The Effect of company characteristics on tax non-compliance rates in Kenya and the moderating effect of liquidity on this relationship

Abstract

This research aimed to investigate the effect of company characteristics on tax non-compliance among large corporates in Kenya, and whether liquidity levels moderate this relationship. Profitability was selected as a control variable. This study leverages concepts from the economic deterrence theory and the agency theory. It is quantitative, grounded on the positivism philosophy and using an explanatory research design. It utilised secondary data obtained from KRA, which dispensed the data while strictly adhering to the provisions of the Data Protection Act. The population comprised companies from the Large Taxpayers Office with uncontested tax audit adjustments for corporation tax. From the retrieved data across the study period (2016 to 2022), a sample size of 251 firms for the study was obtained using purposive sampling to select firms that had at least two instances of additional assessments. Using EViews for panel regression analysis, the study found a weak negative relationship between size and non-compliance rate, with an increase in size leading to decline in non-compliance. It also found a weak positive relationship between age and non-compliance, with non-compliance surging as firms grow older. Findings revealed that the construction sector lead in compliance, while financial and insurance activities, along with manufacturing, despite their low compliance, outperform the wholesale and retail sector. Further, findings established that while liquidity moderates how age and size of companies interact with non-compliance, the effect is not statistically significant. However, the findings revealed that the moderation effect of liquidity is statistically significant for the financial sector, with liquidity not only reducing the effect of this industry’s activities on non-compliance, but also shifting it from positive to negative. The study suggests that the tax authority should concentrate more on older companies as well as devise mechanisms to encourage, motivate, and ensure improved tax compliance in the financial industry.

Keywords: Tax Compliance, Firm Characteristics, Noncompliance