VAT COMPLIANCE COST FOR SMEs IN ALGERIA MOHAMED ABDESSADEK FERDJANI MASTER OF SCIENCE (INTERNATIONAL ACCOUNTING) UNIVERSITI UTARA MALAYSIA JULY 2015 VAT COMPLIANCE COST FOR SMEs IN ALGERIA By MOHAMED ABDESSADEK FERDJANI Thesis submitted to Othman Yeop Abdullah Graduate School of Business, Universiti Utara Malaysia, in Fulfillment of the Requirement for the Degree of Master of Science (International Accounting). CERTIFICATE OF THESES WORK I certify the originality of ideas, analyses, conclusions and recommendations reported in this project paper to be my original work except for quotations and citations which have been duly acknowledged. I also declare that the substance of this paper has not been previously or currently submitted for any other degree or qualification at UUM or any other University. II PERMISSION TO USE In presenting this project paper in partial fulfillment of the requirements for a postgraduate degree from Universiti Utara Malaysia, I agree that the University Library may make it freely available for inspection. I further agree that permission for copying of this project paper in any manner, in whole or in part, for scholarly purpose may be granted by my supervisor or, in her absence by the Dean of Othman Yeop Abdullah Graduate School of Business. It is understood that any copying or publication or use of this project paper or parts thereof for financial gain shall not be allowed without my written permission. It is also understood that due recognition will be given to me and to Universiti Utara Malaysia for any scholarly use which may be made of any material from my project paper. Any request for permission to copy or make other use of materials in this project paper, in whole or in part should be addressed to: Dean,Othman Yeop Abdullah Graduate School of Business, Universiti Utara Malaysia, 06010 UUM Sintok, Kedah Darul Aman, Malaysia . III ABSTRACT Every organization tries to maximize its earnings by stringent cost control measures; however, only some costs are controllable, i.e., material, labor, etc., while others are not, i.e., taxes. In a country like Algeria, the overall tax rate is up to 30% for corporations, and these corporations, on average, spend 451 hours/year on tax compliance. Such a huge amount of time is spent for compliance due to the complex and ever-changing nature of the tax structure in Algeria. As SMEs are the main economic drivers for the Algerian economy, these SMEs are responsible for around 60% of Algerian‘s gross domestic product and employ 1.86 million people. This study is an attempt to explore the VAT compliance cost for the SMEs operating in the Adrar State of Algeria. For this purpose, 360 questionnaires were distributed among SMEs operating in the Adrar State of Algeria, and 327 fully completed questionnaires were received. Descriptive statistics and cross-tabulation were applied to extract useful information. The researcher found that out of the 327, only 122 firms hire external advisors for tax compliance; of the 122 firms (38.3%) which hire external experts, they either utilize the services of different accounting firms or individual consultants. In addition, firms in Algeria spend 4,165,000 DZD in terms of external compliance cost. On the other hand, accounting and tax department‘s employees of sample SMEs, on average, spend 24,244 hours, for accounting and tax matters only. Out of the total hours, the value is 2,967,313 DZD (22.48%). Similarly, SMEs based on different categories (number of employees, number of years established and turnover) unanimously report that high tax compliance cost is significant and an extra burden on the company‘s earnings, which might discourage investors investing in SMEs, which are vital sources of employment and revenue. Keywords: VAT, Compliance cost, Internal compliance cost, External compliance cost, SMEs, Algeria IV ABSTRAK Setiap organisasi cuba untuk memaksimumkan pendapatan dengan mengetatkan langkah- langkah kawalan kos ; Walau bagaimanapun, hanya beberapa kos boleh dikawal, iaitu, bahan, tenaga kerja, dan lain-lain, manakala yang lain tidak dapat dikawal seperti cukai. Di negara seperti Algeria, kadar cukai keseluruhan menjangkau 30% bagi syarikat, dan syarikat-syarikat ini secara puratanya menghabiskan 451 jam / tahun mengenai pematuhan cukai. Ini menunjukkan syarikat menghabiskan jumlah masa yang banyak bagi tujuan pematuhan ini kerana sifat kompleks dan sentiasa berubah-ubah struktur cukai di Algeria. Sektor SMEs (Perusahaan Kecil dan Sederhana) merupakan pemacu ekonomi utama bagi ekonomi Algeria, SMEs menyumbang kepada kira-kira 60% daripada keluaran dalam negara kasar Algeria dan menghasilkan tenaga kerja seramai 1.86 juta orang. Kajian ini adalah suatu percubaan untuk meneroka kos pematuhan VAT bagi SMEs yang beroperasi di Adrar sebuah Negeri Algeria. Bagi tujuan kajian ini, 360 soal selidik telah diedarkan di kalangan SMEs yang beroperasi di Adrar sebuah negeri di Algeria, dan hasilnya 327 borang soal selidik yang lengkap diisi telah diterima. Statistik deskriptif dan merentas penjadualan telah digunakan untuk mendapatkan maklumat yang berguna. Penyelidik mendapati bahawa daripada 327, hanya 122 syarikat menyewa penasihat luar untuk pematuhan cukai; daripada 122 syarikat (38.3%) yang mengupah pakar-pakar luar, mereka sama ada menggunakan khidmat firma perakaunan yang berlainan atau perunding individu. Di samping itu, syarikat-syarikat di Algeria menghabiskan 4,165,000 DZD dari segi kos pematuhan luaran. Manakala bagi Jabatan perakaunan dan percukaian dalam skop SMEs secara purata menghabiskan 24,244 jam, atau kira-kira 10% daripada jumlah waktu kerja mereka hanya untuk menguruskan perkara perakaunan dan cukai sahaja. Daripada jumlah jam, nilai adalah 2,967,313 DZD (22.48%). Berdasarkan kategori yang berbeza dalam SMEs (bilangan pekerja, beberapa tahun ditubuhkan dan perolehan) sebulat suara melaporkan bahawa kos pematuhan cukai yang tinggi adalah penting dan beban tambahan ke atas pendapatan syarikat itu yang mungkin tidak menggalakkan pelabur melabur dalam SMEs yang amat penting sumber pekerjaan dan pendapatan. Kata Kunci: VAT, kos Pematuhan, kos pematuhan Dalaman, kos pematuhan Luar, SMEs, Algeria V ACKNOWLEDGEMENT In the name of Allah the most gracious and the most merciful. Alhamdulillahi alladhi bi niimatihi tatimmus salitu. All praise be to Almighty Allah the lord of the universe, whose blessings, mercy and guidance made it possible for me to complete this challenging journey of having M.Sc (International Accounting). Peace and blessings of Almighty Allah be to our noble prophet Muhammad S.A.W, members of his family, companions and those follow their path till the day of resurrection. I have to appreciate the efforts of my supervisor, Dr. Muzainah binti Mansor for taking the pain of going through my work, making corrections and recommendations that did not only put me on the right track but also make the whole work into reality, I remain indebted to you. The efforts of my discipline and lovely parent for their spiritual and moral support, prayers and encouragement to remain firm in a good track should also be appreciated, may Almighty Allah rewards them with best among his rewards. And also my brothers and sister for suport me and Mr Ahmed bachier Ferdjani who was first support me to finish my master and all family Ferdjani, I say big thank you to you Sir. Let me use this medium to appreciate the untiring prayers and supports from my family members, I remain yours forever. Efforts and guidance of the academic staff of school of accountancy and the university library in providing conducive atmosphere for leaning and research throughout the period of my study should not go unacknowledged. Last but not the least, is to thank my course mates and friends both local and international in Universiti Utara Malaysia. Wa akhiri daawana anil hamdulillahi rabbil alamina VI TABLE OF CONTENTS CERTIFICATE OF THESES WORK ................................................................................ II PERMISSION TO USE .....................................................................................................III ABSTRACT ...................................................................................................................... IV ABSTRAK .......................................................................................................................... V ACKNOWLEDGEMENT ................................................................................................ VI TABLE OF CONTENTS……………………………….…………………………........VII LIST OF TABLES .............................................................................................................. X LIST OF ABBREVIATIONS .......................................................................................... XII CHAPTER ONE: INTRODUCTION 1.1 Background of the Study ...............................................................................................1 1.1.1 VAT as an important source of revenue for the government……………………… ..4 1.1.2 Overview of VAT in Algeria ......................................................................................6 1.1.3 Small and Medium Enterprise (SMEs) in Algeria ......................................................6 1.2 Problem Statement .........................................................................................................7 1.3 Research Question .........................................................................................................9 1.4 Research Objectives .....................................................................................................10 1.5 Significance of the study ..............................................................................................10 1.6 Scope of the Study .......................................................................................................11 1.8 Structure of the thesis...................................................................................................11 CHPTER TWO: LITERATURE REVIEW 2.1 Introduction ..................................................................................................................13 2.2 Tax Compliance Costs .................................................................................................13 VII 2.2.1 Tax Compliance Costs Studies .................................................................................14 2.3 Value Added Tax (VAT) .............................................................................................23 2.3.1 Value Added Tax (VAT) Compliance Costs Studies ...............................................23 2.4 Summary of the Chapter ..............................................................................................36 CHAPTER THREE: METHOLOGY 3.1 Introduction ..................................................................................................................37 3.2 Method of Data Collection ...........................................................................................37 3.3 Questionnaire Design ...................................................................................................37 3.4 Pilot Study ....................................................................................................................38 3.5 Population of the Study and Sample Size ....................................................................38 3.6 Sampling Technique ....................................................................................................40 3.7 Measurement of Compliance Costs .............................................................................40 3.7.1 Section A of Questionnaire .......................................................................................41 3.7.2 Section B of Questionnaire .......................................................................................41 3.7.3 Section C of Questionnaire .......................................................................................41 3.7.4 Section D of Questionnaire .......................................................................................42 3.8 Method of Data Analysis .............................................................................................42 3.9 Descriptive Analysis ....................................................................................................42 3.10 Research Model .........................................................................................................42 3.10 Summary ....................................................................................................................43 CHAPTER FOUR: FINDINGS AND DISCUSSION 4.1Introduction ...................................................................................................................44 4.2 Demographic Background of the Respondents............................................................45 VIII 4.3 Internal Tax Compliance Cost .....................................................................................56 4.4Additional Analysis ......................................................................................................61 4.5 Cross-Tabulation Analysis ...........................................................................................66 4.6 Discussion ....................................................................................................................84 4.6.1 External Tax Compliance Cost .................................................................................85 4.7 Cross Tabulation Analysis ...........................................................................................92 4.8 Summary of the Chapter .............................................................................................94 CHAPTER FIVE: CONCLUSION AND RECOMMENADTIONS 5.1 Conclusion ...................................................................................................................95 5.2 Recommendations ........................................................................................................97 5.3 Limitations and Suggestion for Future Research .........................................................97 REFERENCE ...................................................................................................................98 Appendix A: .....................................................................................................................110 Research questionnaire ....................................................................................................110 APPENDIX C: .................................................................................................................125 MAP OF ALGERIA SHOWING 48 STATE AND ADRAR STATE ............................125 IX