The costs of tax compliance of large enterprises: exploratory analysis of large enterprises in New Zealand.
Degree GrantorUniversity of Canterbury
Degree NameDoctor of Philosophy
The costs of tax compliance refer to the additional expenses that business taxpayers incur in order to comply with the requirements of tax law. Recognising the negative effects that the costs of tax compliance have on business, numerous studies, predominately empirical, have been undertaken by researchers in a number of jurisdictions in order to measure the costs of tax compliance and determine what factors are driving these costs.
However, due to the regressive nature of the tax compliance costs, the majority of these studies have predominately been focused on Small and Medium Enterprises (SMEs). By way of contrast, large enterprises have received very little attention in the literature mainly because large enterprises have been considered to enjoy economies of scale which significantly lessen the burden of tax compliance costs. As a result the costs of tax compliance of large enterprises has remained a largely understudied area and still little is known about the composition, magnitude and factors driving costs of compliance in large enterprises. Furthermore, the concept of a large enterprise itself remains unclear in the literature as no common definition of a large enterprise, which considers the intrinsic features of a large enterprise, has been established in prior studies.
Considering the lack of studies on large enterprises, particularly in New Zealand, the purpose of this study is to analyse how a common definition of large enterprises in New Zealand can be established and to conduct an explorative analysis of the costs of tax compliance of large enterprises in New Zealand. In addition, this study will discuss the application of a mathematical model used to describe cost efficient tax compliance administration in large enterprises.
Analysis of the common definition of large enterprises in New Zealand shows that for a more accurate definition of large enterprises, which would be defined not only by the size of their turnover but also on the basis of their intrinsic characteristics, use of qualitative criteria along with quantitative criteria can be very useful.
Applying a qualitative methodology based on explorative analysis, semi-structured interviews with selected tax practitioners and an Inland Revenue (IR) official were conducted in order to ascertain the magnitude, composition and driving factors of the compliance costs in large enterprises. The interviews were also used in order to gain an understanding of how the tax practitioners and the IR define large enterprises in New Zealand. The findings from the interviews indicate that there is no common understanding amongst tax practitioners of what a large enterprise is in New Zealand. In addition, the IR applies the concept of “significant enterprise” instead of “large enterprise”, using this concept predominately for monitoring the tax compliance of large enterprises.
Further findings reveal that income tax is likely to be the most expensive tax to comply with for large enterprises. Complexity caused by business operations and restructuring initiated by large enterprises appears to be one of the driving factors of compliance costs. Overseas transactions and operations in foreign jurisdictions through controlled foreign companies were also found to add to the costs of tax compliance of large enterprises. Furthermore, the results indicate that large enterprises in New Zealand organise their tax compliance function in a different way to SMEs. In addition, they have a different composition of external costs of tax compliance, with more emphasis on tax planning, tax review and legal services.
Despite these limitations, the findings in this study and the analysis of the common definition of large enterprises in New Zealand can be useful for future empirical studies concerned with the estimation of the costs of tax compliance of large enterprises in New Zealand.