Tax Compliance Costs for SMEs: A Survey of Tax Professionals in Ghana on External Cost of Compliance

SUMMARY This study seeks to ascertain the magnitude of the external tax compliance costs incurred by SMEs in Ghana from the perspective of the tax professionals who provide the service. A survey was conducted with tax professional firms selected from the Institute of Chartered Accountants and the Chartered Institute of Taxation. The study distinguishes between the average annual costs for small, medium-sized and larger firms to compute and file returns, deal with tax authorities, implement changes in tax laws, and maintain records for tax purposes on behalf of their clients. SMEs were found to incur an annual average cost of USD 239. The external cost of compliance was found to be regressive in nature, indicating that the burden was relatively higher for small businesses. Furthermore, the costs incurred by SMEs were mainly due to tax computations as opposed to tax planning .


INTRODUCTION
Small and medium-sized enterprises (SMEs) are globally recognised as engines of economic development and growth (Domingo, 2017).In emerging economies, SMEs are perceived to be the transformers and developers of communities (Dlamini & Schutte, 2021).Ghana is not an exception to the contribution brought by the sector to the economy (OECD, 2019).These small enterprises are considered to be a key contributor to the production landscape in Ghana, as the sector represents a large portion of businesses and provides approximately 85% of manufacturing employment (Aryeetey, 2001).This paper uses the definition of the Ghana Statistical Service's Integrated Business Establishment Survey (IBES) report (2016), which defines small firms as those with less than 30 employees, while medium-sized firms have 30 to 100 employees and large enterprises have above 100 employees.SMEs contribute about 70% of the country's GDP and account for about 99.6% of businesses (IBES report 2016).However, the Association of Ghana Industries (AGI) business barometer indicated that exchange rate volatility, the cost of credit, and a multiplicity of taxes were the main factors affecting enterprises in Ghana (ITC, 2016).Taxes could become a burden to businesses, especially SMEs, if the costs of complying with these taxes are too high (Bruce-Twum & Schutte, 2021).The high costs that SMEs incur could also be a result of the complexity of the tax system, and complexity is clearly a major determinant of the compliance burden (Evans, 2008).
High tax compliance costs (TCC) diminish the profitability of small firms and consequently slow down economic growth (Schoojans et al., 2011).Therefore, in a drive to promote SME growth and development by reducing compliance costs and administrative complexity, the government of Ghana introduced the Self-Assessment Tax System (SAS) in 2015.In the SAS, the taxpayer assesses himself and is mandated to pay taxes based on the estimated income.It is the responsibility of the taxpayer to ensure compliance by understanding tax laws and regulations (Okello,2014), maintaining proper recordkeeping, engaging external tax professionals (Kasipillai & Hanefah, 2000;Okello, 2014;Smulders, 2013), and conducting tax audits and investigations (Marshall et al., 1997;Okello, 2014).Sapiei (2012) stated that SMEs also incur psychological costs as they deal with the negative experiences of taxpayers when obeying tax laws.Due to the activities associated with tax compliance and penalties for tax non-compliance, SMEs engage the services of agents for their tax affairs (McKerchar et al., 2009).
This research is motivated by the paltry research-based evidence about the magnitude of resources SMEs in Ghana devote to complying with tax, especially how much they incur on external compliance costs (fees).This study seeks to reduce the research-based knowledge gap on the magnitude of the external tax compliance costs incurred by SMEs in Ghana.Therefore, the objective of this study was to ascertain the external costs incurred by SMEs from the perspective of the tax professionals that provided these services.The study further investigated the components of fees charged for the different services performed by these professionals for SMEs.Additionally, the study sought to ascertain the views of the tax professionals on the difficulties faced by their clients on tax issues as well as provide recommendations for the reduction of TCC in Ghana.This paper is structured as follows: the next section provides a review of literature related to TCC.The paper further presents the methodology of the study.It then discusses the results of the study and culminates by presenting the conclusion and recommendations of the study.
There are three main components of TCC, which are viewed as opportunity costs that are linked to tax compliance activities (Evans et al., 2014).According to Tran-Nam et al. (2000:236), the first is the time taxpayers spend on assistants and internal personnel; the second and third components comprise of external paid tax advisers and non-labour expenses.These costs are tax-related individual incidental costs or firm overhead costs, including stationery, electricity, computers, photocopies, postage, telephone and transport costs.Tran-Nam et al. (2000) postulate that some of these expenses are clear and easily identifiable and involve direct payments, while others are indirect, for example, the time spent by taxpayers and their unpaid assistants.
The non-labour cost of business is more difficult to estimate and is often ignored in tax compliance cost research.Differences exist among scholars as to the impact it will have on the measurement of the cost, as it is dependent on the level of business analysis (Evans et al., 2014;Sapiei, 2012).Klofsten et al (2021) contends that these expenses could be virtually overlooked in studies that only focus on small firms and microenterprises.Tran-Nam et al. (2000), on the other hand, claim that the omission of non-labour costs would cause a miscalculation of the compliance costs of large business taxpayers.
Furthermore, Evans et al. (2014) and Sapiei (2012) summarised the components of TCC into four types: internal costs, external costs, psychological costs, and incidental costs.Internal costs include how much the time a firm's employees spend on tax matters is worth; external tax costs refer to the payments made to external tax experts (fees for their professional services); incidental costs are other miscellaneous tax costs that might consist of transport, stationery, computers, telephone, and court proceedings costs; and psychic costs, which, according to Sapiei (2012), are the negative experiences of taxpayers in obeying tax laws.Ariff and Pope (2022) classified TCC into economic and non-economic costs.According to the researchers, economic costs could be divided into monetary and time costs, which can be quantified.In contrast, the expenses of stress and worry (psychological costs) experienced due to tax compliance are known as non-economic costs and are more difficult to calculate.Their classification of the compliance cost is depicted in Figure 1 below.(Ariff & Pope, 2002) Ariff and Pope (2002) classified miscellaneous costs under internal economic costs, which are extra expenses incurred in obeying tax laws (incidental costs).In addition to providing the various components of TCC, Figure 1 further indicates that the tax compliance burden's appraisal involves identifying and evaluating the internal and external costs incurred.The external costs could be fees paid to the professional for computing and filing tax returns on behalf of the SMEs, providing for tax advisory (planning) service, or maintaining information (records) for the SME.Studies conducted in both developed and developing countries have shown that external costs incurred by SMEs represent a high proportion of their cost of complying with income tax legislation (Hansford & Hasseldine, 2012;Schoonjans et al., 2011;World Bank, 2020).Smulders et al. (2012) found that in South Africa, external costs represent 40% of the TCC incurred by SMEs.In Ethiopia, the World Bank (2020) also found the external cost to be 37% of the TCC.Abdul-Jabbar and Pope (2008) estimated the external cost at 41% in Malaysia.While the external cost was found to be very high (69%) in Australia (Lignier & Evans, 2012), it represents about 27% in the United Kingdom (Hansford & Hasseldine, 2012)

METHODOLOGY
A positivist approach was adopted due to the quantitative nature of this study.This decision was informed by the dominance of the positivist paradigm in TCC research and the ability to produce statistically rigorous and focused results (Evans, 2003).The targeted population of this study was tax professionals, mainly because practitioners provide a valuable information source to estimate the TCC for small businesses (Smulders & Stiglingh, 2008).The tax professionals selected for this study were practising chartered accountants who are also members of the Chartered Institute of Taxation (Ghana).A total of 50 (out of a population of 398) external tax professional firms were purposively selected from lists obtained from the Institute of Chartered Accountants and responses were obtained from 33 participants, representing a response rate of 66%.Yehuda and Holtom's (2008) analysis of research that acquired data from businesses found that the average response rate was 35.7%; as a result, the overall response rate for this study is within acceptable bounds.
A pilot study was also performed involving 10 tax professionals to ensure the validity of the research instrument and enhance its reliability.The final questionnaires were sent out from December 16 to April 17, 2020.The research collected data for the 2018 year of assessment, as returns for the 2019 year of assessment were not ready during the period of the data collection.A self-administered questionnaire was adopted based on previous research conducted by Saipei (2012), Abdul-Jabbar (2009) and Loo (2006).The questionnaire comprises four parts.The first part requested general information about the tax professionals.The second part focused on the activities and professional fees to assist SMEs in complying with income tax.The perceptions and opinions of the professionals on various tax compliance issues constituted the third part.The final part focused on general and overall issues of the tax compliance burden faced by SMEs.The data was analysed using SPSS and comprised of descriptive statistics for the profiling of the respondents.

RESULTS AND DISCUSSION
The background information of the tax professionals surveyed is presented in Table 1.The information solicited from them includes their place of work, current position, membership in professional bodies, and years of experience in tax-related work.  1, only one respondent was a member of a Big Four accounting firm.The majority (90.9%) of respondents were part of non-big four firms, whereas the rest (6.1%) were tax agents.The majority (69.6%) were partners at firms, with about 15.2% of them being managers, whereas the remaining respondents were senior staff (15.2%).Most (87.9%) of them were members of the Institute of Chartered Accountants, Ghana (ICAG); about 9.1% of them were members of the Chartered Institute of Taxation, Ghana (CITG), whereas one respondent had other qualifications.This appears to be the membership pattern of the accounting professional bodies in Ghana.Almost half (48.5%) had more than 20 years of tax practice experience.About 24.2% of them had between 10 and 20 years of experience, whereas the rest (27.3%) had less than 10 years of tax experience.The respondents thus appear to be experienced, and their responses thus add value and creditability to the results obtained in this study.

Description of external tax professionals' clients
External tax professionals provided information on the size of their clients' businesses, as shown in Table 2. Source: Own formulation Of the 33 respondents, 27 provided information on SMEs.The approximate percentage of SMEs engaging the services of the respondents ranged from 5% to 100%, with an average of 58% over the past three years.The approximate percentage of large companies served by responding tax professionals ranged from 1% to 100% of their clientele, with an average of 28% within the past three years.Table 2 further indicates that SMEs were the main client base of the respondents.The study further sought the breakdown of the client base in terms of sales turnover.The results are presented in Table 3.As shown in Table 3, five professionals indicated that an average of 27% of their clients have a turnover of less than GHC 50.000.Seventeen professionals reported that an average of 20% of their clients have a turnover between GHC 50,000 and GHC 100,000.Nineteen professionals indicated that an average of 14% of their clients have a turnover between GHC 100,000 and GHC 200,000.Nineteen (19) professionals suggested that an average of 24% of their clients have a turnover between GHC 200,000 and GHC 500,000.Twenty-one (21) professionals indicated that an average of 52% of their clients have a turnover between GHC 500.,000and GHC 1.000.000.The sectors in which the clients operated their businesses were also solicited from the respondents.The percentage of client distribution per business sector is presented in Table 4. Source: Own formulation Table 4 shows that 24 professionals indicated that an average of 16% of their clients are from the manufacturing sector.Twenty-eight 28) professionals indicated that an average of 38% of their clients are from the service sector, whereas 17 of them showed that an average of 9% of their clients are from the property and construction sectors.Sixteen 16 professionals indicated that an average of 16% of their clients are from the finance and banking sectors.At the same time, 26 of them noted that an average of 30% of their clients are from the retail (trading) sector.Lastly, 8 of them have an average of 24% of their clients from other sectors.

External tax fees
In order to obtain the external tax costs incurred by SMEs, the practitioners were required to indicate the average tax fees charged by the professionals.The tax fees charged to clients, as indicated by the tax professionals, are presented in Table 5.  5, the minimum tax fees charged range from GHC 1,000 (USD 204) to GHC 30,000 (USD 6,122), with an average of GHC 6 150 (USD 1,255).Also, the maximum tax fees charged range from GHC 1,800 (USD 367 to GHC 200,000 (USD 40,815), with an average of GHC 25,670 (USD 5,239).An overall average tax fee of GHC 15,910(USD 3,247) was charged.To further enhance the interpretation of the compliance cost (external fees), the fee charged was expressed by sales turnover category of SME clients.The results are presented in Table 6.Source: Own formulation Table 6 indicates that external tax fees increase with increased firm size and turnover.In other words, the results appear to show that the size of a business (as measured by turnover) is a major determinant of the fees charged for tax services in Ghana.To ensure a meaningful comparison with other studies, the researcher found it appropriate to consider studies in Africa first and thereafter compare them with other international studies.The interpretation of these comparative results should, however, be made with caution as a result of three main factors.Firstly, there are differences in the methodologies for the computation of compliance costs (Chattopadhyay & Das-Gupta, 2002;Tran-Nam et al., 2000).Secondly, there are differences in the systems of taxation as well as the culture of tax payments between countries (Sapiei, 2012).Thirdly, there are variations in the time when the studies were conducted.However, it is suggested that tax systems in African countries and the culture of tax payments could be largely similar.As a result of this view, the author deems it appropriate to compare the current study with similar studies conducted in Africa.
There is a lack of literature on compliance costs in African studies.However, two studies were found (Smulders et al., 2012;World Bank, 2016) related to SMEs and were used for comparative purposes.All currencies were converted into US dollars for ease of comparison.The South African Rand was converted using 1 USD = ZAR 8.6527 (rate as of 12 December 2012), and the Ghana Cedi was converted using 1 USD = GHC4.9002(rate as of 31 December2018).The World Bank study in Ethiopia was already stated in US dollars.However, the interpretation of the absolute amounts is limited by factors such as inflation and the time value of money.
The external cost in Ethiopia was USD 120.90, and in South Africa, it was estimated to be USD 3,693.18,while the cost in Ghana was USD 234.The results indicate a higher external compliance cost in South Africa compared to the other two countries.The external costs in Ghana and Ethiopia represent 88% and 3.3%, respectively, of the cost incurred in South Africa.A better comparison of the external tax costs incurred by SMEs would be to express the cost as a percentage of turnover.The external fee cost per percentage of turnover in Ghana is shown in Figure 2.

Figure 2. External fee cost by percentage of turnover for Ghana
It appears that the smaller the firm, the greater the impact of the external fees.The burden of external tax costs appears to be heavy on the smaller businesses in Ghana.These findings suggest the regressive nature of taxes in Ghana.The result of this study is consistent with findings in the World Bank (2016), Smulders et al. (2012) in Africa, and other international compliance cost studies like Abdul-Jabbar and Pope (2008) conducted in Malaysia, Lignier and Evans (2012) conducted in Australia, the Belgium study by Schoonjans et al. (2011), the United Kingdom study by Hansford and Hasseldine (2012), as well as the Chattopadhyay and Das-Gupta (2002) study conducted in India.

Analysis by firm characteristics
This section provides a cross-tabulation analysis of the external tax costs incurred by SMES by their characteristics.The results are shown in Table 7.
According to Table 7, approximately half of the TCC for SMEs in the manufacturing and service industries was spent on external compliance costs.However, the retail (trade) sector experienced much higher external tax costs (61%).These findings imply that trading firms paid more in external professional fees than their counterparts in the manufacturing and service industries.On the other hand, SMEs in other industries (such as plantations, agriculture, banking, and finance) had external tax costs that were much lower (43%) than those in all other industries.This suggests that businesses in other industries typically conduct their own tax-related activities, resulting in lower payments to tax experts to act on their behalf.
A split of TCC according to the ownership structure of SMEs is also shown in Table 7.The findings show that partnerships and sole proprietorships were substantially more likely to devote a larger portion of their compliance expenditures to paying external tax fees.Private limited liability corporations, on the other hand, spend a sizable portion of their compliance expenditures internally.As a result, partnerships and sole proprietorships hire external tax professionals for the majority of their tax compliance tasks.Private limited liability firms, on the other hand, typically handle their own tax compliance needs.As a result, the limited liability firms pay less for tax professionals.
When data are analysed according to how long businesses have been in operation, it becomes clear that businesses with an operational history of 20 years or less are more likely to spend a larger portion of their compliance costs on external tax fees.On the other hand, businesses that have been operating for more than 20 years are more likely to incur lower costs for tax professionals.

Firm age
Less than 10 years 54 10-20 years 53 More than 20 years 48 Source: own editing

Analysis by computational-planning cost ratios
The fees charged by professionals were further analysed to ascertain the various components in terms of charges resulting from tax computations and tax planning activities.External tax professionals were requested to state the estimated percentage of their fee for tax computational work, as well as their fee for tax planning and other types of work.The results are presented in Table 8.Source: Own formulation From Table 8, the average percentages of the computational, planning and other costs were 66%, 21% and 27%, respectively.Therefore, the computational and planning cost ratio is 66:21, or 3:1.Hence, the feedback suggests that most of the fees charged were for tax compliance activities of SMEs, such as tax computation for inclusion in annual financial statements, self-assessment estimation at the beginning of the year, and responding to tax demands by the revenue authority.

Reasons for engaging external tax clients
The researchers further sought from the tax professionals' reasons why SMEs engage their services.The main reasons they provided are listed in Table 9.  9, the majority (81.8%) of external tax professionals claimed their services were mainly engaged for calculating the income tax payable.Other significant reasons include dealing with tax authorities (78.8%), implementing income tax changes (75.8%), understanding income tax legislation (72.7%), and maintaining records for income tax purposes (60.6%), in descending order of importance.

Tax difficulties faced by SMEs
After ascertaining the reasons for engaging the tax practitioners for their services, the respondents were asked to provide information on some of the difficulties faced by their SME clients.The main difficulties faced by their SME clients are listed in Table 10.10, the majority (86.6%) of external tax professionals claimed that the major difficulty faced by SMEs is understanding the income tax laws whenever amendments are made.Also, 80% of the external tax professionals indicated that maintaining adequate records for income tax purposes was a major challenge for SMEs.Other difficulties identified included dealing with tax authorities (16.3%), the short period to lodge tax returns (16.3%), and the difficulty in implementing tax changes.The professionals' views on tax difficulties faced by their clients provide further information to cross-check the validity of the reasons provided for the engagement of the professionals.The results confirm that the three top difficulties faced by SMEs were the main reasons for engaging the tax professionals.

Suggestions to reduce tax compliance costs and improve the tax system
Finally, the tax professionals were asked to provide suggestions about reducing tax compliance costs.The recommendations provided by the tax professionals are presented in Table 11.11, digitisation to make online filing of returns possible (38.9%) was suggested by the majority of tax professionals.Other vital suggestions for the reduction of compliance costs include good record-keeping (22.2%), the need for more education on the tax system in Ghana (16.7%) and simplifying the tax law (16.7%).One professional suggested that the GRA should maintain data for each taxpayer on the deduction of taxes from the source.

CONCLUSION
The study sought to ascertain the magnitude of the external tax compliance costs incurred by SMEs in Ghana from the perspective of the tax professionals who provide the service.The study found that on average, tax practitioners charged SMEs GHC 6,150 (USD 1,255) which also showed that small firms incurred an estimated annual cost of GHC 1,398 (USD 285), and medium firms GHC 4,752 (USD 970), to compute and file returns, deal with tax authorities, implement changes in tax laws, and maintain records for tax purposes on behalf of their clients.Furthermore, the cost incurred by SMEs was mainly for tax computations as opposed to tax planning.The external tax fees charged thus increase the cost of tax compliance for SMEs in Ghana.The cost was found to be regressive in nature, indicating that the burden was heavy mainly on small businesses.This study also found evidence to support McKerchar et al.'s (2009) theory that firms engaged the services of external tax professionals on tax issues, and the external tax fees were found to increase with firm size.One of the key reasons for the use of tax professionals by SMEs is the difficulty of understanding tax legislation.As such, it is recommended that constant training be provided to SMEs to enhance their understanding of tax laws and facilitate compliance with them.The training should also take into consideration other tax problems faced by SMEs.To this end, the problems identified by this study will further assist the Ghana Revenue Authority (GRA).This study should be seen as a baseline study that needs frequent updates to ascertain whether the cost of compliance has been reduced.
highest turnover in each bracket)

Table 1
Background information on tax professional

Table 2
Client distribution

Table 3
Client sales turnover

Table 4
Percentage of tax clients' business sector

Table 7
External compliance cost ratios by firm characteristics

Table 9
Reasons for hiring external tax professionals