VAT Compliance Cost and Compliance Behaviour Among Smes In UAE

The implementation of value added tax (VAT) imposes a compliance cost burden on Small and Medium Enterprises (SMEs). This burden may lead to non-compliance or partial compliance with the VAT system. In recent decades, there has been considerable global research on tax compliance costs, examining the development of tax obligations, especially in the United Arab Emirates (UAE). This study aims to identify the compliance costs, both internal and external, and their effects on the behavior of SMEs in the UAE under the Economic Deterrence theory and Institutional Theory. With that, a quantitative methodology was adopted. Personal engagement, including both physical visits and email communication, was conducted, resulting in responses from 384 participants. All collected data were analysed using structural equation modelling (PLESEM). As one of the pioneering research studies conducted in the UAE, integrating the relationship between compliance costs and behavior, it significantly contributes to the literature on VAT compliance. The analysis revealed several significant relationships between independent variables and VAT compliance behavior. Complexity positively influenced penalty imposition, which in turn affected VAT compliance behavior. Compliance cost also positively impacted VAT compliance behavior. Moreover, the probability of detection and tax rate were positively associated with VAT compliance behavior. However, the relationship between complexity and VAT compliance behavior via probability of detection was not significant. Additionally, penalty imposition leading to tax incentives positively influences VAT compliance behavior. These findings highlight the multifaceted nature of factors influencing VAT compliance behavior and highlight the importance of penalties, compliance costs, probability of detection, and tax incentives in shaping compliance behavior among taxpayers. Thus, this research emphasizes the substantial influence of factors like complexity, penalty, and probability of detection on compliance behavior within SMEs in the UAE. Although the study did not find a significant relationship between complexity and penalty, it underscores the necessity of comprehending the internal and external costs of VAT compliance among SMEs in the UAE. These insights are important for policymakers and stakeholders seeking to improve VAT compliance practices and establish a supportive regulatory framework for SMEs in the UAE.