Title: Risky business: Ethnicity and tax compliance practices of small business operators

Transcription

1 Gender, Diversity and Indigeneity Competitive Session Title: Risky business: Ethnicity and tax compliance practices of small business operators Dr Sue Yong Faculty of Business, Economics and Law, AUT University, Auckland, New Zealand Dr Shelagh Mooney Faculty of Culture and Society, AUT University, Auckland, New Zealand 1

2 04 Gender, Diversity and Indigeneity Competitive Session Title: Risky business: Ethnicity and tax compliance practices of small business operators Abstract Governments in culturally diverse developed countries are faced with ethnic groups whose belief systems may differ from the dominant host ethnic group. This study explored whether ethnicity influences the tax compliance practices of the four largest ethnic small business operator (SBO) groups in New Zealand. A nimble intersectional methodology was used to examine the tax practices of 36 ethnic SBOs, 15 business experts and 8 tax practitioners using semi-structured interviews. The findings suggest the ethnicity of some SBOs may interfere with their legal obligations to file tax returns and pay taxes on time ultimately jeopardising their business sustainability. Business groups, and regulatory bodies will benefit from this information when developing policies to help build sustainable futures for these ethnic SBOs. INTRODUCTION Over the past few decades, more relaxed migration policies on humanitarian and economic grounds in developed OECD countries have resulted in culturally diverse societies including those in Australia and New Zealand. Due to the increasing cultural diversity of small business operators (SBOs) (Basu & Altinay, 2002; Ministry of Economic Development, 2012) there is a need to determine whether their tax practices meet regulatory requirements. Therefore, this research explores whether the belief systems of ethnic SBOs in New Zealand influence their tax compliance undertakings. It does so by analysing and comparing the compliance undertakings of the four largest ethnic SBO groups, namely: European, Asian, Maori and Pacific peoples (Statistics New Zealand, 2013). In the Asia Pacific region, small businesses have been recognised both for their contributions to the economy (Ministry of Business Innovation and Employment, 2015) and poor tax compliance statistic (Australian Taxation Office, 2012). Many participate in the informal economy (Morse, Karlinsky, & Bankman, 2009); have inadequate tax knowledge (Ahmed & Braithwaite, 2005); and demonstrate high distrust of tax authorities (Cooper, 1998; Noble, 2000). They experience regressive tax compliance costs (Business New Zealand, 2008) and are not always proficient in record keeping tasks (Evans, Carlon, & Massey, 2005; Prescott & Hooper, 2009). Taxation issues remain as one of SBOs main concerns (Business New Zealand, 2008) and business failures have been associated with poor record keeping for taxation purposes (Evans et al., 2005; Prescott & Hooper, 2009). 2

3 New Zealand provides an interesting case study, given that its culturally diverse society continues to operate according to principles established under the British legal and political system, introduced with the British colonisation of New Zealand and preserved by the dominant New Zealand European ethnic majority (Pakeha). Although part of the same society, the Asian, Pacific peoples and Maori groups have religions, beliefs, languages and rituals that may differ in important ways from those customary in New Zealand. However, despite their cultural diversity, all SBOs are regulated under the same self-assessment tax regime, which requires fair and honest reporting of their tax liability and timely payment of taxes by the taxpayers (Alley & James, 2006). This research is important because although the poor tax compliance rates of SBOs directly affect taxation revenues, little research has examined how ethnicity influences the tax practices of SBOs. This paper is structured as follows. Firstly, the research background is outlined, the research aims and the literature on tax compliance and ethnicity follow before the research methods are explained. The combined findings and discussion are then presented and the conclusion and recommendation section draws the paper to a close. BACKGROUND This paper looks at the tax compliance practices of ethnically diverse SBOs using the nimble intersectional approach recommended by Mooney (2016) for investigating the relationships between individuals, organisations and institutions in a specific location. Intersectional research is based on the notion that categories of difference intersect, they are not experienced as separate or cumulative but linked and simultaneous, for example, race and gender (Holvino, 2010). Founded on the sometimes opposing traditions of critical race research and critical feminism, intersectionality has evolved into a theoretical framework that may be used to explore the complex intersecting relationships between different groups in specific societal or institutional contexts. Feminist and critical race research aims to expose hidden problems in social processes (Hesse-Biber & Leavy, 2006) embedded in societal institutions and reproduced in workplace practices. Such an approach is particularly valuable to examine the social relations that perpetuate inequalities within hierarchical bureaucratic institutions, such as Inland Revenue Department (IRD) in New Zealand. As it asks meaningful questions about the 3

4 power imbalances in societal systems, private and institutional (Calas & Smircich, 2009), an intersectional approach is well placed to investigate the complex web of relationships between ethnic SBOs, their community advisors, accountants and business experts, all of whom are involved in the tax compliance processes regulated by IRD in New Zealand. A further benefit of adopting an intersectional approach is its incorporation of post-colonial feminism principles, where the concept of nations, ethnicity and culture joins other dimensions of study (Holvino, 2010, p. 13). Ethnicity and culture, and therefore colonialism and globalisation have played a major role in the development of contemporary New Zealand. Although the term race is more usual in an intersectional study, this study employs an ethnicity lens as New Zealand uses this term instead of race to report its statistics. Due to the succinct nature of this conference contribution, the paper will only investigate ethnicity categories, although age intersects with ethnicity at various stages in the study findings. An ethnic group has been defined as a collectivity within a larger society having real or putative common ancestry, memories of shared historical past (Basu, 2006, p. 582) and an ethnic business is defined as a business having a set of connections and regular patterns of interaction among people sharing common national background or migratory experiences (Aldrich & Waldinger, 1990, p. 112). Shifting understandings about the penalties and privileges associated with racial or ethnic origin now recognise that particular societal groups can be simultaneously advantaged, and disadvantaged, by the complex mix of age, gender or ethnicity that comprises social identity (Dhamoon, 2011). Such intersections will vary according to specific societal as well as sectoral contexts (Walby, Armstrong, & Strid, 2012). The authors further observe that privilege and penalty can be tracked empirically in a specific organisational context. Therefore an intersectional approach is particularly appropriate for studying tax compliant practices in the specific context of New Zealand. PREVIOUS RESEARCH ON TAX COMPLIANCE AND ETHNICITY/CULTURE Previous tax compliance studies on culture have largely been cross-cultural (Alm & Torgler, 2006; McGee et al., 2008; Torgler & Schneider, 2007), assuming cultural homogeneity within countries. However, given the cultural diversity now evident in the majority of OECD countries, this assumption is no longer considered accurate (Tung, 2008). The dawning recognition of the significant ways that 4

5 the cultural diversity amongst SBOs may affect tax compliance undertakings (Coleman & Freeman, 1994; Birch et al., 2003) means that further investigation is required. To date various intra-cultural studies on ethnicities and tax evasion behaviours have been carried out with students, general taxpayers and SBOs (Birch et al., 2003; Coleman & Freeman, 1994; Coleman & Freeman, 1997; Kasipillai & Abdul-Jabbar, 2006; Rothengatter, 2005; Song & Yarbrough, 1978). Rothengatter s (2005) focus group research claimed that the extent that cultural norms and values regarding business conduct and one s payment of taxes may vary from one ethnic group to another (p. 14). He found that Asians, Greeks, Lebanese, and local born Australians have differing tax attitudes, with the Asian undertaking extensive tax planning to minimise taxes. The variations in the tax attitudes are attributed to the deeply embedded social networks of the Asians, Greek and Lebanese groups. Not declaring cash jobs was not considered unethical behaviour by some of his Asian, Greek, and Lebanese respondents, although interestingly, some of his local born Australian respondents distanced themselves from the practice, clearly acknowledging it was tax evasion. Supporting the notion that tax behaviour have a cultural grounding, SBOs who identified themselves as Australians were more willing to contribute towards taxes compared to those who did not (Rothengatter, 2005). This finding is of particular relevance to New Zealand context with its wide variety of ethnicities amongst SBOs (Ministry of Business Innovation and Employment, 2015). In contrast to previous studies that have taken what appears to be a judgmental stance by focusing on tax evasion, this study supports Pyles (1991) observation that not everyone is predisposed to tax cheating. It also does not place the generally more privileged Pakeha at the center of the study when examining the tax practices of New Zealand businesses. It considers that the objective of most New Zealand SBOs is to comply with the tax requirements, regardless of ethnicity. However, in order to understand how cultural or ethnic influences may shape business practices, the next section will review the link between culture and business behaviours. CULTURE AND BUSINESS BEHAVIOURS Research has shown that culture, although basically unconscious, manifests itself in the business practices and decisions made (Hall, 1976; Hampden-Turner & Trompenaars, 1996; Hofstede & Hofstede, 2005). The study of culture is important as one cannot strip people of their common sense 5

6 constructs or routine ways of seeing and one cannot understand why (an) individual and organisation acts as they do without considering the meanings they attribute to their environment (Trompenaars, Hampden-Turner, & Trompenaars, 1994, p. 19). Some writers suggest that it is essential to understand the cultural values of the individual in order to comprehend their entrepreneurial behaviours and outcomes (Crocombe, 2001; Hampden-Turner & Trompenaars, 1996). One of the cultural values that has been extensively researched in social science and management disciplines is the individualism-collectivism trait (Earley & Gibson, 1998). Individualism-collectivism The cultural dimension of individualism pertains to societies in which the ties between individuals are loose and everyone is expected to look after him or herself and his or her immediate family. Collectivism, on the other hand, pertains to societies in which people are, from birth, integrated into strong, cohesive groups which continue to protect them throughout their lives in exchange for unquestioning loyalty (Hofstede & Hofstede, 2005; Hall 1976). This dimension is measured in terms of how much the individual interest prevails over collective interests. New Zealand, as a country, is ranked high on the individualistic dimension. However, Asians, as a cluster, have lower scores on individualism and have a tendency to be collectivistic (Earley & Gibson, 1998; Redding, 1993; Tsui-Auch, 2008). Both Maori and Pacific peoples are considered collectivistic because of their kinship and community ties. Tribal Maori are influenced by their core values of whanaungatanga (relationships) (Mead, 2003) and manaakitanga (to support, care for others) (Patterson, 1992). For Pacific peoples, the deeply embedded cultural norms of fa asamoa (the Samoan way) and their communal mentality promote collectivism (Macpherson, 2004; Duncan 2008; Tiatia, 1998). More recent studies confirmed that Asians, Maori and Pacific peoples living in New Zealand are predominantly collectivistic whereas the Anglo-Saxon Europeans are largely individualistic (Pio, 2010; Podsiadlowski & Fox, 2011). In summary therefore, it appears reasonable to suppose that culturally grounded beliefs will influence the business practices of SBOs. 6

7 RESEARCH METHODOLOGY AND RESEARCH DESIGN As observed previously this research followed a nimble intersectional approach (Mooney, 2016), which grounds a study in a specific sectoral context, in this case the accounting and taxation sector of New Zealand. A particular strength of intersectionality is that it does not place the privileged, frequently White, in western countries, at the centre of research (Dhamoon, 2014). Rather researchers are charged with investigating how the linkages between categories of difference, for example, ethnicity produce patterns of dominance and subservience in a specific context (Calas et al, 2014). It is important at the onset of an intersectional study to establish a theoretical and contextual grounding for the study detailing how work is performed across the specific sector. In this study, the first stage of research reviewed the literature and secondary data sources to establish the regulatory environment in which the SBOs operate. The second stage involved establishing what organisational practices were used in the sector to comply with current tax legislation. These are generally regarded as ethnicity or gender neutral practices, however frequently ethnicity or gendered understandings may influence how these practices are implemented. The third stage of research involved establishing if any differences in workplace practice, which emerged from analysing the sectoral and regulatory norms, could be linked with specific cultural values based on the ethnicity group that the SBO represented. Data was collected by means of semi-structured interviews with the European, Asian, Maori and Pacific groups. Although surveys are often employed in tax studies, they frequently fail to fully reflect the cognitive processes required to assess complex phenomena (Popper & Sleman, 2001, p. 230) such as tax compliance. In all, 59 purposive, snowballing and information rich (Arksey & Knight, 1999; Rapley, 2007) interviews took place over three years. SBOs were chosen based on ethnicity; turnover of up to NZD1 million; with less than 20 staff. The Maori and Pacific SBOs were sourced with the help of key informants and liaison officers from Te Puni Kokiri (Maori Development Incorporated) and the Pacific Business Trust. Tax practitioners and business experts were sought from the first author s accounting and business networks. These business experts provide mentoring, coaching, financial and technical advice to SBOs on a regular basis. 7

8 Due to the collective nature of the Asian, Maori and Pacific SBOs, the first author built close relationships with them as these groups value trust and relationship building (Smith, 2006:Brown, Tower, & Taplin, 2005). In this way, information was gained that would normally not have been shared to those outside the ethnic grouping. Although the literature suggests various tax compliance factors are important for SBOs, in this study, a taxpayer lens was adopted throughout the data collection and analysis thereby drawing out the taxpayers subjective perceptions of their tax compliance practices. The positioning of research participants as subjects and valued partners is considered fundamental to all intersectional studies (Winker and Degele, 2011). Interview questions and data analysis In the interviews, the semi structure nature and open ended question technique used allowed the researcher to be unconstrained by predetermined categories of analysis (Patton, 2002) and also provided the participants with the freedom to express their beliefs and feelings about compliance issues they consider important (Gaskell, 2000). Specific questions for the SBOs explored their tax compliance experiences with tax authorities, tax practitioners and tax payments. Specific questions for the business experts and tax practitioners explored issues around the effects of cultural attributes and their observations of the tax compliance behaviours and practices of ethnic SBOs. The interview transcripts were analysed manually by the researcher (first author). In the first stage, the social structures and institutions that related to SBOs contact with the tax authority and their tax practitioners were identified. At the second stage, the interviewees perceptions and attitudes about tax compliance norms and practices were uncovered and coded, such as their perceptions of the tax authority and tax practitioners. Finally, the points of intersection between the norms and the social structures were pinpointed, before being linked with the different ethnicity categories. FINDINGS AND DISCUSSION In this necessarily brief conference paper, two aspects of tax compliance will be examined; 1) the record keeping systems and 2) the sources of accounting assistance required for filing tax returns, in order to indicate how practices varied according to the ethnic affiliation of the SBO. 8

9 Record keeping systems When examining the first aspect of tax compliance, the importance of record systems is shown by previous studies, which consider that untimely and inaccurate record keeping function is a causal factor for SBO failures (Evans et al., 2005; Prescott & Hooper, 2009). For good record keeping, accounting knowledge, proficiency and discipline is necessary, which appeared to be demonstrated by the majority of the Asian SBOs. Similarly, most Europeans in this research also showed discipline in ensuring tax compliance undertakings were completed by the due dates. The Asian and European sample showed greater confidence in their record keeping system, and therefore, greater accuracy of their tax returns which contrasts with the Pacific and Maori sample, who expressed negative emotions, such as stress, worry and fear, when discussing tax compliance issues. In this study, five Pacific SBOs admitted to having basic or no tax knowledge. Further, they did not give priority nor appeared to show much interest in record keeping, supporting existing literature that Pacific operators tend to procrastinate in work related tasks until they become absolutely necessary (Crocombe, 2008). The apparent avoidance approach towards record keeping that was displayed by Pacific SBOs was supported by comments from Business experts 11 and 12, echoed by tax practitioner 7. They considered that Pacific SBOs lacked discipline and were unsystematic with their record keeping, which heightened the stress associated with tax compliance. The record keeping approach of the Pacific SBO appeared to be very similar to the Maori SBOs. To the Maori group, tax penalties and bureaucracy were largely associated with tax compliance, brought on by late/non tax filing and their perceptions of government departments. The late/non tax filing was related to their inability to generate timely tax returns and tax payment delays. This disadvantage was compounded by their tendency to outsource record keeping tasks as Maori SBOs often felt incompetent with tax related issues. A specific problem experienced by most Maori small businesses in this study was the seasonal nature of their business dealings. They suffered from a lack of alternative sources of income/funding. An additional weakness appeared to be connected with their collectivistic traits as 9

10 despite tax payment difficulties, some, for example, Maori SBO2, did not aggressively pursue the debts owing from whanau (family) members. A final handicap lay in Maori business s inability to borrow from mainstream finance, due to their collective land ownership. The common ownership model was considered to be unsuitable collateral, hence they have low cash reserves (Warriner, 2007): Mainly is because they do not have the collateral for borrowings. For example, they may be living on the land but often the land is not theirs, but it is jointly owned by the iwi (family) or hapu (sub-tribe). And therefore you cannot use the land as collateral against the loan. (Business expert 5) The findings show that tax compliance undertakings were burdensome, and indeed difficult, for Pacific and Maori SBOs when compared to the Asian and European groups. However, tax practitioners recognised that most SBOs were not excellent bookkeepers (Tax practitioner 2) and: To SBOs, tax compliance is hard and they don t know what to do and again they are busy running their business. They can t be tax experts because there is so much for them to actually know which they can t know it all. (Business expert 13) The lack of financial literacy revealed by some groups in their inconsistent record keeping, was further reflected in poor cash management practices, resulting in delays when tax payments are due. The following were some rather unsympathetic observations by tax practitioners and business experts about the tax compliance processes of SBOs: Fifty percent of the small businesses do not really know about their tax obligations and 50 percent choose not to know about it. (Tax practitioner 7) Often times it comes down to a number of things like lack of knowledge and lack of information. The other thing is lack of financial literacy skills, and the other thing too sometimes it is almost living in a state of denial. (Business expert 11) In brief, the reasons suggested by the tax and business experts to explain the noncompliance of business owners indicate that, for SBOs, record keeping was not considered a priority or indeed an imperative. Yet, the findings show that it is necessary for SBOs to demonstrate literacy and proficiency skills, and discipline in record keeping to successfully file timely and accurate tax returns. Sources of help with tax query and relationship with the IRD When reviewing how businesses accessed assistance with tax issues, three sources of help were used by ethnic SBOs when they encountered a tax query: paid accountants; unpaid family and friend advice; and IRD. Table 1 in Appendix 1 indicates the proportion of help sought from each source. 10

11 In Table 1, it appears the Asian group was most dependent on unpaid assistance from family and friends, followed by the Maori and Pacific groups. These preferences possibly reflect the collectivistic groups access to information, which was available from their group membership. Of all the groups, the Asians were the least dependent on paid assistance, thereby saving money spent on tax compliance costs. Their in-group collectivism granted them access to people with tax knowledge. Both the Asian and Pacific groups also showed greater willingness to interact with the IRD compared to the Maori and European operators. For the Asians, the benefit of cost savings were the main reason. In contrast, the European group relied heavily on paid assistance, as they did not appear to have access to peers and friends with tax knowledge, possibly considering such aspects of their financial affairs private due to their individualistic traits. The findings suggest, however, they were willing to pay for their accountant s services trusting them to look after their tax welfare and were comfortable dealing with them. A significant finding was the lack of trust towards IRD by the European group, demonstrated in their decision to seek paid professional advice, rather than access the free advice offered by IRD. In Table 1, it can be observed that none of the Maori groups would seek help directly from the IRD, unlike the other groups. One Business expert explained the origin of their fear lay in their historic oppression under European colonisation of New Zealand and the ensuing confiscation of their ancestral lands (Business Expert 3). They were reluctant to deal with the IRD and some viewed them as a white bureaucracy, who had the power to hurt them (Maori operator 6). The fear of the tax authority prohibited some Maori SBOs from contacting the IRD when they encountered tax problems. The consequences of non-contact and lack of attention to their tax problems were financial penalties for non-payment, with attendant adverse effects. In contrast, the relatively high number of Pacific SBOs resorting to the IRD might be explained by the younger age profile and greater exposure to the European ways of business. Their proffered rationale for contacting the IRD was to save costs. However, there was a disadvantage associated with their willingness to seek advice from IRD. Two other Pacific operators did not challenge the IRD tax assessments, even though they may have disagreed with them. Business expert 11

12 10 reflected that Pacific cultural attitude towards government bodies could disadvantage them when dealing with IRD and tax practitioners: The Pacific Islanders look at authorities with high esteem and that s why they struggle with that they always rely on others to tell them what to do and how to do it and they are followers. The above findings showed how important it is to understand the underlying reasons and motivations behind the wide variations in the quality of record keeping by SBOs as well as their choice of whom to consult for tax assistance. For some groups, their practices appeared to be linked with their cultural values, while others were linked with the standard of accounting skills and knowledge possessed by the SBOs. Certainly, there are financial implications connected with tax compliance decisions. For example, making the decision to access a high proportion of paid assistance can be detrimental to SBOs in terms of incurring high tax compliance costs. It is, therefore, important for business and regulatory groups to ensure that ethnic SBOs understand both the tax compliance process and how they can minimise the compliance burden and cost. It is also vitally important for the IRD to know why ethnic SBOs may encounter difficulties with compliance, due to specific cultural values and associated practices that may advantage or disadvantage specific ethnic SBOs. Research suggests that a high degree of voluntary compliance is required to maintain the integrity of any tax system. Rather disturbingly, the finding of this intersectional study suggest intermingled privilege and penalty for some ethnic groups is linked to the different ways that they conducted their tax compliance practices. In terms of record keeping and access to advice, Maori SBOs appeared to be disadvantaged by their distrust of government bodies that could possibly assist them owing to their historic oppression by the colonisation of New Zealand by European (Pakeha) settlers. Paradoxically, the Pacific SBOs are also disadvantaged by their compliant attitudes towards IRD, albeit in a different way by their reluctance to challenge the authority s tax assessment on them. CONCLUSION AND RECOMMENDATION This working paper can only offer brief insights into the complex mix of advantage and disadvantage linked with the ethnically influenced practices of SBOs in New Zealand. The preliminary findings from the study indicate there are distinct cumulative effects of being different to the dominant 12

13 norm in the specific context of New Zealand. Ethnicity based cultural values do not only influence the tax compliance undertakings of SBOs, they also influence how these practices are perceived by taxation experts and business experts, who draw interpretations based on their own social positioning in post-colonial society New Zealand. The still to be completed intersectional analysis indicates that aspects of societal domination and subordination are reproduced in the tax compliance practices of SBOS, depending on their ethnicity or cultural affiliation. Regulatory bodies and business groups need to be aware of these influences and nuances when interacting with culturally diverse SBOs. The findings indicate strongly that assistance must be customised to meet the differing needs of these organisations in order to grant them and their communities a sustainable future. As with all research, this study is unable to examine all aspects of tax compliance undertakings of SBOs. Therefore, further studies are required to support the current findings. In addition, other ethnic groups in other countries that exhibit cultural values different from the mainstream should also be considered. Such study may also usefully be extended to most OECD countries with multi-cultural taxpayers, such as Australia, the United States, United Kingdom, Canada and Western Europe. This study holds profound implications for government and the tax authorities. One is that cultural values do influence tax compliance behaviours and therefore government and business agencies and regulatory bodies ought to take into consideration the cultural underpinnings on SBOs tax and accounting undertakings. Tax authorities need to have a better understanding of the cultural values of their SBO taxpayers and how they impinge on their tax behaviour. This understanding will assist them to target their regulatory strategies in order to match the varied characteristics and behaviours of their taxpayers. It is also consistent with the call for responsive regulation (Braithwaite, 2007) and that there should be a suite of regulatory strategies, as the regulatory strategy of one size fits all is less effective given the cultural heterogeneity of taxpayers in most countries. By being responsive in their regulatory approach, tax authorities could ensure that tax policy and practice is no longer hit and miss, but rather is targeted to get the optimal tax compliance outcomes. 13

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19 Appendix 1: Sources of help sought by ethnic small business operators with tax queries First point of consultation for a tax query Europeans Asians Maori Pacific Peoples Total 1. Paid assistance 22% 8% 17% 17% 64% 2. Unpaid 0% 11% 8% 3% 22% assistance 3. IRD - free 3% 6% 0% 5% 14% Subtotal 25% 25% 25% 25% 100% Table 1: Sources of help sought by ethnic SBOs with tax queries 19