Tax compliance and small and medium enterprise operators: an intra-cultural study in New Zealand

Yong, Sue (Siew Eng)
Hooper, Keith
Northcott, Deryl
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Doctor of Philosophy
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Auckland University of Technology

Despite the economic importance of the tax collection process undertaken by small and medium enterprises (SMEs), little is known about their tax compliance behaviour in general, and particularly in relation to cultural factors. With the growing cultural diversity of SME ownership, there is a need for an intra-cultural study of how SME operators comply with tax regulation. This knowledge is important for both tax authorities and the business community in identifying cultural factors that may hinder successful tax compliance, so that remedial actions can be taken to improve compliance by SMEs.

This qualitative study applies Hofstede’s (1980, 2001) cultural framework to examine the differences in the tax compliance behaviours, attitudes, and perceptions of European, Maori, Asian and Pacific SME operators in New Zealand. As the aim was to gain rich and in-depth understanding of the tax compliance dynamics of ethnic SME operators, additional perspectives were sought from tax practitioners and business experts to provide insights into the influences of networks, time and risk orientations, and SME operators’ perceptions of the tax authority. To achieve that, 59 ethnic SME operators, tax practitioners, and business experts were interviewed between 2006 and 2010.

The study found some collectivistic groups used their networks to lower their tax compliance costs, whereas others were required to fulfil their group’s obligations, thereby hindering their ability to pay their taxes on time. Groups with higher uncertainty avoidance, long term time orientation and masculinity traits had better record keeping systems and fewer tax compliance problems. High power distance groups showed greater reverence and fear towards the tax authority and tax practitioners. The Asian SME operators who participated in this research showed the least difficulty with filing their tax returns and paying their taxes on time, whereas the Europeans experienced some difficulties and the Maori and Pacific SME operators encountered the most problems. Given that, tax compliance activity can no longer be thought of as culturally neutral, as is assumed in some tax compliance research.

Since Hofstede’s work was based on a quantitative methodology, the qualitative design of this study aimed to validate and understand Hofstede’s dimensions in the tax compliance context for SME operators intra-culturally. The qualitative approach generated rich content in terms of providing real tax compliance stories, perceptions and experiences that highlighted some difficulties created by cultural incompatibility with the New Zealand tax requirements. The study also offers suggestions to the tax authority, policy makers and business community to reduce the likelihood of noncompliance amongst SMEs. In order to comply with the tax regulations, there is a need for SME operators to modify and adapt their cultural values to align with the tax requirements, as failure to do so will result in tax compliance difficulties. In addition, the tax authorities also need to be culturally aware that some ethnic groups may have difficulties complying due to their cultural values, thereby requiring targeted assistance and monitoring measures.

Tax compliance , SME , Hofstede , Intra-cultural
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