Tax compliance costs in developing countries: Evidence from Ethiopia

Tax compliance costs in developing countries: Evidence from Ethiopia

This paper estimates tax compliance costs for business taxpayers in Ethiopia; it also assesses factors affecting the magnitude of tax compliance costs. The paper uses survey data from a scientific sample of 1,003 Ethiopian businesses. Total tax compliance costs in the year 2012/13 were estimated to be about 4.5 percent of tax revenue collection. Tax compliance costs were found to be regressive and there was a higher burden for smaller businesses in Ethiopia than those in Kenya or Nepal. Business profit tax, value added tax (VAT) and turnover tax (ToT) constituted the largest share of tax compliance costs. Simplifying the tax regime for smaller businesses, reducing the frequency of VAT filing for relatively small businesses, raising the VAT threshold and revisiting mandatory VAT sector specific registration requirements were suggested areas of reform.