INTERNATIONAL JOURNAL OF MULTIDISCIPLINARY: APPLIED

BUSINESS AND EDUCATION RESEARCH

2023, Vol. 4, No. 4, 1350 – 1364
http://dx.doi.org/10.11594/ijmaber.04.04.29

Research Article

Factors Affecting Tax Compliance of MSMEs in Dipolog City

Janven A. Granfon1, Wella Nova Joy D. Lagare2, Dexter A. Aling2, Neil Bryan D. Dangcalan2,
Ara A. Ebanay2
1Assistant Professor 3, College of Business Administration, Jose Rizal Memorial State University,
Philippines
2Students, College of Business Administration, Jose Rizal Memorial State University, Philippines

Article history: ABSTRACT

Submission February 2023
Revised April 2023 This research is made focused on assessing what factors could affect the
Accepted April 2023 tax compliance of MSMEs in Dipolog City, one of the major economic driv-
ers are; (1) Tax Inspection Possibility, (2) Tax Rates, (3) Tax Penalties,
*Corresponding author: (4) Tax Policies Complexity, (5) Social Norms and (6) Tax Knowledge.
E-mail: Through random sampling, 96 business owners/managers/bookkeepers
chagelishviliana@yahoo.com of specifically retail MSMEs in Dipolog City were extracted as respond-
ents. A descriptive correlational quantitative method was used in this
study, utilizing standardized adapted questionnaires for gathering data
which was analyzed and interpreted using frequency, percentage distri-
bution, mean, Kruskal-Wallis test, and Spearman Rho. Findings revealed
most of the enterprises belong to a micro level and are still in the busi-
ness for 2-5 years. Furthermore, among the factors identified, only Tax
inspection Possibilities, Tax Penalties, and Tax Knowledge have signifi-
cant relationships with tax compliance. This means that the possibility of
being inspected, delayed payment of obligations, and their knowledge of
tax laws increased the respondents’ awareness of tax compliance. If a tax-
payer has knowledge about tax laws, payments, and tax rates applied to
his/her business, compliance increases. It is also recommended that the
taxing authority must conduct a statutory tax seminar to MSMEs as tax-
payers.

Keywords: MSMEs, Tax Compliance, Tax Inspection Possibilities, Tax

Knowledge, Tax Penalties

Introduction specifically tax compliance, the government

Tax is a system of funding levied on the cit- could provide a vast array of public services, to
izens of the country or state intended for the name a few defenses, public order and safety,
common good. With the existence of tax, health, education and social protection among

How to cite:
Granfon, J. A., Lagare, W. N. J. D., Aling, D. A., Dangcalan, N. B. D., & Ebanay, A. A. (2023). Factors Affecting Tax Compliance
of MSMEs in Dipolog City. International Journal of Multidisciplinary: Applied Business and Education Research. 4(4), 1350
– 1364. doi: 10.11594/ijmaber.04.04.29
 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

others. Tax compliance is the willingness of the because it is being influenced by several fac-
taxpayer’s to pay taxes, however ultimately tors. Several factors affecting tax compliance
necessary to achieve country’s economic equi- such as, tax awareness, and penalties (Paco et
librium (Winslade, 2013). In layman's terms, al., 2022). Tax inspection possibility, tax rates,
tax compliance is the free and complete perfor- tax penalties, tax policies Complexity, social
mance of all tax duties prescribed by law. As norms, tax knowledge (Nguyen, 2022).
said, taxes are the lifeblood of the government Therefore, in order to assess these factors
and so should be collected without unneces- or to measure the level of how it affects tax
sary hindrance (Gr_l_28896_1988 @ compliance, the study analyzed the mentioned
Lawphil.Net, n.d.). As important as tax compli- ones which affect MSME’s tax compliance in
ance is to the continued subsistence of the gov- Dipolog City. The study being undertaken
ernment, Micro, Small and Medium-sized En- demonstrates the impact of each factor on
terprises (MSMEs), in particular, is to economic MSMEs’ tax compliance. Since then, the study
growth, in developing the Philippine economy also addresses the government and tax regula-
to be exact. In Republic Act No. 9501, Section 3, tors/agencies, like the Bureau of Internal Reve-
in particular, MSMEs is defined as “any busi- nue (BIR), to give more attention to tax compli-
ness activity or enterprise engaged in industry, ance on MSMEs.
agribusiness and/or services, whether single Research in the Philippines at the MSMEs
proprietorship, cooperative, partnership or regarding tax compliance is very limited, with
corporation whose total assets (exclusive of this; this study helps to close the gap in the lit-
land) must have value falling under the follow- erature by determining significant effects of
ing categories:(1) Micro – not more than each factor to the tax compliance of MSMEs.
₱3,000,000, (2) Small – ₱3,000,001 to Furthermore, the researchers want to contrib-
15,000,000 and (3) Medium – ₱15,000,001 to ute in such a manner that the government rec-
100,000,000”. ognizes the need to evaluate tax prejudice
Although they are small in size compared to against MSMEs, if any, which will be beneficial
large ones, they are vital to the economy be- to the major economic driver of the Philippines,
cause they alleviate poverty through creating the MSMEs, and for better tax compliance
jobs for the country's growing labour force, among the subject overall. Although this study
promote economic growth in rural and remote was successful in demonstrating the significant
areas, and serve as a breeding ground for new effects between the variables, additional re-
entrepreneurs and large enterprises. Empiri- search on the given variables is still encour-
cally, according to the Department of Trade and aged.
Industry (2018), MSMEs in the Philippines ac-
count to 99.52% of the registered businesses in Objectives
the country and provide 63.19% of jobs, thus This study determined which factors could
making itself the backbone or the lifeblood in affect the Tax compliance of Micro, Small and
promoting sustainable and inclusive growth. Medium size Entities by answering the follow-
Accordingly, the collection of taxes from Micro, ing questions:
Small, and Medium Enterprises is a vital source 1. What is the profile of the enterprise in
of income for the Bureau of Internal Revenue. terms of size and length of operation?
With tax being obligatory in nature, this be- 2. What is the level of Tax Compliance of
comes the source of the majority of MSMEs’ MSMEs?
concerns. In the country other than the Philip- 3. What factors affect Tax compliance?
pines, specifically Malaysia, depending on the 4. What action plan can be developed based
business establishment, MSMEs were taxed as on the result of the study?
either individual taxpayers for unincorporated
businesses or corporate taxpayers for incorpo- Review of Related Literature
rated businesses (Pope & Jabbar, 2008). In fact, Tax is a charge that citizens of a country or
with emphasis on tax compliance, this becomes a state must bear for the primary reason that
the source of the majority of MSMEs’ concerns the government must raise revenue from the
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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

people it governs in order to avoid being para- on the other hand, lowering tax rates does not
lyzed, which results in a lack of motive power always result in increased tax compliance.
to activate or operate. Additionally, here in the Studies suggested that there was a correla-
Philippines, it can only be demanded and en- tion between tax rates and tax compliance, in
forced by the government of the said country other words, tax rates influenced the taxpayer’s
upon its citizens and residents thus cannot be tax compliance. As evidence, Collins and
enforced on subjects beyond its geographical Plumlee (1991) concludes that the higher the
authority as this would impinge on foreign sov- tax rate, the less likely taxpayers were to com-
ereignty. According to the National Tax ply; in other words, high tax rates result in high
Research Center, taxation in the Philippines tax noncompliance. (Tilahun, 2019). Further-
started on May 15, 1959. This occurred as a re- more, when the study looked at the effect of tax
sult of the enactment of Republic Act (RA) No. rates on tax evasion, the findings revealed that
2211, which institutionalized tax research in tax rates and tax evasion have a direct relation-
the Philippines on the said date, “creating the ship. As a result, an increase in tax rates re-
Joint Legislative Executive Tax Commission sulted in an increase in tax evasion.
(JLETC) as a new agency under the administra- Tax Penalties. A tax penalty is a monetary
tive supervision of the national economic de- penalty imposed by the tax law for performing
velopment authority”. Over the years, other or failing to perform a prescribed act, such as
taxes and duties have been added through failing to file a return on time, filing it incor-
amendments and enactments. rectly, or filing undervalued returns. In the
With tax being obligatory in nature, this be- Philippines, as provided by the Bureau of
comes the source of the majority of MSMEs’ Internal Revenue, tax penalty is divided into
concerns. In fact, with emphasis on tax compli- three (3) categories namely: (A) Tax Returns
ance, this becomes the source of the majority of with Tax Due, (B) Tax Returns with No Tax Due
MSMEs’ concerns because it was influenced by and (C) Statements/Records Required to be
several different factors. These aforemen- Filed with No Tax Due to be Paid. In the first
tioned factors are claimed to have an effect on category, penalties include surcharge embod-
tax compliance cost incurred by MSMEs and ied in NIRC Sec. 248-Civil Penalties, Interest in
these include the following: (1) Tax Inspection NIRC Sec. 249 and NIRC Sec. 255-Compromise.
Possibility, (2) Tax Rates, (3) Tax Penalties, (4) Tax Returns with No Tax Due include the refer-
Tax Policies Complexity, (5) Social Norms and ence specifically found in page 4 of Annex A of
(6) Tax knowledge which will be presented in RMO No. 7-2015 and the NIRC Sec. 250. Tax
the following literatures. penalty concerning the last category was di-
Tax Inspection Possibility. Tax inspection rectly attributable to NIRC Sec. 275-Violation of
was defined as the process of evaluating the Other Provisions of this Code or Rules and Reg-
completeness and accuracy of information and ulations in General.
documents in tax records, as well as taxpayers' Tax Policies Complexity. Tax policies
compliance with tax laws. That being said and complexity arises due to the increase sophisti-
in connection to the study concerning factors cation in the tax laws, as examined in the liter-
affecting tax compliance conducted by Nguyen ature of (Saad, 2014) on tax complication of
(2021), of which tax inspection was one of the which complexity of tax system is classified
factors, Tax inspections have a positive impact into calculation, tax forms, compliance costs,
on reducing tax evasion because they prevent principles and procedures.
tax fraud and force taxpayers to comply with According to Nguyen (2021), in the study
tax laws, thereby increasing tax compliance. concerning factors affecting tax compliance of
(Kirchler,2007). which the complexity of tax policies is one of
Tax Rates. Tax rate is an important factor the factors, a complex tax system can have a
determining tax compliance, since this influ- negative impact on tax compliance through cre-
ences taxpayer’s decision to comply with the ating barriers and higher compliance costs for
tax laws. Raising marginal tax rates is likely to taxpayers, as well as reducing preferences and
encourage taxpayers to evade tax even more; limiting taxpayers' compliance ability.
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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

Social Norms. In the study conducted by The literature and studies included in this
(Nguyen, 2022) regarding factors affecting tax study highlighted the variables under consider-
compliance, tax compliance is closely related to ation, which are the factors affecting tax com-
ethical and social norms. (Battiston & Gamba, pliance as well as tax compliance itself. These
2013, 2016; Fjeldstad & Semboja, 2001; mentioned factors are perceived to be affecting
Traxler, 2010), and have influence on the inten- MSMEs ability towards meeting their tax obli-
tion of complying taxes (Bobek et al., 2007). gations. Therefore, in order to determine or as-
However, as a working definition, social norms sess the factors level of influence with regards
are construed in accordance with Cialdini & to MSMEs tax compliance, the study analysis
Trost (1998), as “rules and standards that are the mentioned ones through relating to the op-
understood by members of a group, and that erating MSMEs in Dipolog City, limiting only to
guide and/or constrain social behaviour with- those operating retail stores. With the study be-
out the force of laws”. ing undertaken, this demonstrates the influ-
(Nguyen, 2022), in his study regarding fac- ence of each factor on MSMEs’ ability to comply
tors affecting tax compliance; social pressures with tax compliance. Since then, the study has
have a significant positive impact on voluntary also urged the government and tax regula-
tax compliance among taxpayers. (Battiston & tors/agency, such as the Bureau of Internal
Gamba, 2016). Because of their social ac- Revenue (BIR), to pay more attention to
ceptance, taxpayers in a social community form MSMEs' tax compliance. Furthermore, the re-
compliance intentions. searchers hope to contribute in such a way that
Tax Knowledge. As defined by Mulya the government will recognize the need to eval-
(2012), a tax knowledge is tax information that uate tax prejudice against MSMEs, if any exist,
taxpayers can use to act, make decisions, and which will benefit the Philippines' main eco-
pursue specific tax directions or strategies. nomic driver, MSMEs, as well as better tax com-
In the research conducted by Ilkham & pliance among the subject overall.
Haryanto, (2017), It demonstrated that when a Particularly, the framework in Figure 1 will
person has a broad knowledge and under- be used to determine the impact of the prede-
standing of the importance of taxes used by the termined common factors towards the tax com-
state to finance his household and for public in- pliance of MSMEs operating retail in Dipolog
vestment, he or she is more motivated to pay City. The variables adopted are from results of
taxes, of which the findings complement to the the previous study of by Nguyen (2022) that
previous study done by Yunus et al.,( 2017) are said to be generally affecting tax compli-
that tax knowledge or tax education have a ance of MSMEs.
moderate positive relationship with tax com-
pliance.

FACTORS AFFECTING
TAX COMPLIANCE
Tax Inspection Possibility
Tax Rates TAX ACTION PLAN
Tax Penalties COMPLIANCE
Tax Policies Complexity
Social Norms
Tax
MethodologyKnowledge
Figure 1. Conceptual Framework

Research Method procedures and frequently employs graphs and

The researchers used a quantitative re- figures for data analysis. (Pervez Ghauri, 2005).
search method. Quantitative research fre- The study collected data through primary
quently draws conclusions based on statistical sources using a standardized adapted survey

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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

questionnaire with a 4-level Likert scale. Philo- divided into two (2) parts. The first part dealt
sophical stances attributed to analyse objec- with the respondents profiling such as the
tively, was through an etic epistemology name of the business, the category of the busi-
through realism ontology, to satisfy the enter- ness as to whether it is a micro, small or me-
prises’ profiles, and correlate the impact of the dium, number of years in operation, gross in-
predetermined factors affecting tax compli- come per year and the respondent’s position in
ance. the business. The second part dealt with the se-
ries of statement in connection to each of the
Research Respondents factors affecting tax compliance extracted from
This study determined extent on how the the study conducted by Nguyen (2021), as such
predetermined common factors of tax compli- rated as either Strongly Agree, Agree, Disagree
ance does are affecting the MSMEs, particularly or Strongly Disagree. The factors in the ques-
the operating retail stores in Dipolog City. Spe- tionnaire specifically include the (1) Tax in-
cifically, the respondents of this study were the spection possibility, (2) Tax rates, (3) Tax pen-
MSMEs owner/manager/bookkeeper for they alties, (4) Tax policies complexity, (5) Social
are the one who’s well-knew and has direct ac- Norms and (6) Tax Knowledge. Additionally,
cess with regards to the information concern- there were also statements that focused on tax
ing the MSMEs tax compliance, specifically the compliance, to correlate the factors and the tax
operating retail stores in Dipolog City. As what compliance.
being mentioned, the study made emphasis on
operating retail stores in the said locality and Validation of Instrument
its total population was retrieved from the De- Statements in connection to the factors as
partment of Trade and Industry (DTI). well as to the tax compliance were ex-
Moreover, Slovin’s formula was utilized tracted/based on the research study conducted
upon obtaining its sample population of which by Nguyen (2021), a study of which scope was
represents the study’s total number of re- in Vietnam. Although, tax vary from place to
spondents. From this sample MSMEs, the re- place as it is territorial in nature so as not to im-
searchers surveyed its owner/manager/ pinge foreign sovereignty, statements were
bookkeeper respectively, of which reason was seen as generalized as each of it does not limit
being mentioned above. Furthermore, qualifi- to a specific place, specifically Vietnam, thus
cations were simplified, for as long as the re- considered applicable to the undertaken study.
spondents were involved and knowledgeable In connection to the extracted questionnaire,
enough regarding the business’ tax compliance. no modification was made and to assess the re-
liability of each statement, Cronbach Alpha’s
Research Instrument reliability test was utilized of which results fol-
The main instrument for data gathering low.
was the questionnaire. The questionnaire was
Table 1. Cronbach Alpha’s Reliability Test
Component N of Items Cronbach's Alpha
1. Tax Inspection Possibility 3 0.744
2. Tax Rates 4 0.726
3. Tax Penalties 4 0.725
4. Tax Policies Complexity 5 0.804
5. Social Norms 3 0.785
6. Tax Knowledge 4 0.769
7. Tax Compliance 4 0.798

Cronbach's Alpha coefficients were used to results in Table 1 show that all variables have
examine the degree of correlation between ob- Cronbach's alpha coefficients greater than 0.6,
served variables in the research model. The indicating that the statements can be used
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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

effectively and reliably (Hoang & Chu, 2008). MSMEs operating retail stores tax compliance.
Thus, the results remain the observed variables Kruskal-Wallis Test was also used to deter-
belonging to the factor groups. mine if there is a significant difference between
the ordinal data namely, size and length of op-
Data Analysis eration and tax compliance. And Spearman
To treat and interpret the data being gath- Rho to measure the strength of association be-
ered as well as to address the study’s underly- tween two variables. In the study, the said sta-
ing problems, various statistical treatments tistical treatment was used to determine if
were used, of which such were as follows: Fre- there is a significant relationship exists be-
quency and Percentage Distribution were tween the study’s two variable, the factors af-
utilized to find out the number of research par- fecting tax compliance and the tax compliance
ticipants in percentage. Mean was used to de- itself.
termine the extent to which the factors affect

Results and Discussion

Profile of the Enterprise
Table 2. Frequency and Percentage of the Enterprise in their profile
Business Category Frequency (f) Percent (%)
Micro 77 80.21
Small 13 13.54
Medium 6 6.25
Total 96 100.00
Length of Operation Frequency (f) Percentage (%)
0 - 1 year 18 18.75
2 - 5 years 27 28.13
6 - 10 years 30 31.25
11 - 15 years 10 10.42
16 - 20 years 7 7.29
21 - 50 years 4 4.17
Total 96 100.00

The table above shows the frequency and There were also operating retail stores who al-
percentage of the enterprise, specifically the ready operate in a number of years, as evi-
operating retail stores in terms of its business denced in the table, specifically in a range of 16-
category and its length of service. Of which, as 20 years and 21-50 years of which having a 7
what can be seen in the table, 77 out of 96 retail and 4 retail stores, a percentage share of 7.29%
stores or 80.21% classify themselves as micro and 4.17% respectively.
businesses. Additionally, 13 retail stores or
13.54% were small and 6 or 6.25% were me- Factors Affecting Tax Compliance
dium businesses. Moreover, the frequency and Tax inspection possibilities consist of three
percentage of operating retail stores in terms of questions in total, and two out of three ques-
their length of operation, revealed that most of tions have a mean of 3.21 and 3.18, respec-
the surveyed participants were in a range of 6- tively, while the other one is 3.31. The respond-
10 years of operation, specifically, 30 out of 96, ents agreed that tax returns can be tested and
yielding a total percentage of 31.25%. Follow- the possibility of inspection due to tax frauds,
ing, 27 out of 96 were in a range of 2-5 years, while strongly agreed on fraud are likely to be
having 28.13% percentage share. There were discovered by tax authorities. The average
18 and 10 retail store were currently in its 0-1 mean on the tax inspection possibility is 3.24,
year and 11-15 years in operation, a percentage which implies that the respondents already
share of 18.75% and 10.42% respectively. have insight on the possibility of tax inspection.

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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

Thus, the result suggests that the possibility of of micro, small, and medium-sized enterprises
tax inspection can influence the tax compliance (MSMEs).

Table 3. Factors Affecting Tax Compliance

Factors Mean Description
Tax Inspection Possibility 3.24 Agree
Tax Rates 2.42 Disagree
Tax Penalties 2.74 Agree
Tax Policies Complexity 2.66 Agree
Social Norms 3.11 Agree
Tax Knowledge 3.25 Agree
Composite Mean 2.90 Agree

The result is supported by Kirchler et al., tax compliance. Thus, experiencing noncompli-
(2008), as he stated that tax inspection can af- ance should reduce the tax rate to the mean tax
fect tax compliance as it increases the level of rate. Furthermore, (Guztaman, 2019), stated
tax compliance of the taxpayers. Tax inspec- that low tax rate would cause the increase of
tions have a positive impact on reducing tax compliance, yet if the tax rate is high, the tax
evasion because they prevent tax fraud at an compliance would be low.
early stage and force taxpayers to comply with Tax penalties on the other hand has a mean
tax laws. Accordingly, a research conducted by of 2.74 suggesting that tax penalties can influ-
Prihandini (2018),from his study of the optimal ence tax compliance of the taxpayers. Three of
level of tax compliance in a hostile climate the four questions have a mean of 2.40, 2.26,
based on authority and trust, he said that and 2.38, indicating that respondents disa-
through an effective tax inspection voluntary greed, and the fourth has a mean of 2.06, indi-
compliance will increase. If the tax inspection is cating that respondents agreed. Respondents
carried out in an unreasonable manner and the react to the statement that penalties are rela-
examination process is distressing to the tax- tively small. They agreed that tax penalties are
payer, this will result in a negative attitude to- high, punishment is strict, and penalties are
ward the tax officials. stringent.
The composite mean of Tax rates is 2.42 Based on the deterrence theory, there is a
which describe as disagree. One of the four positive relationship between tax penalties and
questions has a mean of 2.46, indicating that re- compliance. Penalties for noncompliance
spondents agree with the statement that high should be increased to improve compliance. As
tax rates have been applied to businesses. How- a result, increased tax penalties would increase
ever, the means for three of the four questions tax compliance and vice versa (Oladipupo &
are 2.40, 2.26, and 2.38 indicating that Obazee, 2016). In addition, As to Guztaman
respondents disagree with the statement. Re- (2019), tax compliance could be improved by
spondents specifically disagree that tax rates putting pressure on taxpayers to keep them
are unsuitable for business activity, that tax from engaging in any violations or illegal acts in
rates are higher than in other areas, and that their businesses in order to evade taxes. The act
businesses are displeased with tax rates and of sanctioning could be carried out if taxpayers
payable tax fees. The findings suggest that tax were caught committing tax violations through
rates cannot affect the tax compliance of enter- a good and integrated tax administration sys-
prises. tem and a good, qualified tax examination.
This is supported by most empirical re- The other factor is the Tax Policies Com-
search findings stating that tax rates have sig- plexity, this factor measure how it affects their
nificant negative correlation with tax compli- tax compliance. With a description of "Agree,"
ance. Accordingly, Masud & Gambo, (2019), the statement "It is not easy to calculate the tax
findings shows that there is a negative effect on payable" obtained the lowest rate of 2.61. We

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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

can deduce from the results that the intricacy significant influence on voluntary tax compli-
of tax legislation makes it difficult for respond- ance. According to (Liu, 2014)’s empirical re-
ents to assess their tax liability. The statement search, social norms influence both voluntary
"The content for the tax return is confusing" re- and compelled tax compliance at the same time.
ceived the highest mean of 2.72, still retaining Strong subjective compliance standards effec-
the description of "Agree." Overall, the factor tively replace fines as a deterrent to tax eva-
"Tax Policies Complexity" earned a composite sion, implying that the deterrent effect of a pen-
mean of 2.66, which can be classified as alty can be completely eliminated when subjec-
"Agree." As a result, the researchers deter- tive norms are strong.
mined that the respondents have difficulty un- Lastly, the respondents rated “Tax
derstanding the country’s tax rules as well as Knowledge” as it relates to their tax compliance
the processes involved in meeting their obliga- with a mean of 3.25. The mean value of the
tions to the government and thus, could poten- statements as displayed, spans from 3.16 to
tially lead them to inadvertently disobey the 3.38. Only the statement “Understand the regu-
tax rules and regulations. lations for filling and paying taxes,” which had
Tax laws are too complex for taxpayers to the highest mean value of 3.38, can be consid-
understand, especially given how frequently ered “Strongly Agree,” while the rest were only
they change. That is why, when faced with tax “Agree.” Overall, the factor “Tax Knowledge” re-
challenges, some corporate taxpayers hire the ceived a composite mean of 3.25 which is clas-
services of external tax consultant (Noor sified as “Agree”. It indicates that the respond-
Sharoja Sapiei & Jeyapalan Kasipillai, 2013). As ents, having enough knowledge about tax, were
a result of the complexity of the tax system, in- affected positively on their tax compliance.
advertent disobedience occurs frequently. This Olatunji Olaoye (2017), stated that the level
is because, because it is not a free service, some of knowledge and information on tax admin-
taxpayers may have difficulty locating the ser- istration in terms of tax rates, allowances, al-
vices of external tax professionals. lowable and non-allowable expenses, and tax
Social norms is also considered as one of penalties determines taxpayers' compliance
the factors. The statement “Tax evasion will be with tax regulations in terms of filing returns
condemned by the society” received an average and remittance. Osebe (2013), also found that
rating of 3.00, with an “Agree” response. As a tax knowledge and education had a strong fa-
result, it’s safe to assume that the respondents vorable impact on tax compliance.
are aware of the public’s reaction to tax evasion Finally, the table showed the results of all
issues. The next statement, “Tax compliance is the factors as rated by the respondents accord-
ethical,” earned a mean of 3.36, which is consid- ing to their influence on their tax compliance.
ered “Strongly Agree,” indicating that the re- From the table, it is clear that the outcome of
spondents are fully aware that they should “Tax Rates” differs from that of the others hav-
comply with their tax duties. The last state- ing a mean of 2.42, with a description of “Disa-
ment, “Tax evasion is shameful and wrong,” re- gree”. This is because the respondents believe
ceived a mean of 2.96, indicating that the re- that the tax rate applied to their business is sig-
spondents agree that dodging tax duties is nificant, hence it had little impact on their ca-
immoral. The composite mean for social norms pacity to fulfill their tax responsibilities. The
is 3.11, which is considered “Agree,” indicating rest of the factors with mean values ranging
that the respondents appreciate public opinion from 2.66 to 3.25 are regarded as “Agree”. From
as it affects their tax compliance and at the the result, only five of the six factors are consid-
same time, recognizing its positive effect. ered by the respondents as having an impact on
In their empirical study, Battiston & Gamba their tax compliance. Overall, the six (6) factors
(2016), discovered a strong link between tradi- garnered a composite mean of 2.90, which is
tional ethical principles and tax compliance. considered as “Agree”.
They contend that social norms have a

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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

Table 4. Level of MSMEs Tax Compliance in Dipolog City

Statements Mean Description
1. Enterprises register taxes in accordance with regulations. 3.36 Strongly Agree
2. Enterprises declare and calculate taxes strictly according 3.33 Strongly Agree
to regulations.
3. Enterprises fully and accurately declare and pay taxes. 3.42 Strongly Agree
4. Enterprises always comply with regulations on invoices 3.14 Agree
and accounting vouchers.
Composite Mean 3.31 Strongly Agree

The mean of each tax compliance statement and medium-sized enterprises (MSME) is sub-
is shown in the table above. There were four ject to tax and encouraged to pay taxes to tax
statements comprising on tax compliance hav- system.
ing the mean of 3.36, 3.33, 3.42, and 3.14 re- Accordingly, (Pope & Jabbar, 2008) MSMEs
spectively. It showed that respondents strongly are subject to income tax, either as individual
agree on paying taxes in accordance with regu- taxpayers (unincorporated businesses) or cor-
lations, declaring and calculating taxes in strict porate taxpayers (incorporated businesses),
accordance with regulations, and paying taxes depending on the business establishment. The
fully and accurately. Compliance with invoice Income Tax Act of 1967 governs the taxation of
and accounting voucher regulations is also both individuals and corporations, with nearly
something that the respondents agreed on. The identical tax measures. Business taxpayers of
average mean is 3.31, indicating that tax com- all sizes are required by law to file a yearly tax
pliance on MSME is evidently high in Dipolog return, as mandated by Sections 77 and 77A of
City. One main reason for this is tax being the said Act.
obligatory in nature. Moreover, micro, small,

Table 5. Test of Significant Difference in Respondent’s Tax Compliance When Grouped According to
Business Size
Business Size
Tax Compliance
Median H-Value p-value @ 0.05 Interpretation
Category
1 5.0 Not significant
2 10.0 3.61 0.164 Not significant
3 5.5 Not significant

Table 5 above illustrates the evaluation of of MSMEs operating retail in Dipolog City is not
the significant difference across business cate- significant. Empirically, business size does not
gories in terms of tax compliance of retail contribute to the differentiation of the tax com-
MSMEs in Dipolog City using Kruskal-Wallis H- pliance of MSMEs operating retail in the locality
Test. Kruskal-Wallis H-Test is an ideal statisti- of Dipolog. There is no study supporting that
cal treatment for test of difference to be used in Micro, Small and Medium enterprises’ tax com-
nonparametric, independent and ordinal data pliance has no significant difference. Therefore,
which does not satisfy normality. researchers recommend future researches to
Result showed a p-value of 0.164 which is undertake the tax compliance of each of Micro,
greater than the level of the significance alpha Small and Medium enterprises in particular is
0.05. Thus, the difference of the tax compliance its difference.

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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

Table 6. Test of Significant Difference in Respondent’s Tax Compliance When Grouped According to
Length of Operation
Length of Operation
Tax Compliance
H-Value p-value @ 0.05 Interpretation
Years in Operation
0 - 1 year 5.68 0.339 Not Significant
2 - 5 years 3.66 0.301 Not Significant
6 - 10 years 1.35 0.852 Not Significant
11 - 15 years 2.15 0.543 Not Significant
16 - 20 years 1.86 0.394 Not Significant
21 - 50 years 2.40 0.494 Not Significant

Table 6 above illustrates the evaluation of the significance alpha 0.05. Thus, the difference
the significant difference of tax compliance of of the tax compliance of MSMEs operating retail
retail MSMEs in Dipolog City when grouped ac- in Dipolog City is not significant regardless of
cording to length of operation using Kruskal- the years the business operated. Similar to the
Wallis H-Test. case above, no sufficient evidence support that
The data for the length of operation was there is no significant difference between tax
grouped prior to the evaluation of the signifi- compliance of MSMEs as based on how many
cant difference of MSMEs’ tax compliance. Re- years they have operated in the industry.
sults showed a p-value of 0.339, 0.301, 0.852, Hence, parallel test is suggested to correspond
0.543, 0.394 and 0.494 respective to the ranges or object the findings.
given above which is greater than the level of

Table 7. Test of Significant Relationship between Factors and the Tax Compliance
Variables Rho p- Strength of
Decision Interpretation
Correlated Value value Relationship
Tax
Compliance
Tax Inspection 0.238 0.02 Slight Positive Reject Ho Significant
Possibility Relationship
Tax Rates 0.065 0.529 Negligible Posi- Fail to Not Significant
tive Relationship Reject Ho
Tax Penalties 0.232 0.023 Slight Positive Reject Ho Significant
Relationship
Tax Policies 0.060 0.559 Negligible Posi- Fail to Not Significant
Complexity tive Relationship Reject Ho
Social Norms 0.024 0.819 Negligible Posi- Fail to Not Significant
tive Relationship Reject Ho
Tax Slight Positive Reject Significant
Knowledge 0.239 0.019 Relationship Ho

Table 7 above shows all predetermined fac- Spearman rho Correlation Test was put into
tors in the research model (1) Tax Inspection course.
Possibility, (2) Tax Rates, (3) Tax Penalties, (4) Among all the factors abovementioned, Tax
Tax Policies Complexity, (5) Social Norms and inspection possibility, Tax penalties and Tax
(6) Tax Knowledge, related to the tax compli- knowledge have projected a significant rela-
ance. To test the significant relationship tionship towards tax compliance. In which, Tax
between the factors to the dependent variable, penalties is the most significantly related to tax

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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

compliance with a p-value of 0.023, followed by affirmed by Collins & Plumlee (1991), Tilahun
Tax inspection possibility and Tax Knowledge (2019) and Fisman & Wei (2004).
with p-values of 0.02 and 0.019, respectively. Tax Penalties and Tax Compliance. The
Conversely, there is no significant relationship analysis of data regarding the relationship of
found between factors namely Tax rates, Tax tax penalties and tax compliance shows signifi-
policies complexity and Social Norms, since the cance. There is a positive effect to tax compli-
findings have resulted to p-values > 0.05. Social ance by imposed tax penalties. This claim is op-
norms being the least significantly related posed by Mahdi & Ardiati (2017), stating that
showing a p-value of 0.819, then Tax policies there is no significant relationship between the
complexity with p-value of 0.559 and lastly, is factor tax penalties to the dependent variable,
the Tax rates representing a p-value of 0.529. tax compliance. Moreover, a support study by
Positive rs-value < 0.3 is shown in all fac- Siamena et al., (2017), implied contrary to the
tors of tax compliance, hence there are slight latter. Tax penalties are punishments for the
positive to negligible positive relationships tax payment violations of taxpayers, in which
present as obtained from the data analysis. This punishment is in accordance to the current reg-
simply means that as the factors increases tax ulations written in taxation legislation, ex-
compliance there so follows. pressly, tax penalties are seen as solutions to
Tax Inspection Possibility and Tax Com- tax noncompliance (Rahmayanti et al., 2020).
pliance. The findings of the study show that tax Tax Policies Complexity and Tax Compli-
inspection possibility is significantly related to ance. The result of correlating tax policies com-
tax compliance of retailing MSMEs in Dipolog plexity to tax compliance yields to a no signifi-
City. This entails that the possibility of being in- cant relationship. In accordance with the result,
spected by tax authorities actually prompts tax policies complexity of the tax system in
taxpayers to comply with their tax duties and Dipolog City for retail MSMEs has nothing to do
responsibilities. The high level of tax inspection with their tax compliance. This could mean that
possibility by tax authorities increases corpo- although some of the taxpayers may find it
rate tax costs (Nguyen, 2022). Because busi- complicated to understand the tax system for
nesses believe they will be inspected regarding their tax compliance, they will remain tax com-
their tax obligations, they should establish a pliant as affected by other significantly related
mechanism for self-declaration, self-calcula- factors abovementioned. Gambo et al., (2014),
tion, and self-payment of their tax obligations do not correspond to the result as he posited
based on the tax provisions in the state budget that tax complexity has a significant negative
established by law. A consistent result is found correlation to tax compliance. Supporting the
in the study of (Manaye, 2018), positing that insignificance of the relationship between the
the practice of being aware that if an evasion to complexity of tax policies and tax compliance is
tax is detected chances are a consequence of the study conducted by Musimenta (2020), in-
penalties which is normally unfavored by en- dicating that regardless of the complex tax sys-
terprises. tem taxpayers comply with their taxes.
Tax Rates and Tax Compliance. Tax rates Social Norms and Tax Compliance. Social
as the basis of how much should the taxpayer norms appeared to have no significant relation-
allocate expense for their tax surprisingly has ship with tax compliance based on the results
no significant relationship with tax compliance. of the Spearman rho correlation test utilized.
But a positive negligible relationship has re- Either normally taxpayers within the commu-
sulted from the data analysis. The result objects nity of Dipolog City who belonged to the indus-
the findings in the study of Nguyen (2022), ex- try are tax compliant or not, it does not affect
plaining that when tax rates increase the tax the behaviour of taxpayers’ compliance with
compliance decreases, vice versa. Accordingly, tax authorities. Conversely, personal tax com-
an increase in tax rates discourages taxpayers pliance becomes more important when social
to comply and pushes them hide revenues or norms promote it, tax compliance standards
income and increase their cost fraudulently as are rising which leads to an increase in

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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

compliance intents (Jimenez & Iyer, 2016). likely they will be tax compliant. Thus, if tax-
Identical to the result obtained, Nguyen (2022), payers understand the tax system, tax compli-
corresponds that social norms factor influences ance will likely increase. Similarly, the study
corporate tax compliance with a negligible conducted by Oladipupo & Obazee (2016), has
level of influence. This result is strengthened also showed a significant although not strong
with studies conducted by (Battiston & Gamba, relationship of tax knowledge and tax compli-
2013, 2016; Liu, 2014; Traxler, 2010). Hence, ance. However, differs in their claim that tax
tax evasion could be condemned by the com- knowledge is more significantly related to tax
munity because when social norms increase so compliance, since the results obtained show
as the tax compliance. The negligible influence the contrary. Additionally, is the study of
of social norms to tax compliance could be Inasius (2019),that well supported the signifi-
traced from the abrupt and gradual globaliza- cant relationship between tax knowledge and
tion and changes of ethical behaviours in the lo- tax compliance, the author indicates that high
cality as influenced by drastically changing eco- tax knowledge would increase tax compliance
nomic community and never-ending develop- behavior. Intuitively, the more learned a tax-
ments. payer is regarding the basis of taxation the
Tax Knowledge and Tax Compliance. The more willing to comply they will be and the
results show a positive significant relationship more there will be no reason for them to evade
between tax knowledge and tax compliance, tax. Because tax knowledge is critical for bet-
confirming that tax knowledge improves tax- tering tax compliance, and hence more revenue
payers' tax compliance ability. This could also to fund the government's recurrent and devel-
be interpreted as the taxpayer having more opment expenditures, as well as indicates
knowledge and understanding of tax laws, tax lower administrative expenses for revenue col-
declaration and payment, tax obligations, and lection (Clifford Machogu & Jairus Amayi,
the tax rate applied to the business, the more 2013).

Action Plan
Table 8. Proposed Action Plan on Tax Knowledge Generation to MSMEs
Activity/ Persons Involved
Purpose Budget Date
Programs Organizer Participants
1. 1-Day BIR and 1. MSMEs To fully provide to the Approx. 6 Every 1st
Business Local Tax own- current or potential Million month of
Registra- authorities ers/man- owners/managers of for about Calendar
tion Semi- agers MSMEs of the “know 2,000 Year
nar hows” regarding busi- partici-
2. Potential ness registrations, no- pants
MSMEs tarization of articles,
own- required clearances
ers/man- and fees payments
agers needed for MSMEs
operation.
2. 1-Day BIR and MSMEs own- To inform the MSMEs Approx. 6 Every end
Statutory Local Tax ers/managers owners/managers of Million of the 2nd
Tax Com- authorities all the BIR and Local for about and 4th
pliance tax authorities’ dead- 2,000 quarter of
Seminar lines, penalties, sur- partici- Calendar
charges and interests pants Year
imposed for late filing
of tax returns and to
encourage them to

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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

Activity/ Persons Involved

Purpose Budget Date
Programs Organizer Participants
appreciate the rela-
tive communal bene-
fits of regular and
proper tax compli-
ance in engaging
ways.

The Proposed action plan is developed to ity, tax rate, and social norms accept the hy-
address the need based on the result of the pothesis. The other factors on the other hand,
study. The result showed that Tax Inspection tax inspection possibility, tax penalties, and tax
Possibility, Tax Penalties and Tax Knowledge knowledge rejected the hypothesis as the re-
are could really affect the compliance of taxes sults showed that these factors exerted signifi-
by the MSMEs. Owners must be knowledgeable cant impact on the respondents’ tax compli-
enough on the technicalities of the taxes in the ance. These factors were also perceived by the
taxing authority. To generate this knowledge, respondents as having influence on their tax
information dissemination must be done compliance. The possibility of being inspected
through seminars, workshops, or even in- increased the respondents’ awareness of the
fographics by the authority. Informing them of possibility that their fraud would be discov-
the possible sanctions and penalties if they do ered. If there is fraud, there is also penalty.
not comply with the tax law. Aside from fraud, delayed payment of obliga-
tions also lead to having to pay for penalties
Conclusion thus, the presence of tax penalties increases the
This study aims to determine the level of tax respondents’ tax compliance. Research results
compliance among MSMEs in Dipolog City, with also showed that tax knowledge is the most sig-
a focus on the retail industry, as influenced by nificant factor to affect the tax compliance of
factors such as the tax inspection possibility, MSMEs. If a taxpayer has the knowledge about
tax rates, tax penalties, tax policies complexity, tax laws, payments and tax rates applied to
social norms, and tax knowledge. The study’s his/her business, the compliance increases.
findings revealed that respondents perceived Furthermore, the survey found no signifi-
only five of the six factors to have an influence cant differences in compliance among respond-
on their level of tax compliance, with the tax ents based on business size or length of opera-
rate having no effect at all. tion, thus, it implies that enterprises of all ages
However, using Spearman Rho as a statisti- and sizes had nearly identical assessments of
cal treatment, data analysis revealed different tax difficulties. Overall, the findings led the re-
results for some of the components. Despite the searchers to conclude that Dipolog City, partic-
respondents’ belief that tax policy complexity ularly the MSMEs in the retail industry, com-
and social norms have a substantial impact on plied with their tax obligation in accordance
their tax compliance, the study found no mean- with the law, having no intentions of evading it.
ingful association. From this, it can be argued The result of this research also confirmed only
that the potential for tax inspection and societal three factors – tax inspection possibility, tax
standards had insufficient influence on the re- penalties, and tax knowledge – out of the six
spondents’ compliance. The tax rate was re- factors to have significant effect on MSMEs tax
garded by the respondents as having no influ- compliance, refuting the established idea that
ence on their compliance. It can be deduced all six factors have a significant impact on tax
from this that the factors of tax policy complex- compliance of MSMEs.

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 Granfon et al., 2023 / Factors Affecting Tax Compliance of MSMEs in Dipolog City

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