The Determinants of Tax Compliance Intention in a Rentier Economy: The Case of SMEs in Saudi Arabia

Abstract

Taxes are a vital component of national economies. With income generated by tax systems, governments are able to finance their public expenditure. However, the amount of tax revenue that governments can spend depends on taxpayer compliance with the system. Worldwide, government budgets lose billions of dollars because of noncompliance.

Based on recent statistics, SMEs (medium, small and micro-sized businesses) are the major contributor to the tax gap and have been described as a ‘hard-to-control segment’. Encouraging voluntary compliance by building a system centred on taxpayer needs is the most important way to enhance SME compliance with the tax system. Understanding the factors that influence taxpayer decisions will accomplish this. In this project, this study builds on earlier research which has highlighted the importance of understanding the behavioural aspects behind people's decisions and has broadened the scope of research on the tax compliance area to include the social, cultural, and political aspects of the taxpaying environment.

Previous literature has not focused on rich rentier economies. Citizens living in such economies are expected to show low compliance compared to others. The combination of a rentier economy and a significant welfare program produces a culture of entitlement. In this respect, Saudi Arabia can serve as a ground-breaking case study. This study aims to examine various factors, derived from both the economic and non-economic approaches, that can impact SME compliance intentions in a rentier economic environment, specifically in Saudi Arabia. Intention can predict behaviour with considerable accuracy. This research employs primary data that was obtained through an online questionnaire.

This research project extends the original model of the planned behaviour theory (TPB) to include a number of economic and behavioural factors. Besides the constructs founded by TPB, other constructs are grounded in different theories, including utility theory (UT), deterrence theory, the theory of reasoned action (TRA), equity theory and reactance theory.

This study investigates the effect of a variety of factors indicated by the literature and proposes new factors that stem from the characteristics of a rentier economic environment. These factors are incorporated into a comprehensive model of tax compliance.

The findings of this research reveal that, among the economic factors, tax rates and financial constraints strongly influence taxpayer behaviour. On the other hand, audit probability appears to have an insignificant impact on taxpayer decisions. These results align with other studies in the literature and are consistent with the circumstances and environment surrounding SMEs in Saudi Arabia.

In regards to non-economic factors, personal norms, subjective norms, tax complexity, tax knowledge, and entitlement mentality strongly influence taxpayer behaviour, and in particular, personal norms, subjective norms, and entitlement mentality come across as the strongest predictors of tax compliance.

This study demonstrates the importance of combining economic and behavioural approaches to understand taxpayer behaviour. Additionally, this study illustrates the significance of contextual considerations in the tax compliance field. The economic environment, the characteristics of SME enterprises, and the novelty of their experience with taxes all play a role in shaping SME behaviour towards taxes.

The study provides several key suggestions for policymakers to enhance tax compliance. The study emphasizes the importance of effective communication, especially in regions where taxes are newly enacted, and suggests highlighting the benefits of taxes for public services, which can help citizens understand the purpose of taxation. Additionally, it underscores the significance of building positive social norms around tax compliance by improving interactions between taxpayers and tax authorities. The idea of viewing tax authorities as service providers is a progressive approach to encourage compliance, particularly for small businesses, by simplifying tax systems and offering assistance.

This study addresses the gaps in the literature concerning taxpayers’ compliance behaviours and, more importantly, tax compliance behaviours in a rentier economy. To the researcher’s knowledge, this is the first project that brings the issue of rentier economies to taxpayer compliance studies and explores the implications of such an environment on taxpayers' behaviours.