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The study explores the role of tax education and fear-appealing messages in the linkage between tax audit and tax compliance among corporate entities. Data was collected from 205 corporate entities using questionnaire as an instrument. The data was analysed using the PLS-SEM. It was observed that tax audit enhances tax compliance among corporate entities. Again, while tax education partially mediates the linkage between tax audit and tax compliance, fear-appealing messages negatively moderate the relationship between the two. The study concluded that regular tax education during tax audits enhances tax compliance but does not release threatening messages to taxpayers. It was recommended that tax revenue authorities should increase tax audit frequency and educate tax payers during the audit exercise. This has the tendency to improve the level of tax compliance among corporate entities.

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Introduction

Tax compliance is critical in maintaining a functioning and sustainable tax system (Bird & Davis-Nozemack, 2018; Wadesangoet al., 2018). Governments mainly rely on taxpayers voluntarily complying with tax regulations to fund public services and promote economic stability. However, despite implementing tax audits and education initiatives, the level of tax compliance among taxpayers remains challenging in many jurisdictions (Blaufuset al., 2022), especially among corporate entities (Bedi, 2016; Siregaret al., 2019). This has prompted tax authorities on the prevalence of tax non-compliance globally (Yusofet al., 2014).

The issue of ensuring voluntary compliance with tax laws has been a persistent challenge faced by tax administrators and agencies worldwide for several decades. This problem has had adverse effects on the economies of these nations. (Chepkuruiet al., 2014; Kuug, 2016).

In Ghana, despite the diligent endeavors undertaken by the Ghana Revenue Authority (GRA) to implement convenient tax solutions, such as the self-assessment systems (Dwengeret al., 2016), tax awareness (Mohamadet al., 2023; Oduroet al., 2017), tax audits (Bedi, 2016; Sapiei & Kas ipillai, 2013; Siregaret al., 2019) among others, corporate entities resort to evading or avoiding taxes (Armstronget al., 2015; Hopeet al., 2013). In a speech given by the Honorable Minister of Finance, Ken Ofori-Atta, in 2020 on “Enhancing Revenue Collection through the Tax Audit and Quality Assurance Unit,” it was revealed that there existed a significant number of unregistered taxpayers, estimated to be around 5 million, encompassing both individuals and corporate entities resulting in several revenue loss. These challenges were attributed to various bottlenecks in the system and led to over emphasizing the importance of observing transparency and consistency in implementing tax collection measures (Bestet al., 2021; Ministry of Finance, 2020).

Furthermore, it is noteworthy that, after exhibiting advancements since 2000, Ghana’s tax-to-GDP ratio has now struck a plateau below the government’s targeted goal of 20% by 2023 (Ministry of Finance, 2020; Iddrisuet al., 2021). This phenomenon prompts inquiries regarding the efficacy of applied methods and the underlying variables contributing to tax non-compliance. Some of these inquiries are the deficiencies in the processes used for self-administered assessments, the efficiency of penalties and punishments in deterring taxpayers, the loopholes in the income tax laws that necessitate attention, whether tax education influence taxpayers to comply and finally, whether tax audits influence tax compliance. Examining the factors that impact tax compliance and the efficacy of tax audits within business entities in Ghana is of great importance and thereby, necessitated the pressing demand for this study.

The existing literature on tax audits and tax compliance is abundant, particularly about individual taxpayers and Small and Medium-Sized Enterprises (SMEs) (Alshira’h & Abdul-Jabbar, 2020; Ayalew, 2014; Beeret al., 2020; Bestet al., 2021; Chalu & Mzee, 2018; Kasper & Alm, 2022). The conceptions of these authors, including Alemu (2020), Ayalew (2014), Chalu and Mzee (2018), George and Diavastis (2015), Kasper and Alm (2022), Olaoyeet al. (2018), Olaoye and Ekundayo (2019), Nurebo and Lekaw (2019), primarily focus on the perspective of tax authorities, neglecting the interests of tax payers. However, limited studies have been conducted to examine the influence of tax audits on tax compliance among corporate entities especially in African economies where tax systems are not so robust to ensure compulsory compliance (Bedi, 2016; Fury Puspitaet al., 2016; Rinaldoet al., 2011; Saw, 2017). Despite the enormous attention given by researchers regarding tax audit and tax compliance, there still remains a need for empirical research on these concepts in less-explored African countries and regions within emerging nations such as Ghana.

Numerous studies have examined the direct correlation between tax audits and tax compliance, yielding conflicting conclusions. For example, several studies (Alshira’h & Abdul-Jabbar, 2020; Ayalew, 2014; Beeret al., 2020; Bérgoloet al., 2017; Gemmell & Ratto, 2012; Kasper & Alm, 2022; Olaoyeet al., 2018; Olaoye & Ekundayo, 2019; Saw, 2017) have found a statistically significant positive association between tax audit and tax compliance. However, other studies (Bedi, 2016; Siregaret al., 2019) have reported no significant relationship between tax audit and compliance. Additional research conducted by Bestet al. (2021) and Kasper and Alm (2022) has revealed varying impacts on the compliance behaviour of taxpayers following an audit. Therefore, the efficacy of tax education programmes in facilitating taxpayers’ comprehension of tax legislation and its potential role in mediating the association between tax audits and compliance behaviour necessitates additional investigation. Again, existing literature on tax compliance has primarily focused on the direct effects of tax audits on tax compliance or tax education on compliance behavior separately and has largely overlooked the potential moderating role of fear-appealing messages (Mohamadet al., 2023). It becomes evident that various models have been employed in the study of tax audits and tax compliance. These models include the implementation of specialised information system tools (George & Diavastis, 2015), the utilization of statutory audits adjustments (Blaufuset al., 2022), and the provision of management support (Nurebo & Lekaw, 2019), in order to strengthen the connections between these constructs. On the contrary, studies examining the role of tax education as a mediator, with fear-appealing messages moderating their relationship are few, rendering this study distinctive and unparalleled. This study aims to address the gap in knowledge on the role of tax education as a mediator and fear-appealing messages that would moderate the relationship between tax audits and tax compliance behaviour.

By examining these nuanced relationships, this study provides a comprehensive understanding of the factors influencing tax compliance behavior among corporate entities in Ghana, thereby contributing to the development of effective strategies for promoting tax compliance and addressing the persistent compliance challenges faced by governments. The rest of the study is organised as follow; the next section reviews existing literature followed by the methods applied in achieving the study objective. This is followed by presentation and discussion of the result of data analysis. The study then draws a conclusion and makes a policy recommendation.

Literature Review

Theoretical Review

The study was guided by two main theories: Deterrence Theory and the Theory of Planned Behaviour (TPB). According to Jackson and Milliron (2002), the economic deterrence models are oriented towards a theoretical standpoint in comprehensively examining tax evasion and compliance. The Deterrence Theory assumes that taxpayers are unwilling to discharge their tax liability and, through audit, detection, and penalty, often “deter” them into compliance. Although this theory distinguishes between the threat of punishment and the actual punishment (Chalfin & McCrary, 2017), economics literature primarily focuses on the former. The decision to comply made by a taxpayer is often examined within an expected utility framework that incorporates Becker (1968) economics-of-crime methodology. The deterrence theory posits that people obey the law after they realize its advantages exceed its drawbacks. While some have argued in favour of this viewpoint, others have argued against it because it is the certainty of punishment when it is realistically promised, not the harshness of punishment, which compels people to obey. Beeret al. (2020) for instance, demonstrated that, in aggregate, operational tax audits induce taxpayers to increase their reported taxable income by roughly 15% a year after the examination in the United States. The vice-versa happens if tax audit doesn’t take place at all. Overall, the specific deterrent effect of audits on subsequent reporting behavior adds to the static gain from direct audit revenue. This theory would however seek to portray a positive relationship between tax audit and tax compliance due to the possible risk of detection and penalties to be raised after an effective tax audit if taxpayers do not comply and the fear-appealing messages that may arise as a result of possible non-compliance by the corporate taxpayer.

The TPB is a social psychology theory that explains how behavioral intention is influenced by attitudes toward conduct, subjective standards, and perceived behavioral control (Ajzen, 1991). In achieving and maintaining behavioral change necessitates an intention to stop engaging in a bad behavior or start engaging in good behavior (Ajzen, 2005) and again, intention is influenced by perceptions of social norms as well as by attitude toward the behavior and the degree of perceived behavioral control. Since many important attitudes and beliefs are modifiable, they are the ultimate goals for any ensuing tax education programs (Brewer & Rimer, 2008; Trawule, 2017) and, as such, should encourage tax compliance. The idea of planned behavior holds that the information people learn shapes their intentions, which are then manifested in their behavior. This suggests that when people are being educated right after-tax audit, it tends to increase the awareness of corporate tax payers and results in the enhancement of tax compliance in the future. Thus, TPB would portray a strong positive relationship between tax education and tax compliance.

Empirical Literature and Hypothesis Development

The main argument of the study is captured in the conceptual framework shown in Fig. 1. From the framework, the study argues that tax audit should provide a platform for tax payers to be educated on the need to pay tax. When this happens, there may not be the need to issue fear-appealing messages to tax payers as a compelling mechanism for tax payers to pay tax.

Fig. 1. Conceptual framework.

Tax Audit and Tax Compliance

Tax audits have been a widely employed tool by tax authorities over time to boost tax compliance because companies found evading taxes are required to pay the taxes on their undisclosed income, including associated penalties (Alm, 2021). Chalu and Mzee (2018) sought to explore the factors that influences the effectiveness of tax audit in Tanzania. They categorized the factors into four: organizational, tax auditors, taxpayers and regulatory. George and Diavastis (2015) focused on examining the relationship between tax audit effectiveness, tax legislation and the use of specialized information system tools. The study sampled 200 tax auditors who were administered with questionnaires. Key conclusions indicated that efficient information systems aid tax auditors in locating tax infractions. This study aligns with our present research as it would be extended to aid in an appropriate approach towards educating taxpayers to increase the compliance rate.

Kasper and Alm (2022) investigate the effect of audit effectiveness on the share of undeclared income that the tax agency detects in an audit on post-audit tax compliance. The study sampled 333 tax payers and surveyed them by administering questionnaires. Laboratory experiments were used in analyzing findings. The results indicated that tax audits produce varying effects on post-audit compliance, with the effectiveness of the audits playing a crucial role in determining these outcomes. Specifically, effective audits lead to an increase in post-audit tax compliance. However, results from the laboratory experiment may not reflect taxpayers’ post-tax audit behavior in the real world for which reason it has become necessary for this current study. Saw (2017) went a step further and explored how the frequency of audits improve taxpayer compliance in Malaysia. The study concluded that tax audit should focus on effective approaches to ensure a higher level of compliance to reduce time and costs incurred by business entities or tax authorities during subsequent audits. Hence, the call to find an effective approach to educating tax payers and enhancing corporate tax compliance. Beeret al. (2020) explored the impact of operational tax audits on the future reporting behavior of 7500 self-employed US taxpayers. Their findings indicated that a more precise targeting of audits towards noncompliant taxpayers could result in increased direct audit revenue and prove beneficial for subsequent tax collections. Among every other study on tax audit effectiveness, the quantification of its impact on tax compliance from this study gave a different turning point that sought to realistically convey on-field results in the context of America. The current study adopts some variables in communicating the findings in the Ghanaian context.

In Ghana, Bedi (2016), echoing Ayalew's (2014) research, investigated the statistical significance of tax audits on tax compliance. The findings indicated that neither tax audits nor cash flow significantly affected tax compliance. However, board size and auditor type were positively and significantly linked to tax compliance, while the industry demonstrated a statistically significant negative impact. Overall, the study reinforced the notion that taxpayers are generally reluctant to comply voluntarily with their tax obligations. Nevertheless, post effects of audit were missing in this research, where this current study focuses on in line with the right approaches to be adopted when educating tax payers in enhancing tax compliance (Ayalew, 2014; Chalu & Mzee, 2018; Kasper & Alm, 2022; Saw, 2017; Tigist, 2021). Given the forgoing empirical evidence, the current study concentrates on how tax audit engagements affect tax compliance in Ghana among corporate entities capitalizing on its operational effect on the tax payers and hypothesised that:

H1: Tax audits significantly influence tax compliance.

Tax Audit and Tax Education

After tax audit, management letters and recommendations are crucial steps in the audit process as they offer the audited company valuable knowledge and direction on how to enhance internal controls and tax compliance (Bottet al., 2020). The relationship that leads to tax education after tax audit has not been clear and has empirically not been established. However, the end product of every audit, being the auditor’s opinion is usually complimented with some management letters and recommendations that seek to improve some internal controls, financial statement procedures and tax compliance on a whole (Furnham & Gunter, 2015; Kaka, 2021). This review seeks to throw light on the role of these management letters and recommendations from tax auditors to aid in explaining the relationship that exists between tax audit and tax education.

With regards to identification of issues, the corporate tax payers are provided with assistance to identify any problems, shortcomings, or areas of concern related to the entity’s tax compliance or financial reporting practices by management letters that the tax auditor has prepared following a thorough examination of the audited entity’s financial records, tax returns, and internal controls (Stephan Hayes & Baker, 2014). They proceed to give thorough justifications for the problems found. They outline the type, extent, and potential effects of the issues on the entity’s ability to comply with tax laws and maintain accurate financial records. These suggestions are useful in assisting the company to improve its internal control and tax compliance procedures. The management letters often make suggestions to ensure that, the organization complies with all applicable tax laws and rules to prevent penalties and legal consequences that may occur from breaking tax regulations. To practically sense the direct impact of tax audit on the type of education given, the management letter requires swift action from the audited entity. This is to avoid additional difficulties or penalties. It is in the entity’s best advantage to resolve the concerns that have been found and put the suggestions into practice as quickly as feasible. As such, the current study hypothesised that:

H2: Tax audits significantly influence tax education of corporate tax payers.

The Role of Tax Education and Fear-Appealing Messages

Dwianikaet al. (2022) examined the relationship between tax education and compliance, focusing on Small Business Tax Compliance during the Covid-19 pandemic. Their findings indicated that conventional tax socialization methods, such as seminars, had little impact on taxpayer compliance. Instead, the study highlighted a potential link between higher taxpayer compliance and the presence of tax incentives and online-based tax information systems facilitated by tax volunteers. Trawule (2017) also disclosed that, tax education had an impact on self-employed people’s tax compliance, but the exact nature of the relationship relies on the subject matter of tax education and the desired level of compliance. He added that the division of tax compliance into committed, capitulated and inventive tax compliance has a considerable impact on overall tax compliance. This also confirms Berhane (2011) and Mascagni and Santoro (2018) findings. Additionally, Ayalew (2014) in his findings indicated that, most taxpayers with insufficient knowledge of the tax regulations, might fail to cooperate with the tax system and the tax auditors instead of educating taxpayers, penalize them, leading to the reluctance of some honest taxpayers in terms of filing and reporting. Others, thus, deliberately fail to support the tax auditors with the required information during the audit. This then leads to the call of the third hypothesis as follows:

H3: Tax Education mediates the relationship between tax audit and tax compliance.

Alemu (2020) provided relevant information to policy-makers and implementers in the area to help them design an appropriate tax system that can increase government revenue and assure economic stability. Using a sample of 50 tax auditors the study found that fines and penalties had a negative effect on tax compliance. Penalties and fines had a favorable effect on the degree of tax compliance, whereas anticipated opportunities for tax evasion had a negative effect (Dullecket al., 2016). The study provides some preliminary evidence that enforcing penalties and fines, as well as educating investors in the real estate industry about taxes, may improve tax compliance. On the other hand, high compliance costs and opportunities for tax evasion would discourage investors in the real estate industry from adhering to tax laws (Osebe, 2013). The study advised that the cost of tax compliance should be set in a way that discourages people from evading taxes. In order to deter tax evasion, it was also advised that penalties and fines should be strictly enforced (Osebe, 2013). The current study seeks to respond to the call of Trawuleet al. (2022) to explore if the strict enforcement of some fear-appealing messages such as fines, penalties, imprisonment among others will enhance the future compliance of corporate tax payers by either strengthening or weakening the relationship that exist between tax audit and tax compliance. Therefore, the call for the fourth hypothesis stated as:

H4: Fear-appealing messages significantly moderate the relationship between tax audit and tax compliance.

Methodology

Population, Sampling and Data Collection Method

The study considered all companies in the Greater Accra region that have undergone tax audit at least once within the last thirteen years. However, the companies under focus were those in the manufacturing, trading, and service sectors due to their volume of transactions, which have major tax implications. As of March 2023, the total population of audited corporate entities in the Greater Accra region was 31,498 (GRA, 2023). Operationally, the study employed cluster sampling, where companies in the Weija-Gbawe Municipality were selected as the target population, which resulted in 766 companies. For a company to be included in the sample, it must have experienced tax audit by the GRA for the last thirteen years at least once. Again, the company must be in existence for at least three years. Finally, respondents must either be an accountant, an internal auditor, a general manager, or their representatives who have experienced tax audits. Consequently, 256 companies that met the inclusion criteria were selected for the study. Data on the constructs was collected using questionnaires. A total of 205 questionnaires were retrieved, representing an 80% response rate. The retrieved responses were deemed fit for the analysis of the study (Di Guardoet al., 2020; Onoyase, 2010).

Measurement of Constructs

The study constructs were measured using various scales. Tax audit was measured using a modified 10-item on a seven-point Likert scale by Chalu and Mzee (2018) ranging from “1 = Strongly disagree” to “7 = Strongly agree”. The Likert scale was chosen as a suitable measurement tool because the research focused on examining the viewpoints of taxpayers. The Cronbach Alpha coefficient for the scale is 0.830 (Chalu & Mzee, 2018). For the study’s reliability, the Cronbach alpha test was 0.897, which indicates that the model fits the data relevant to measuring tax audit.

Tax compliance was measured using a modified 17-item seven-point Likert scale by Olusegun (2021) from Fischer’s module for tax compliance. The Likert scale ranged from “1 = Strongly disagree” to “7 = Strongly agree”. The choice of this scale was influenced by the fact that Fischer’s model is widely recognized as one of the most practical and widely accepted conceptual frameworks for comprehending tax compliance behavior. The Cronbach Alpha of the scale is 0.797. The Cronbach Alpha revealed from the study was 0.927, which served as assurance of validity and reliability of the measurement scale.

Tax education was measured using a 7-item modifications scales anchored on a seven-point Likert scale ranging from “1 = Strongly disagree” to “7 = Strongly agree” by Alemu (2020). The study’s reliability was 0.943, which was good for the main study.

Fear-appealing messages (FAM) were measured using a 6-item anchored on a seven-point Likert scale by Alemu (2020). The scale ranged from “1 = Strongly disagree” to “7 = Strongly agree”. The value coefficient of the Cronbach alpha was 0.878, confirming the measurement scale’s validity.

Results and Discussion

Demographic Characteristics of Respondents

With the sample of 205 responses retrieved, 46 (22.4%) respondents are from the trading or commerce sector, 25 (12.2%) respondents from the manufacturing sector, and 134 (65.4%) respondents are from the service sector. This observation confirms that fact that most companies in the study area are service oriented. Again, 110 (53.7%) respondents were either accountants or finance officers, 52 (25.4%) were internal auditors and 27 (13.2%) were general managers. However, 16 (7.8%) were representatives of the expected respondents. Finally, over 80% of the responses indicated that the GRA was frequently present to review and assess the taxes that were filed and reported. This suggests that there exist a few organizations that warrant the attention of tax authorities for the purpose of conducting tax audits.

Confirmatory Factor Analysis (CFA)

Model Fitness Test

This was carried out to determine how well the model fits the data. In doing so, the Standardized Root Mean Square Residual (SRMR) and the Normed Fit Index (NFI) were used together with the Squared Equalidean Distance (d_ULS) and the Geodesic Distance (d_G) as the bootstrap-based test for the exact model-based test. The findings of the model fitness indicate that the conceptualized model had a better fit for the data based on the sampled data. The NFI is 0.803, while the SRMR is 0.064. These indices show that the conceptualized model fits the data better than the competing models, as demonstrated in Table I. The results of the bootstrapping analysis for d_LS and d_G indicate that there is a 13.17% probability of accepting the null hypothesis, suggesting no difference between the hypothesized correlation matrix and the empirical correlation matrix. Similarly, for d_G, there is a 10.22% probability of accepting the null hypothesis.

Fit indices Threshold Final CFA model
SRMR <0.08, excellent; 0.08–0.10, acceptable1 0.0641
d_ULS >0.05, excellent2 0.1317
d_G >0.05, excellent3 0.1022
NFI >0.7, excellent; 0.7–0, acceptable4 0.8030
Table I. Model Fitness Indices

Validity and Reliability Test

The validity and reliability of the measurement scales were also assessed, and the result was presented in Table II. Two forms of validity test were performed: convergent and discriminant validity. To test for the convergent validity, bootstrapping analysis shows that the obtained indicator loadings on respective constructs were statistically significant at a 5% significance level in the final iteration. This is proven by looking at the average extracted variance, factor loadings, and composite reliability (Gholamiet al., 2013). The composite reliability (CR) values of the constructs were all greater than 0.7, and the average variance extracted (AVE) values were also above 0.5, meeting the threshold of 0.5 or above, as advised by Henseleret al. (2014). This means that, on average, all the constructs in the proposed model can explain more than half (with an AVE above 0.50) of the variance observed in their respective indicator items. For instance, among the constructs, Tax Education exhibited the highest AVE, indicating that it could explain approximately 74.7% of the variation observed in all its associated indicator items.

Latent variable Indicators Factor loadings Cronbach’s alpha Composite reliability(CR) Average variance extracted (AVE) Construct reliability (rho_a)
Tax audit (TA) TA1 0.845 0.897 0.921 0.662 0.900
TA2 0.847
TA4 0.770
TA6 0.860
TA8 0.812
TA9 0.741
Tax compliance (TC) TC1 0.849 0.927 0.941 0.666 0.931
TC10 0.827
TC13 0.764
TC17 0.730
TC2 0.909
TC3 0.878
TC7 0.720
TC9 0.832
Tax education (TE) TE1 0.793 0.943 0.954 0.747 0.948
TE2 0.844
TE3 0.922
TE4 0.924
TE5 0.865
TE6 0.909
TE7 0.781
Fear-appealing messages (FAM) FAM2 0.892 0.878 0.916 0.732 0.884
FAM3 0.879
FAM4 0.844
FAM6 0.806
Table II. Measurement Scale and Model Indicators

For the discriminant validity assessment, the heterotrait-monotrait (HTMT) ratio of correlations and cross-loadings of the constructs were used. Here there is an indication of discriminant validity for constructs with HTMT values below 0.90 (Henseleret al., 2014) as shown in Table III.

Construct 1 2 3
1. Fear-appealing messages
2. Tax audit 0.673
3. Tax compliance 0.532 0.574
4. Tax education 0.467 0.548 0.614
Table III. Heterotrait-Monotrait Ratio (HTMT)–Matrix

Correlation Analysis

The correlation matrix in Table IV indicates that, the independent and the dependent variable exhibited a significant and positive correlation. To check for multicollinearity the correlation coefficients between the predictor variables were examined. A correlation coefficient of 0.90 or above indicates that there is significant multicollinearity present (Crotherset al., 2009; Henseleret al., 2014). From Table IV, the highest correlation coefficient between the predictors is 0.758 and were not significant indicating a signal of no collinearity between the predictors.

Constructs Mean Std. dev. 1 2 3 4
1. TC 3.8466 1.36704
2. TA 3.9337 1.40388 0.861**
3. TE 4.5749 1.79130 0.787** 0.758*
4. FAM 4.4368 1.77974 0.670** 0.703 0.688
Table IV. Summary Statistics and Correlation Matrix

Structural Model and Hypotheses Testing

The hypothesized model was empirically tested using the Partial Least Square Structural Equation Modelling (PLS-SEM), as it allows all paths to be evaluated concurrently. The result of the path analysis is presented in Fig. 2, and Table V. The results of the structural model showed a coefficient of determination of 0.836 for the dependent variable, Tax Compliance. This is a reflection of the extent to which the predictors explain the endogenous variable. It demonstrates that 83.6% of tax compliance variances are a result of the variation in the predictor variables. As such, we proceed to test the study hypotheses.

Fig. 2. Structural model with standardized loadings.

Model Original sample (O) Sample mean (M) Standard deviation (STDEV) T statistics (|O/STDEV|) Hypothesis
H1: TA → TC 0.564 0.568 0.095 5.972*** Supported
H2: TA → TE 0.874 0.875 0.019 46.422*** Supported
TE → TC 0.191 0.185 0.094 2.033**
H3: TA → TE → TC 0.167 0.162 0.083 2.017** Supported
H4: FAM × TA→ TC −0.166 −0.168 0.057 2.934*** Supported
Table V. Path Coefficients with Their Bootstrap Values and ‘T’ Values

Tax Audits and Tax Compliance

H1 hypothesis predicts a direct relationship between Tax Audit (TA) and Tax Compliance (TC) among corporate entities in Ghana. From Table IV, TA is positively related to TC (r = 0.861, p < 0.05). From Fig. 2 and Table V, the result of the direct effect of TA on TC is positive and is significant at 1% (β = 0.564, |t| = 5.972, p < 0.01). Hence, the null hypothesis is rejected at 1% level of significance and concluded that, Tax audit have the tendency to enhance the tax compliance level of corporate entities. This provides support for the study hypothesis.

Tax Audit and Tax Education

H2 hypothesis predicts a direct relationship between Tax Audit (TA) and Tax Education (TE). From Table IV, TA is positively related to TE (r = 0.787, p < 0.05). From Fig. 2 and Table V, the result of the direct effect of TA on TE is positive and is significant at 1% (β = 0.874, |t| = 46.422, p < 0.01). Hence, the null hypothesis is rejected at 1% level of significance and concluded that, tax audit practices have the tendency of being used as a medium to educate tax payers mainly, corporate tax payers. The study therefore provides a support to reject the null hypothesis, hence, supporting the study hypothesis that, tax audit significantly influences tax education.

The Role of Tax Education and Fear-Appealing Messages in the Relationship between Tax Audit and Tax Compliance

H3 hypothesis predicts an indirect relationship between TA and TC, with TE mediating the relationship. From Table IV, TA is positive and significantly associated with TE (r = 0.758, p < 0.1). Also, TE is positively and significantly associated with TC (r = 0.787, p < 0.05). From Table V, the result of the direct effect of TA on TE is positive and significant (β = 0.874, |t| = 46.422, p < 0.01), and the direct relationship between TE and TC is positive and significant at 1% (β = 0.191, |t| = 2.033, p < 0.05). Again, the indirect relationship between TA and TE and then TE and TC is positive and significant (β = 0.167 |t| = 2.017, p < 0.05). Thus, we reject the null hypothesis and conclude that Tax Education partially mediates the relationship between Tax Audit and Tax Compliance.

H4 hypothesis tests the moderating role of Fear-appealing messages (FAM) between Tax Audit and Tax Compliance. The finding shows that FAM negatively moderates the linkage between TA and TC (β = −0.166 |t| = −2.934, p < 0.05). This implies that the presence of Fear-appealing messages does not enhance the positive linkage between Tax Audit and Tax Compliance. Thus, Fear-appealing message negatively moderates the relationship between the two constructs providing a support for the study hypothesis.

Discussion of Findings

The study’s findings indicate that there is a strong relationship between tax audit activities and tax compliance among corporate entities in Ghana. The initial recognition of the possibility of a tax audit among corporate taxpayers gives rise to the notion that tax authorities have the capacity to detect inaccuracies and then apply supplementary penalties or consequences. This phenomenon leads corporate taxpayers to accurately file their tax returns and promptly disclose their payments.

The process of randomly selecting corporate taxpayers for audit appears to have a notable impact on these taxpayers. Corporate entities tend to prefer having their tax paperwork prepared in advance, without any external pressures or unexpected written notices of tax audits. In addition, many corporations derive satisfaction from complying with governmental requirements as a demonstration of goodwill. The general consensus is that individuals have a responsibility to fulfil their tax obligations in order to contribute to the economy and participate in commercial activities.

The probability of being publicly identified as a corporation that evades tax obligations generates a perception of irresponsibility, potentially resulting in customer attrition and stakeholder disengagement, as well as discouraging prospective stakeholders from making investments. the deterrence effect of tax audit on tax compliance in this study reflects a positive and significant relationship due to the possible risk of detection and penalties to be raised after tax audit engagements if taxpayers do not comply. This theoretical effect is in line with Beeret al. (2020) from the U.S. who demonstrated that operational tax audits induce taxpayers to increase their reported taxable income by roughly 15% a year after the examination. For taxpayers who had additional tax assessment after tax audit engagements, they reported a tax income of about 64% after the first year’s audit and maintained a 44% increase in taxes reported three years after the audit and vice versa. Hence, to enable the economy to achieve the government’s tax-to-GDP ratio target of 20% by 2023 (Ministry of Finance, 2020; Iddrisuet al., 2021), tax authorities in Ghana must continue to keep up with their new strategies that have helped in reflecting changes as compared to results found by (Bedi, 2016) and employ other beneficial strategies that will aid in unveiling additional tax assessments evaded by some corporate taxpayers to help contribute more than 25% to the entire annual tax income to the government.

Comparing both direct and indirect effects from Table V, Tax Education plays a partial mediation role (Zhaoet al., 2010) since both effects are significant (Baron & Kenny, 1986; Hairet al., 2019; Zhaoet al., 2010). Though effective tax audit measures and strategies lead to an enhancement of tax compliance behaviours, engaging corporate taxpayers during and after-tax audit engagements to educate them is evident to increase their compliance behaviours. This is in agreement with Berhane (2011) who emphasized the taxpayer’s ability to embrace any new system if they have sufficient knowledge to comprehend them. He added that to achieve the goals of voluntary compliance, taxpayers must be knowledgeable and well-educated (especially in tax matters), and their level of tax literacy must be current, continuously improved and reinforced to maintain it, and must be capable of applying them at relevant points in time.

Examining the moderating role of Fear-appealing messages in the relationship between tax audit and tax compliance among corporate entities in Ghana, the observed result is a projection of a negative significant effect on tax compliance if the tax authorities or GRA continues to threaten corporate taxpayers with punishments, fines, penalties and imprisonment due to related inconsistencies and misapplications of the tax laws in the course of tax filing and reporting process. The deterrence theory’s orientation of detection of tax evasion and penalties implemented to deter taxpayers into compliance (Yonget al., 2019) contrasts the findings of this study. In the Ghanaian context, according to the findings of this study, the more tax authorities impose and intensify the penalties of non-compliant corporate taxpayers, the less reluctant they become. A study by Dullecket al. (2016) reported their findings that the introduction of fear-appealing messages had a favorable effect on the degree of tax compliance among investors and real estate industries. Also, in agreement with Osebe (2013), whose findings advised that penalties and fines should be strictly adhered to. However, the current study confirms the findings of other empirical studies (Alemu, 2020; Trawule, 2017; Trawuleet al., 2022), which revealed a negative relationship with tax compliance and suggested that the willingness to pay taxes can be achieved without the need for some fear tactics and penalization. Although the application of FAM could practically influence tax compliance actions, it is not a good predictor of tax compliance behaviours (Gadzoet al., 2019; Trawuleet al., 2022). It also confirms the findings of Ayalew (2014) that when tax auditors penalize taxpayers instead of educating them, it leads to a high degree of unwillingness of some honest taxpayers in terms of payment while others deliberately fail to support tax auditors with the required information during the audit. Hence strengthening negative actions and attitudes towards tax compliance that could cause defaulters to ally with unscrupulous officials to massage the figures. The differences found in the findings of other studies, such as Dullecket al. (2016) and Osebe (2013), may be a result of culture, environment, level of understanding and patriotism as well as the commitment level of tax authorities in line with strict adherence to the punishment of the offences as stipulated in their tax laws. Unfortunately, the results of the study in the Ghanaian setting reflect a significant negative association that the FAM construct has between tax audit and tax compliance.

Conclusion and Recommendations

From the foregoing discussions, it can be concluded that the elevation of the frequency of tax audit engagements by the GRA will lead to a corresponding rise in the level of tax compliance. Again, the inclusion of tax education in the tax audits will be a panacea to a decrease in taxpayers’ mistakes and an improvement in their understanding of both new tax regulations and the implementation of existing ones. Finally, the presence of FAM leads to a high degree of unwillingness of some honest taxpayers in terms of compliance, while others deliberately fail to support tax auditors with the required information during the audit.

It is therefore recommended that GRA should increase the frequency of tax audit engagements with corporate entities and consciously include tax education as part of the tax audit procedures. Also, GRA should exercise caution when using FAM in their communication with taxpayers. GRA is encouraged to utilize a more balanced approach as they supplement the use of FAM with other communication strategies that focus on educating taxpayers about the benefits of tax compliance and the consequences of tax non-compliance. This approach is likely to be more effective in promoting voluntary compliance among taxpayers.

Limitations and Suggestions for Future Studies

The study focused on corporate entities in Ghana, specifically the Greater Accra Region. Future research could expand the scope to investigate the role of tax education and FAM in other jurisdiction of the country for comparative purposes. Future research could also adopt a qualitative research design to provide an in-depth understanding of the factors that influence the relationship between tax audit and tax compliance. The study concentrated only on the taxpayers’ views to make inferences. Future research could take into account the perspectives of tax auditors or combine both perspectives to enhance the quality of inferences and conclusions.

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