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  • Coercion or Persuasion? Making Large Corporations Tax Compliant in Bangladesh

    By

    MD ZAKIR HOSSAIN AKHAND

    A thesis submitted to

    The University of Birmingham

    for the degree of

    DOCTOR OF PHILOSOPHY

    International Development Department School of Government and Society University of Birmingham May 2012

  • University of Birmingham Research Archive

    e-theses repository

    This unpublished thesis/dissertation is copyright of the author and/or third parties. The intellectual property rights of the author or third parties in respect of this work are as defined by The Copyright Designs and Patents Act 1988 or as modified by any successor legislation.

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  • Abstract To induce tax compliance, two opposite approaches are used: the coercive and the persuasive:

    firm action versus collaboration. Little attention has been paid to the comparative success of

    these two approaches a situation this thesis seeks to remedy by investigating the

    effectiveness of three coercive and three persuasive instruments among large corporate

    taxpayers registered with the LTU of Bangladesh. Following an analysis of survey data using

    binary and multilevel logit and CHAID models, and an analysis of elite interviews employing

    an interpretivist approach, the findings suggest that coercion or persuasion are less likely to

    improve tax compliance when used separately than when used in combination, although

    coercion seems the more powerful of the two. Factors underlying the power of the coercive

    approach are the rationality and regularity of its application, along with its legal and financial

    imperatives. Reasons contributing to the appeal of the persuasive approach are a reduction in

    tax compliance costs, an improvement in accountability and a reduction in knowledge gaps

    between taxpayers and tax administrators, and coordination of the various tax laws.

  • Dedication

    To my late father, Md Abul Hossain Akhand, for his endless love and encouragement

  • ACKNOWLEDGEMENT An attitude of gratitude creates blessings. I am deeply grateful to my lead supervisor, Dr Michael Hubbard, who to me and many of his students is a fount of wisdom and inspiration. His exceptional support, generosity, and interest in my work beyond the call of duty made this thesis a success. There is no way I can repay the debt I owe to this kind-hearted English gentleman. I am also grateful to my co-supervisors: to Simon Delay for his sharp intellectual stimulation; and to Dr Peter Watt for his insightful comments.

    It is a great sadness to me that both my parents passed away during the years of my PhD studies. My father, whose only passion was reading reading for pleasure was an intellectual by instinct, obtaining masters degrees in three separate disciplines (English Literature, Modern History and Law), despite coming from a humble background. My father was the first to ignite in me the idea of doing doctoral research; and my mother, a school teacher all her life and my first teacher, sustained that flame through her emotional support. My loving memories of them gave me the strength to rise to the challenge of doing this research and to finish it on time.

    I am proud of my wife, Sabina Sharmin, and my only son, Sam a young cricket connoisseur and future physicist. My wife made great sacrifices to help me reach my goal, risking her career and her domestic comfort. She cheerfully endured all the crazy demands of my PhD life and never gave up her hopes for me. It is unlikely that I would have survived the stress of doctoral research without her support. I know that as a husband and father I failed to reconcile my obsession with academic life and the deep needs of our family during these years. I am looking to the future to make amends for the strains I have put upon them.

    I am also grateful to my sister, Jahanara Hossain, for her boundless concern for my academic progress and my mental well-being, and to my brothers Kamal Hossain and Sajjad Akond for their strong support. I am indebted to Birmingham Universitys International Development Department for an award towards the payment of my tuition fees, and to the UK Chartered Institute of Taxation (CIOT) for its financial support via a dissertation grant. Special recognition goes to Professor Stephen McKay, Professor Stephen Gorard and Dr Eric Yeboah for their advice on quantitative analysis. And, finally, I am grateful to Helen Hancock for her splendid advice on written English.

  • 2.7.4 Simplified Tax Law .................................................................................................... 43 2.7.5 Taxpayer Service ........................................................................................................ 46 2.7.6 Mutual Understanding ................................................................................................ 47

    2.8. Who are the Large Corporate Taxpayers? ..................................................................... 49 2.8.1 Large Taxpayer Units (LTUs) and Large Corporate Taxpayers ................................... 50 2.8.2 Challenges and Benefits of Managing Large Corporate Tax Compliance .................... 54 2.9 Large Corporate Tax Compliance Models: Are They Coercive or Persuasive?............... 57 2.9.1 Co-operative Compliance Model (CCM) .................................................................... 57 2.9.2 Horizontal Monitoring Approach and Compliance Covenants..................................... 60 2.9.3 Real Time Compliance Approaches ............................................................................ 62

    TABLE OF CONTENTS CHAPTER I.......................................................................................................................... 1 INTRODUCTION ................................................................................................................ 1

    1.1 Introduction and Statement of the Problem ...................................................................... 1 1.2 Aims and Objectives of the Study.................................................................................... 5 1.3 Main Research Question and Methodology ..................................................................... 5 1.4 Scope of the Study........................................................................................................... 7 1.5 Relevance of the Study .................................................................................................... 8 1.6 Structure of the Study .................................................................................................... 11

    CHAPTER II ...................................................................................................................... 13 COERCIVE AND PERSUASIVE TAX COMPLIANCE INSTRUMENTS AND THEIR IMPLICATIONS FOR LARGE CORPORATIONS............................................................ 13 2.1 Introduction................................................................................................................... 13 2.2 Tax Compliance: A Conceptual Review ........................................................................ 14

    2.2.1 Tax Evasion and Avoidance ....................................................................................... 17 2.2.2 Types of Tax Compliance: Filing, Reporting and Payment ......................................... 19

    2.3 Do We Need a Different Framework to Study the Tax Compliance of Large Corporations?...................................................................................................................... 22 2.4 Tax Compliance Theories: Do They Advocate Coercion Or Persuasion? ...................... 24 2.4.1 Expected Utility Theory ............................................................................................. 25 2.4.2 Prospect Theory ......................................................................................................... 26 2.4.3 Deterrence Theory ...................................................................................................... 27 2.4.4 Intention Theory ......................................................................................................... 28 2.4.5 Norms of Compliance................................................................................................. 29 2.4.6 Inertia Model.............................................................................................................. 30 2.4.7 Expectancy Theory..................................................................................................... 30 2.4.8 The political economy model of tax compliance ......................................................... 31

    2.5 Do Coercion and Persuasion Conflict or Complement?.................................................. 32 2.6 How to Balance Coercion and Persuasion? .................................................................... 35 2.7 Instruments of Coercion and Persuasion in Managing Tax Compliance ......................... 39 2.7.1 Tax Audit ................................................................................................................... 39 2.7.2 Tax Penalty ................................................................................................................ 41 2.7.3 Imprisonment ...............................................................................................

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