenue for governments. Collecting tax revenues is a major problem for all countries around the world. However, governments tend to make efforts to reduce lost tax revenues. On the other hand, most taxpayers try to optimize their tax debts by engaging in tax planning, tax evasion/fraud, or tax avoidance actions. The main purpose is always to reduce tax debts.
Tax authorities cannot rely on full tax compliance because despite most taxpayers being willing to pay their share (Diogo, 2018; Kirchler, 2007), some engage in illegal actions to reduce their tax debts (Alm, 2019). On this topic, Lamberton, De Neve, and Norton (2018) argue that most taxpayers prefer not to pay taxes, resulting in a tax gap, which is tax revenues lost due to tax noncompliance, such as the tax gap of 31 billion [pound sterling] in the UK (Her Majesty's Revenue & Customs [HMRC], 2020). Richardson and Sawyer (2001) alert us to the increasing tax gap, making it an important matter of discussion for all governments.
In recent years, the Portuguese Tax Administration (PTA) has adopted several measures to reduce tax non-compliance and promote taxpayers' cooperation to improve voluntary tax compliance. In 2012, the Portuguese government ordered most firms to use electronic invoicing systems and automated reporting. Meanwhile, the PTA created an electronic system--e-invoice--for taxpayers to monitor their tax deductions at any time. The e-invoice system has been crucial to maintain a low tax gap, especially the value added tax (VAT) gap. There are two points to highlight: i) the Portuguese VAT gap has been decreasing since the implementation of e-invoice (13.7% in 2014 to 7% in 2019, always below the EU average of 14.3% in 2014 and 9.6% in 2019) (Center for Social and Economic Research [CASE], 2020), and ii) e-invoice granted an award to Portugal in 2013--the CIO Award. E-invoice gave individual taxpayers the possibility to deduct 15% VAT in some activity sectors that are more prone to the shadow economy with the condition that taxpayers ask for an invoice-receipt with their tax identification number (TIN). In 2014, the Portuguese government went further and introduced a tax lottery to discourage deviant behaviors connected to the shadow economy, allowing taxpayers the possibility to earn prizes such as cars (previously) and treasury certificates. However, this citizen cooperative action is not mandatory, since people are not legally obliged to request an invoice with their TIN.
In 2011, Portugal required a bailout package, an agreement which committed the country to increase its tax burden significantly. This context made it urgent for the e-invoice system and other measures adopted by the PTA to increase tax collection effectiveness. Thus, the purpose of our paper is to analyze citizens' behavior in relation to sales invoices in the context of collaborating with the PTA on tax compliance. Specifically, we address two research questions: i) we identify the determinants that lead individual taxpayers to request invoices with(out) a TIN, and ii) we identify the sociodemographic characteristics that are associated with these behaviors. Principal component factor analysis and cluster analysis were used to perform the analysis. Both methods were applied to a sample of 240 Portuguese citizens whose data were collected through a questionnaire survey.
Feld, Frey, and Torgler (2006) point out that there is a limited amount of empirical and experimental evidence to investigate in detail the impact of positive rewards on tax compliance. Furthermore, the scarce literature on tax compliance examines the individual impact of a specific incentive (e.g. lotteries) on requests for invoices with a TIN. Except for Wilks, Cruz, and Sousa (2019), the literature does not analyze the multiple factors that can influence these behaviors. A better understanding of taxpayer attitudes and behaviors is crucial for promoting cooperation between taxpayers and tax administrations (Mitu, 2016). Moreover, identifying taxpayers' behavior is critical to addressing tax non-compliance (Devos, 2014). Thus, this paper aims to provide new insights into what motivates citizens to cooperate with the tax authority in pursuing VAT evaders.
Following this introductory section, Section 2 provides the literature review. Section 3 describes the research model, research variables, and sample. Section 4 presents the empirical results, and Section 5 focuses on the discussion. Section 6 offers the conclusions, contributions, and future research topics.
2 Literature Review
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i Tax compliance
The main goal of collecting taxes is to satisfy the government's financial needs (Pereira, 2018). Also, taxes are an important matter for society because of social norms (Bobek, Hageman, & Kelliher, 2013; Bobek, Roberts, & Sweeney, 2007), since taxes are the main point of social contracts (Brockmann, Genschel, & Seelkopf, 2015). The more effective tax authorities are at managing tax compliance, the smaller the tax gap will be (Richardson & Sawyer, 2001). The tax gap is "the difference between tax collected and the tax that should be collected" (HMRC 2012, p. 3). This definition is also compatible with the one used by the IRS (Raczkowski, 2015). The main literature refers to the core features for the abovementioned definition of the concept of tax gap (Robbins & Kiser, 2020). HMRC used an older definition: "the tax gap measures the amount of tax we ultimately fail to collect, or, alternatively the amount of uncorrected non-compliance" (Palan, Murphy, & Chavagneux, 2010, p. 66). According to Murphy (2008), and the HMRC's point of view, the due amount of tax to be paid can be broken down into two components: 1) the part that is due if the letter of the law is complied with, and 2) the part that is due if the spirit of the law is also complied with. This situation can lead us to a specific tax gap--the expectation gap--as
[...] the difference between the headline or declared tax rate for companies, and the rate of tax they actually pay. This gap is a measure of the difference between the contribution society expects business to make by way of tax paid, and what is actually paid. (Murphy, 2008, p. 4)
Increasing the level of tax compliance is now a major challenge for tax authorities and governments around the world (Agbetunde, Akinrinola, & Odinakachi, 2020).
Regarding the definition of tax compliance, there is no single universally accepted definition (Devos, 2014). Several authors present their own definition of tax compliance (Balestrino & Galmarini, 2003; Borrego, 2015; Devos, 2014; Diogo, 2018; James & Alley, 2002; Kirchler, 2007; McBarnet, 2001; McKerchar, 2003; Organisation for Economic Co-Operation and Development [OECD], 2010; Roth, Scholz, & Witte, 1989). Based on these authors, Diogo (2018) states that tax compliance occurs when taxpayers cumulatively submit, in due time their tax returns with the real value of earned income and expenses that is fiscally accepted and supported, and they pay the amount due by the end of the voluntary payment period and comply with their additional obligations as specified by the tax codes.
Regarding tax compliance research, Antinyan and Asatryan (2020) argue that there are several excellent literature reviews such as those of Alm (2019), Andreoni, Erard, and Feinstein (1998), Slemrod (2007; 2019), and Slemrod and Yitzhaki (2002). Additionally, we can mention Borrego (2015) and Diogo (2018) for research on tax compliance in Portugal and Devos (2014) in Australia. Borrego (2015), Devos (2014), and Diogo (2018) identify two major theoretical approaches to tax compliance: 1) economic deterrence theory and 2) fiscal and social psychology models.
Economic deterrence theory is linked to the economic crime theory of Becker (1968), which led to the papers by Allingham and Sandmo (1972), Srinivasan (1973), and Yitzhaki (1974). Economic deterrence theory assumes that taxpayers are rational in aiming to maximize their expected utility. In order to maximize their expected utility, they have to decide if they are willing to report all income or risk being audited and fined for underreporting income. In order to dissuade taxpayers from intentional tax non-compliance, the main measures, in terms of tax legislation, are fines, constituting one of the variables of the AS model, and carrying out tax audits with an associated probability. Tax compliance models, based on economic theory, thus instill control and punishment of non-compliant taxpayers as measures to educate and deter taxpayers from defaulting on their tax obligations (Chu, 1990; Kirchler, 2007; Sanson, Montgomery, Gault, Gridley, & Thomson, 1996). Since the papers by Allingham and Sandmo (1972) and Yitzhaki (1974), several studies have been developed based on economic deterrence theory. However, these studies have inadequately understood tax compliance behavior due to their weak predictive reliability (Alm, 2019; Borrego, 2015; Devos, 2014; Diogo, 2018). Nevertheless, Allingham and Sandmo (1974) and Yitzhaki (1974) count more than 6400 and 1500 citations respectively in Google Scholar.
Social psychology has been used to develop a mechanism for understanding human behavior. Social psychology models aim to analyze how people shape their expectations and how these influence their personal choices, with several studies carried out in the field of methodological procedures and tax compliance determinants (Borrego, 2015; Devos, 2014; Diogo, 2018; McKerchar, 2003).
One important study that uses the fiscal and social psychology approach is that of Schmolders (1959), who presents the concept of tax mentality as "individual resistance to direct taxation" (Schmolders, 1959, p. 342), which can vary across countries. It is also important to refer to Strumpel's (1969) study, which introduces the willingness to cooperate variable in a tax compliance model...
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