Accepted Manuscript

Title: Corporate tax compliance: Is a change towards

trust-based tax strategies justified?

Authors: Maarten Siglé, Sjoerd Goslinga, Roland Speklé,

Lisette van der Hel, Robbert Veldhuizen

PII: S1061-9518(18)30149-6
DOI: https://doi.org/10.1016/j.intaccaudtax.2018.06.003
Reference: ACCAUD 243

To appear in: Journal of International Accounting, Auditing and Taxation

Please cite this article as: Siglé M, Goslinga S, Speklé R, van der Hel L,
Veldhuizen R, Corporate tax compliance: Is a change towards trust-based tax
strategies justified?, Journal of International Accounting, Auditing and Taxation (2018),
https://doi.org/10.1016/j.intaccaudtax.2018.06.003

This is a PDF file of an unedited manuscript that has been accepted for publication.
As a service to our customers we are providing this early version of the manuscript.
The manuscript will undergo copyediting, typesetting, and review of the resulting proof
before it is published in its final form. Please note that during the production process
errors may be discovered which could affect the content, and all legal disclaimers that
apply to the journal pertain.
 Corporate tax compliance:

Is a change towards trust-based tax strategies justified?

Maarten Sigléa,b,1 , Sjoerd Goslingab,c,2, Roland Spekléa,3,

T
Lisette van der Hela,b,4, Robbert Veldhuizenb,5

R IP
a
Nyenrode Business Universiteit, Straatweg 25, 3621 BG Breukelen, The Netherlands

SC
b
Netherlands Tax and Customs Administration, Laan op zuid 45, 3072 DB Rotterdam, The

Netherlands. Maarten Siglé, Sjoerd Goslinga, Lisette van der Hel and Robbert Veldhuizen work for

U
the Netherlands Tax and Customs Administration. Their contribution to this paper is written on a
N
personal note and does not necessarily reflect statements and/or opinions of the Netherlands Tax and
A
Customs Administration.
M

c
Department of Social & Organizational Psychology, Leiden University, Wassenaarseweg 52,

2333 AK Leiden, The Netherlands

D

1
Corresponding author, ma.sigle@belastingdienst.nl, T. +31652486462
TE

2
s.goslinga@belastingdienst.nl
3
r.spekle@nyenrode.nl
EP

4
l.vdhel@nyenrode.nl
5
rj.veldhuizen@belastingdienst.nl
CC
A

1
 Corporate tax compliance

Is a change towards trust-based tax strategies justified? 1

T
IP
Maarten Siglé (Corresponding author), Nyenrode Business Universiteit,

R
Netherlands Tax and Customs Administration,

SC
ma.sigle@belastingdienst.nl, laan op zuid 45, Rotterdam, The Netherlands; T. +31652486462

U
Sjoerd Goslinga, Leiden University, Netherlands Tax and Customs Administration,
N
s.goslinga@belastingdienst.nl
A
M

Roland Speklé, Nyenrode Business Universiteit,

r.spekle@nyenrode.nl
D
TE

Lisette van der Hel, Nyenrode Business Universiteit, Netherlands Tax and Customs Administration,

l.vdhel@nyenrode.nl
EP

Robbert Veldhuizen, Netherlands Tax and Customs Administration,

CC

rj.veldhuizen@belastingdienst.nl 2
A

1
This paper has greatly benefited from comments and suggestions by two anonymous reviewers. We also
appreciate valuable feedback from participants in EIASM’s 5th Workshop on Current Research in Taxation and
a seminar at Nyenrode Business University.
2
Maarten Siglé, Sjoerd Goslinga, Lisette van der Hel-Van Dijk and Robbert Veldhuizen work for the
Netherlands Tax and Customs Administration. Their contribution to this paper is written on a personal note and
does not necessarily reflect statements and/or opinions of the Netherlands Tax and Customs Administration.

2
Abstract

Both the power of tax authorities to detect and punish non-compliance and the perceived trust in the

tax authorities are generally assumed to affect tax compliance. In the present study, we build from the

Slippery Slope Framework (SSF) to examine the role of trust and power in corporate tax compliance.

Survey data collected among representatives of large (profit and not-for-profit) organisations in the

T
Netherlands (n=271) show a positive relationship between trust and tax compliance. Power appears to

IP
be negatively associated with voluntary compliance, but we find no significant relationship between

power and enforced compliance. Furthermore, we find a moderating effect of power on the

R
relationship between trust and voluntary compliance: high power appears to undermine the positive

SC
effect of trust on self-reported voluntary compliance. Results also indicate that enforced compliance is

U
not related to self-reported tax aggressiveness, but we do observe a positive association between

enforced compliance and self-reported tax minimization. This association, however, is not significant
N
if we exclude the not-for-profit organisations from the analysis. Overall, these results can be
A

interpreted as an encouragement for the worldwide development of trust-based regulatory activities

M

(e.g. cooperative compliance strategies). Implications for future research are discussed.
D

Keywords: corporate tax compliance; slippery slope framework; trust; power

TE
EP

This research did not receive any specific grant from funding agencies in the public, commercial, or

not-for-profit sectors.
CC
A

3
1. Introduction

Large organisations are important for a country’s state budget. A considerable part of these

organisations pay corporate income tax, but they also act as withholding agents for various taxes and

levies such as payroll tax, value added tax, and taxes on certain cross-border payments like dividends,

royalties, and interest (OECD, 2009). In recent years, large organisations have increasingly been

criticised for avoiding taxes, and there is growing public and political indignation about the use of

T
aggressive tax planning arrangements by some of these organisations.

IP
Given the importance of corporate tax compliance, empirical research regarding large

organisations’ tax behaviour is surprisingly scarce. The few studies that have been conducted

R
generally focus on economic determinants of corporate tax compliance, such as tax rates, audit

SC
probabilities, and other deterrent factors. Research among private taxpayers, self-employed individuals

U
and small business owners, however, shows that sociological and psychological factors are at least as

important as economic factors in explaining differences in tax compliance (e.g. Goslinga & Denkers,
N
2009; Hartner, Rechberger, Kirchler, & Schabmann, 2011).
A

This insight has also been noted by regulators. Whereas traditionally, regulators generally
M

embraced a power-based regulatory strategy built on economic deterrence, that approach now seems to
D

be giving way to a normative, trust-based strategy utilising persuasion and moral appeal (e.g. Ariel,

2011). The effectiveness of these two regulatory strategies has been the subject of scholarly debate,
TE

but the emerging consensus seems to be that a mix of both strategies is optimal (Shapiro &
EP

Rabinowitz, 1997), and that the use of power- and/or trust-based regulatory instruments by tax

authorities should depend on the motives (or motivational postures) of taxpayers (Braithwaite, 2008).
CC

The consensus, however, is largely based on studies of tax behaviour of individuals, and only very few

empirical studies have examined the effectiveness of the two strategies (and their combination) in
A

supporting tax compliance of large organisations.

The present study aims to contribute to the literature by empirically testing the roles of power

and trust as determinants of corporate tax compliance. While power has received some attention

regarding corporate tax compliance (e.g. Joulfaian, 2000; Hoopes, Mescall, & Pittman, 2012;

DeBacker, Heim, Tran, & Yuskavage, 2013; Bame-Aldred, Cullen, Martin, & Parboteeah, 2013), the

4
role of trust and the interaction between power and trust have not. A better understanding of the

factors that determine tax compliance of large organisations may contribute to improved regulatory

strategies for such organisations (OECD, 2010) which could be highly relevant for tax authorities.

Indeed, many regulators are in the process of changing their large organisation tax compliance strategy

towards a more trust-based approach (Kirchler, Kogler, & Muehlbacher, 2014), such as the so-called

cooperative compliance strategies (OECD, 2013). In addition, the OECD (2013) encourages tax

T
authorities to combine power- and trust-based approaches in their so-called compliance risk

IP
management approaches. Tax authorities’ compliance risk management approaches focus on the

underlying determinants of (non-) compliance instead of treating the symptoms of non-compliance

R
(OECD, 2004; Van der Hel-Van Dijk & Siglé, 2015). The perceived power of tax authorities (e.g. in

SC
the form of perceived detection probabilities) and the trust in tax authorities (e.g. in the form of

U
perceived procedural justice) are important examples of these underlying determinants. Therefore, tax

authorities apply (a mixture of) power- and trust-based approaches to affect these underlying
N
determinants. By exploring the role of trust and power in corporate tax compliance, this study provides
A

new evidence on the ongoing discussion regarding the effectiveness of employing trust- and power-
M

based regulatory strategies.

D

The remainder of this paper is structured as follows. In section 2, we provide a general

theoretical background to tax compliance of large organisations. In that section, we also introduce the
TE

so-called ‘Slippery Slope Framework’ (SSF) as our theoretical starting point, and we develop the
EP

hypotheses. In section 3 we describe methods and measurement. The results are presented in section 4,

and section 5 discusses our conclusions.

CC

2. Theoretical background and development of hypotheses

A

2.1 Tax compliance

Tax compliance is difficult to define, and previous studies often neglect to offer a definition or

explanation of the term (Hasseldine & Morris, 2013). Hasseldine and Morris (2013) stress that it is the

tax code that gives meaning to tax (non-)compliance. The OECD (2004, p. 7) applies the same

approach, defining tax compliance as a legal concept with four categories of obligations: 1)
5
registration in the tax system, 2) timely filing or lodgement of requisite taxation information, 3)

reporting of complete and accurate information, and 4) payment of taxation obligations on time. In a

similar vein, Slemrod (2004) defines non-compliance as not reporting and/or not paying what is

legally owed. However, these legalistic approaches may run into practical difficulties, because the tax

law is not always precise (James & Alley, 2002). Furthermore, it is a point of contention whether

compliance is just the act of obeying with the letter of the law, or whether it should also include

T
obedience with the spirit of the law. Taxpayers and tax authorities may be inclined to answer this

IP
question differently, which makes tax law even more ambiguous (Bergman, 1998). The legalistic

definition of tax compliance also ignores the unintentional ways in which non-compliance can occur,

R
including memory lapses, calculation errors or inadequate knowledge of tax laws (Weigel, Hessing, &

SC
Elffers, 1987). From the perspective of the tax authorities, the distinction between intentional and

U
unintentional non-compliance is important for determining the appropriate regulatory response

(OECD, 2009). For example, when non-compliance is a result of inadequate knowledge of tax laws,
N
service provision (e.g. education) might be a more effective regulatory strategy than enforcement.
A

Therefore, it may be useful to study the willingness of taxpayers to pay taxes, rather than to focus on
M

the fulfilment of legal obligations. The willingness of taxpayers to pay taxes is referred to as ‘tax

morale’, and is defined as the intrinsic motivation of taxpayers to pay taxes (Ruiu & Lisi, 2011).
D

Many empirical studies use tax avoidance as an indicator of corporate tax (non-)compliance. Tax
TE

avoidance, however, lacks a universally accepted definition (Hanlon and Heitzman, 2010), and can
EP

have different meanings in different countries (Hasseldine & Morris, 2013). Hanlon and Heitzman

(2010) see tax avoidance as a conceptual continuum of tax planning strategies, with making use of
CC

‘perfectly legal’ opportunities to minimize the tax liability at one end, and the use of tax shelters closer

to the other end of this continuum. We subscribe to this approach, and will use multiple proxies for
A

(non-)compliance in an attempt to cover the full continuum in our analyses.

2.2 Tax compliance of large organisations

The sample of this study consists of organisations that have been categorised by the NTCA as large.

The NTCA uses the following criteria for this classification: a) turnover exceeds ten million euros and

6
gross wages exceed two million euros; or b) gross wages exceed eight million euros; or c) assets

exceed one billion euros. Consistent with standing practice in many countries, we include not-for-

profit organisations, provided they meet these criteria.

Studies of tax compliance behaviour of large organisations have tended to focus on economic

factors. These studies generally found strong similarities between large organisations and individual

taxpayers in their response to these economic factors (Hanlon & Heitzman, 2010). For example,

T
deterrence instruments such as a higher detection probability (Joulfaian, 2000; Hoopes, Mescall, &

IP
Pittman, 2012; DeBacker, Heim, Tran, & Yuskavage, 2013; Bame-Aldred, Cullen, Martin, &

Parboteeah, 2013) and higher fines (Kamdar, 1997) are generally found to positively affect tax

R
compliance of large corporations, similar to their effect on individuals (e.g. Cebula, 2013). However,

SC
the effects of trust and trust-related factors (such as procedural justice) on tax compliance of large

U
organisations have largely escaped research attention, even though there is some reason to believe that

the role of these factors in tax compliance might be different for large organisations than for individual
N
taxpayers (Hanlon & Heitzman, 2010; Slemrod, 2004).
A

An important difference between individuals and organisations is that individuals in organisations

M

work (by definition) in ‘groups’, usually with several actors holding varying degrees of responsibility
D

(Ariel, 2011). Employees acting on behalf of a firm experience different incentives than individual

taxpayers who bear the tax expenses themselves. These incentives are the main focus of the growing
TE

literature that studies the effects of manager compensation on corporate tax compliance (Armstrong,
EP

Blouin, & Larcker, 2012; Gaertner, 2014; Powers, Robinson, & Stomberg, 2013; Rego & Wilson,

2012). But large organisations differ from private taxpayers in several other respects as well (OECD,
CC

2009). For example, large organisations are more complex, especially if they operate internationally,

and are perceived as more powerful opponents of tax authorities (OECD, 2009 & 2013). Large
A

organisations are (financially) capable to hire professional advisors to manage tax planning and

compliance affairs, which puts them in a stronger position to contest tax laws and the tax authorities

(Braithwaite, 2002; McBarnet, 2002). The effects of these differences on compliance, however, have

yet to be explored, both theoretically and empirically.

2.3 The slippery slope framework

7
To study the role of trust and power in a setting of large organisations, we build from a theoretical

framework known as the ‘Slippery Slope Framework’ (SSF). The SSF was introduced by Kirchler,

Hoelzl and Wahl (2008) and integrates empirical findings from economics, sociology and psychology.

The SSF identifies two central factors that influence taxpayer compliance, namely the perceived power

of, and trust in, tax authorities (Kogler, Batrancea, Nichita, Pantya, Belianin, & Kirchler, 2013). Power

of the tax authorities is defined as the perception of taxpayers “of tax authorities’ capacity to detect

T
and punish tax crimes” (Wahl, Kastlunger, & Kirchler, 2010, p. 385). Trust in the tax authorities is

IP
“the general opinion of individuals and social groups that the tax authorities are benevolent and work

beneficially for the common good” (Kirchler et al, 2008, p. 212). While both factors can stimulate

R
compliance, the quality of compliance can range from enforced compliance to voluntary compliance.

SC
The SSF postulates that a deterrence-based regulatory strategy increases the perceived power

U
of tax authorities and results in enforced compliance, whereas a trust-based regulatory strategy

increases trust in tax authorities and results in voluntary compliance. Voluntary compliance reflects a
N
willingness to comply out of a sense of moral obligation, while enforced compliance reflects a feeling
A

of being coerced to comply (Kogler et al., 2013). Both voluntary and enforced compliance are
M

assumed to contribute to tax compliance in general (Kogler et al., 2013). The SSF also emphasizes the
D

interaction between power and trust, postulating that the effects of power and trust depend on each

other (Lisi, 2012).

TE

According to the SSF, the effectiveness of a strategy of a tax authority in realising high levels
EP

of compliance is partly dependent on the so-called ‘tax climate’. The tax climate in society can vary on

a continuum between antagonistic and synergistic (Kirchler et al., 2008). In an antagonistic climate,
CC

tax authorities perceive taxpayers as ‘robbers’ and expect them to evade taxes whenever it is beneficial

for them. In such a climate, the assumption is that increasing power can enforce taxpayer compliance.
A

The disadvantage of an antagonistic climate is that taxpayers do not develop an intrinsic motivation to

comply. They are likely to perceive tax authorities as ‘cops’ and to behave like opponents of

authorities, contesting the law. In such a climate, costly enforcement measures (i.e. the exercise of

power) of tax authorities are continuously required (Gangl, Hofmann, & Kirchler, 2012).

8
 In a synergistic climate, in contrast, tax authorities perceive taxpayers as ‘clients’ who expect

and deserve professional service and fair procedures (Gangl et al., 2012). In such a climate, increasing

trust in tax authorities is more likely to improve (voluntary) compliance than increasing perceived

power (Kirchler et al., 2008). Taxpayers perceive tax authorities as legitimate and as servants of

society, and laws as morally appropriate. In this climate, taxpayers are more willing to cooperate and

to obey rules (Tyler, 2006). Since the tax climate can vary on a continuum and because real life

T
settings will typically be situated somewhere between the two extremes, the SSF asserts that optimal

IP
tax compliance usually requires a combination of power and trust (Prinz, Muehlbacher, & Kirchler,

2014).

R
With regard to both individual and self-employed taxpayers, several studies provide evidence

SC
supporting the hypothesised relationships of the SSF (Benk & Budak, 2012; Gangl, Hofmann, Hartl,

U
& Kirchler, 2016; Gobena & Van Dijke, 2016; Hofmann et al., 2014; Kirchler & Wahl, 2010; Kogler

et al., 2013; Liu, 2014; Mas’ud, Aziah, & Saad, 2014; Muehlbacher, Kirchler, & Schwarzenberger,
N
2011; Ruiu & Lisi, 2011). These studies generally find that conditions of high trust and/or high power
A

are positively related to tax compliance. Also, they typically find that trust is positively related to
M

voluntary compliance, while power is positively related to enforced compliance (Kogler et al., 2013).
D

Support, however, is not unambiguous for all hypothesised relationships, and some mixed findings are

reported as well. For instance, some studies find no relationship between enforcement and tax
TE

compliance (Kirchler & Wahl, 2010), while others report a positive association between enforcement
EP

and tax evasion (Kastlunger et al., 2013). Furthermore, power is sometimes found to be negatively

associated with voluntary compliance (Wahl et al., 2010), while other studies find a positive relation
CC

(Benk & Budak, 2012; Muehlbacher et al., 2011). Even though there is a growing body of empirical

studies that support the SSF (Hofmann, Gangl, Kirchler, & Stark, 2014), the mixed results indicate
A

that additional empirical work is still valuable. Moreover, since the SSF has never been tested with

regard to large organisations, it is not clear whether or to what extent findings generalise to this group

of taxpayers.

2.4 Hypotheses

Trust

9
Trust in the tax authorities refers to the general belief in society that tax authorities work towards the

common good. When tax authorities act fairly towards taxpayers, they foster trust and thus stimulate

voluntary compliance. Trust is considered the main factor in explaining voluntary tax compliance of

individual taxpayers (Kogler et al., 2013). As mentioned, however, in an organisational context,

people work (by definition) in groups (Ariel, 2011). The resulting group dynamics and organisational

culture can affect trust building and its effects on behaviour (Gunningham & Sinclair, 2009).

T
Inter-organisational trust – as opposed to trust between individuals - has received much

IP
attention as an independent subject of research (e.g. Bachmann & Zaheer, 2013). Inter-organisational

trust is seen as a key element for successful cooperation between organisations and between

R
organisations and government (Six, 2013). Zaheer, McEvily and Perrone (1998) show that inter-

SC
organisational trust is rooted in interpersonal trust between individual boundary spanners of two

U
organisations (i.e. the tax authority and a large organisation), which becomes institutionalised over

time. Trust at the organisational level is, therefore, dependent on trust at the individual level
N
(Rousseau, Sitkin, Burt, & Camerer, 1998; Six, 2013). Given this common origin, we expect the role
A

of trust in compliance to be similar for large organisations and individual taxpayers. There is some
M

indirect evidence to support this expectation. Based on survey data, Nur-Tegin (2008) report a positive
D

association between trust in the government as a whole and tax compliance of large organisations. The

findings of Gunningham and Sinclair (2009) corroborate this role of trust in regard to intra-
TE

organisational trust. They found that trust between workers and management was key in improving
EP

regulatory compliance of a large organisation. In addition, the results of Nielsen and Parker (2009)

indicate that co-operative behaviour by regulators breeds an accommodating, co-operative attitude on

CC

the part of large organisations in the context of the Australian Consumer and Competition

Commission. Therefore:
A

H1: Perceived trust in the tax authorities is positively related to voluntary tax compliance.

But then, trust-based regulatory approaches are inherently limited in their ability to improve overall

compliance. One of the main benefits for taxpayers of a trust-based regulatory approach is that it

10
economizes on enforcement activities (Scholz, 1984). This, however, may elicit opportunistic

behaviour by taxpayers who might strategically abuse the trust put in them (Voermans, 2013). For

example, taxpayers might take advantage of the reluctance of tax authorities to further investigate

poorly substantiated tax positions by taking more aggressive tax positions. Thus, if tax authorities

approach taxpayers with good faith, taxpayers have the option not to reciprocate that treatment

(Coglianese & Lazer, 2003; Gunningham, 2010), for instance when the trust-based approach is

T
perceived as coming from a position of weakness (Scholz, 1984). Subsequently, taxpayers might

IP
surmise that the tax authorities are unwilling to actually punish non-compliance in fear of decreasing

perceived trust. As a result, when trust increases, the feeling that one is forced to pay taxes might

R
decrease (Muehlbacher et al., 2011). Accordingly:

SC
U
H2: Perceived trust in the tax authorities is negatively related to enforced tax compliance.
N
Power
A

Power of the tax authorities is defined as the perception of taxpayers “of tax authorities’ capacity to
M

detect and punish tax crimes” (Wahl et al., 2010, p. 385). Empirical results regarding the effects of the
D

exercise of power of tax authorities include findings on prior audits (Bernasconi, Corazinni, & Seri,

2014), fines (e.g. Cebula, 2013) and detection probabilities (Phillips, 2014). Most studies in this
TE

stream of research focus on individual taxpayers or small business taxpayers, and generally find a
EP

positive effect of power on tax compliance.

Empirical evidence of the effects of power on tax compliance by large organisations is limited.
CC

There is, however, some empirical evidence from small and medium-sized organisations. Niu (2011),

for instance, document a positive relationship between tax audits and sales tax compliance. Similarly,
A

Hoopes et al. (2012) and Bame-Aldred et al. (2013) report evidence to suggest that higher audit

coverage increases tax compliance by organisations. Di Porto (2011), on the other hand, found a

negative effect of audits on the compliance of organisations regarding payroll taxes; the number of

declared workers actually decreased with audit activities. Finally, Murray (1995) and Anderson and

Bodvarsson (2005) found no effect of the level of audit probabilities on the tax compliance of

11
organisations. As one of the very few studies relying solely on data from large organisations,

DeBacker et al. (2013) found evidence of a lower effective corporate income tax rate in the years

following an audit, suggesting successful tax evasion in the slipstream of an audit.

The mixed results suggest an ambiguous, multi-faceted response of taxpayers to the use of

power by tax authorities, which may also depend on how taxpayers experience this use of power. If

taxpayers are confronted with additional tax liabilities and penalties after an audit, this could increase

T
their perception of the power of the tax authorities to detect non-compliance, resulting in increased

IP
compliance. In practice, however, an audit may fail to discover (all) non-compliant behaviour, and

actually detected non-compliance could go unpunished (Andreoni, Erard, & Feinstein, 1998). In that

R
case, the exercise of power may have no effect (or even a negative effect) on subsequent compliance

SC
decisions. In sum, taxpayers may have diverse reactions when they experience the actual exercise of

U
power. One possible reaction of taxpayers after experiencing an audit is an audit probability update;

they believe it is less likely to be selected for another audit in the near future, leading to less
N
motivation to comply (DeBacker et al., 2013; Di Porto, 2011). Nevertheless, it is likely that when
A

taxpayers do perceive a potential threat of the use of power by tax authorities they respond by
M

increasing their compliance. Thus:

D

H3: The perceived power of tax authorities is positively related to enforced tax compliance.
TE
EP

When power is perceived to be coercive (as opposed to legitimate), it might decrease voluntary

compliance (Wahl et al., 2010). Coercive power creates or supports an antagonistic climate, in which
CC

taxpayers are likely to perceive tax authorities as ‘cops’ and to behave like opponents of authorities,

contesting the law. By being treated as a ‘criminal’, a taxpayer is more likely to behave like one.
A

Regulators’ actions, thus, influence which motive dominates compliance decision-making (Ayres &

Braithwaite, 1992; Etienne, 2011; Gunningham, Thornton, & Kagan 2005). External interventions,

such as audit activities and the possibility of a fine, can undermine intrinsic motivation. This is known

as the ‘crowding-out effect’ (Feld & Frey, 2007). With regard to tax compliance, there is empirical

evidence regarding the crowding-out effect for individuals and small organisations (e.g. Gangl,

12
Torgler, Kirchler, & Hofmann, 2013). Regarding large organisations, however, empirical evidence is

still lacking. Therefore, we formulate our hypothesis in line with the general predictions of the

‘motivation crowding theory’ (Frey & Jegen, 2001):

H4: The perceived power of tax authorities is negatively related to voluntary compliance.

T
The interaction between trust and power

IP
The perceived power of tax authorities can affect the relationship between trust and voluntary

compliance (Lisi, 2014). Up to a point, the exercise of power is seen as an essential function of the tax

R
authorities, protecting taxpayers against free-riders (Gangl et al., 2012). When tax authorities fail to

SC
provide this protection, this might undermine the positive effects of trust on voluntary tax compliance.

U
For example, if trusting, compliant taxpayers see that non-compliance of others, such as competitors,

goes unpunished, they may decide to level the playing field and lower their own compliance for
N
economic reasons. It might also be that when the power of tax authorities is perceived as low,
A

taxpayers interpret a trust-based approach as coming from a position of weakness. Even firms with
M

generally benign intentions might be encouraged to take advantage of this position and lower their
D

compliance (Scholz, 1984). Thus, we expect low power to attenuate the positive relationship between

trust and voluntary compliance.

TE

On the other hand, the perception of too much power might weaken the effect of trust on
EP

voluntary compliancy (Feld & Frey, 2002). Feld and Frey (2002) describe the relationship between

taxpayers and tax authorities as a psychological contract that is broken when the tax authority is
CC

perceived as distrusting and disrespectful. Accordingly, the use of power can undermine trust,

transforming the contract in the eyes of the taxpayer into a purely extrinsically motivated relationship,
A

and crowding out intrinsic motivation (Six, 2013). As a reliance on coercive power breaks affective

bonds, it hinders the development of a real commitment to collaboration (Inkpen and Currall, 2004).

Furthermore, when the perceived power of tax authorities is sufficiently high, taxpayers may feel that

they are forced to pay taxes, regardless of the level of trust in the tax authorities (Gobena & Van

13
Dijke, 2016). Thus, we expect both low and high power to attenuate the positive relationship between

trust and voluntary compliance.

We conclude:

H5: Both low and high perceived power of the tax authorities attenuate the positive relationship

between trust and voluntary compliance.

T
IP
Tax compliance

For tax authorities, the important outcome of their interactions with taxpayers is the level of actual

R
compliance, irrespective of whether this compliance is achieved through enforcement or cooperation

SC
(Kirchler et al, 2008). However, due to limited capacity, tax authorities are forced to choose between

U
different strategies to achieve their goals. The costs (i.e. manpower) of regulatory strategies necessary

to achieve desired levels of tax compliance are different for a strategy forcing taxpayers to comply and
N
a strategy aimed at fostering trust to encourage taxpayers to comply voluntarily. Yet these strategies
A

have the same ultimate goal: increasing tax compliance behaviour, either by encouraging voluntary
M

compliance through increased trust or by enforcing compliance through increased power. Voluntary

and enforced compliance reflect two different kinds or ‘flavours’ of behavioural intentions that lead to
D

compliance behaviour (Kirchler & Wahl, 2010; Kogler et al., 2013). Trust-based and power-based
TE

regulatory strategies are aimed at influencing these intentions (through the underlying determinants of
EP

compliance behaviour) with the purpose of increasing actual tax compliance. Accordingly:
CC

Voluntary compliance (H6) and enforced compliance (H7) intentions are positively related to actual

tax compliance.
A

Figure 1 visualises our hypotheses. The bold lines represent the postulated relationships (H1 to H7),

while the dotted lines represent the direct effects of trust and power on compliance (for which we

control in our model). Besides controlling for these direct effects, we also control for possible

14
correlations between power and trust, between voluntary and enforced compliance, and between

various operationalizations of compliance (see section 3.2).

[insert Figure 1 about here]

3. Method

3.1 Sample and procedure

T
The data for our study were collected in 2014 through a survey among senior staff responsible for tax

IP
matters of large organisations in The Netherlands (e.g. tax director, head of tax, CFO or controller).

R
The survey data were collected as part of a larger research project of the NTCA that aims to shed light

SC
on the relationship between NTCA’s regulatory strategy for large organisations and tax compliance.

The administration of the survey was commissioned to an external research agency.

U
The research population is the group of 8,558 large organisations in The Netherlands. Because
N
of their unique individual characteristics and structures, the NTCA excluded the largest 81
A
organisations from this group. From the remaining population of 8,477, a sample of 350 organisations
M

was drawn. Because the NTCA is particularly interested in possible compliance effects of its trust-

based cooperative compliance programme,i the sample was stratified to include enough organisations
D

participating in this programme.ii Also, the sample was stratified to include a sufficient number of
TE

organisations that only recently met the criteria to qualify as a large organisation. The final sample

consisted of 95 large organisations participating in the cooperative compliance programme, 180 large
EP

organisations that did not participate in that programme, and 75 organisations that first met the criteria

to qualify as large at the end of 2013.iii

CC

At the start of the research project, the NTCA informed by phone the officials of the selected

350 large organisations about the research project. Next, the NTCA sent an official letter to announce
A

the project and to explain its objectives and procedure. Subsequently, the external research agency sent

a (email) request to participate, including a link to the web-based survey. After two weeks, the

research agency reminded all non-respondents. A week later, senior staff of all selected organisations

received a general message from their contacts within the tax authority to stress the importance of their

15
participation in the research project. The survey was anonymous, so the NTCA did not know who

responded and who did not (which was also made clear to the staff beforehand).

After approximately one month the survey was closed. A total of 271 out of the 350 selected

organisations completed the survey; a response rate of 77%. Respondents are mostly males (84%) with

an average age of 48 years. Additional information about the responding large organisations is

presented in Table 1. 23% of the organisations in the sample are not-for-profits.iv Turnover (without

T
VAT) in 2013 exceeds 200 million Euros for approximately 10% of the organisations and varies for

IP
approximately 80% of them between 10 million Euros and 200 million Euros. The turnover of the

participating organisations is not significantly different from non-participating organisations, nor from

R
the total population of large organisations.

SC
[insert Table 1 about here]
U
N
3.2 Measures
A

Measurement instruments
M

Table 2 provides detailed information on our variables, including the exact wording of the underlying
D

items, and descriptive statistics.

TE

[insert Table 2 about here]

EP

Our dependent variable is corporate tax compliance. As discussed in section 2.1, compliance is
CC

difficult to measure unambiguously. Therefore, we will use a series of proxies for (non-)compliance

that are intended to cover the full spectrum of different meanings attached to the term. With tax
A

minimization (“My organisation explores the limits of tax legislation”), we measure the more

legalistically defined end of the spectrum, while tax aggressiveness (“My organisation uses risky tax

structures”) should cover the other end. Within the Dutch context, ‘risky tax structures’ refer to what

is also known as abusive tax transactions. Following the U.S. General Accounting Office, Slemrod

(2004, p. 880) defines such transactions as “[…] complicated transactions […] to exploit tax loopholes

16
and provide large, unintended tax benefits” from the perspective of legislators. Both tax minimization

and tax aggressiveness are self-reported, single-item measures in our study and are, thus, especially

vulnerable to measurement error. This is especially true for the tax aggressiveness measure. The

wording of this measure has a strongly negative connotation in the Dutch context, which may invite

underreporting, even if respondents are promised anonymity. Therefore, in addition to these two items,

we also use a general self-reported measure of tax compliance, consisting of three items based on the

T
compliance indicators from Slemrod, Blumenthal and Christian (2001). These three compliance

IP
indicators are in line with three of the four categories of taxpayer obligations as named by the OECD

(2004), i.e. timely filing of tax returns, timely payment of due taxes, and reporting complete and

R
accurate information. The fourth obligation mentioned by the OECD is registration in the tax system.

SC
We exclude this from our measure, because not registering is simply not an option for large

organisations.
U
In the context of the SSF, Kirchler et al. (2008, p. 212) describe trust as the perception that
N
“tax authorities are benevolent and work beneficially for the common good.” In this conceptualization,
A

trust is strongly associated with procedural justice, i.e. the perceived fairness of procedures and the
M

enactment of procedures by authorities (Verboon & Van Dijke, 2011). Because taxpayers find it hard
D

to assess whether tax authorities are trustworthy, they use their judgment of procedural justice as a

measure for trustworthiness of the tax authorities (Van Dijke & Verboon, 2010). Accordingly, we
TE

measure perceptions of trust with six items based on Verboon and Van Dijke (2011) (which are, in
EP

turn, based on Tyler, 1997 and Braithwaite & Makkai, 1994), originally developed to measure

procedural justice.
CC

We measure perceptions of power with three items based on Verboon and Van Dijke (2007).

This measure focuses on the probability of detection, because the potential of tax authorities to detect
A

non-compliance is seen as the key element in the perceived power of tax authorities (Kirchler et al.,

2008). Other elements of perceived power, such as penalties, depend on the detection of non-

compliance; i.e. without the detection of non-compliance, no penalty can be imposed (Alm, Sanchez,

& De Juan, 1995).

17
 To measure voluntary compliance and enforced compliance we rely on Kirchler & Wahl

(2010) with some adjustments to the wording of the items to suit the context of our study.

Confirmatory factor analysis

To test the dimensionality of the constructs, we perform a confirmatory factor analysis, including all

intended indicators for the five constructs in our model, i.e. trust, power, enforced compliance,

T
voluntary compliance and self-reported tax compliance. We constrain each indicator to load on its

IP
expected construct, and find that one item for voluntary compliance and two items for enforced

compliance have to be eliminated because of low factor loadings, leaving three items for both

R
constructs.v All other items load on their respective construct. Model fit for the resulting model is

SC
assessed using the following goodness of fit indices (Sharma, Mukherjee, Kumar, & Dillon, 2005):

U
Tucker-Lewis index (TLI), comparative fit index (CFI), root mean square error of approximation

(RMSEA), and normed noncentrality parameter (NNCP). For a smaller sample size (around 200),
N
Sharma et al. (2005) recommend cut-off values of < .08 for RMSE and >.90 for TLI, CFI and NNCP.
A

All indices indicate good fit, with RMSEA= .03, TLI= .99, CFI= .99, and NNCP= .99. Furthermore,
M

the Chi-square to degrees of freedom ratio is 1.22, which is also fully satisfactory.
D

Convergent validity is quite acceptable for all constructs, with all AVE scores exceeding .5

(Hulland, 1999). Discriminant validity is also satisfactory; the square root of the AVE score of each
TE

construct exceeds the bivariate correlations of that construct with the other exogenous constructs in the
EP

model (Fornell & Larcker, 1981).

Because data for all variables are self-reported and collected during the same period of time
CC

through the same survey, common method bias (CMB) is a potential concern. However, the design of

our study alleviates this risk. Firstly, because our respondents are responsible for tax matters within
A

their organisation, they have extensive experience with our topic. Also, the subject of our study has

high personal relevance for the respondents. Therefore, respondents are both able and motivated to

provide accurate answers, which is a precondition to avoid biased responses (MacKenzie & Podsakoff,

2012). Secondly, because our model includes mediators for multiple dependent variables, it is unlikely

that the relationships in our model are part of cognitive maps of our respondents (Chang, Van

18
Witteloostuijn, & Eden, 2010). This mitigates some of the most powerful causes of CMB, i.e. implicit

theories and consistency motif (Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). But most

importantly, we validate two of the proxies for our dependent variable using data from another source

(Speklé and Widener, in press). For every large organisation in the sample, the NTCA has appointed a

‘client coordinator’ as an interface between the organisation and the NTCA. As part of the larger

research project of the NTCA, a survey was sent to the client coordinators. Among other questions, the

T
client coordinators were presented with equivalent statements regarding tax minimization and tax

IP
aggressiveness as the organisational staff in their survey. The scores on these questions are both

significantly correlated with tax aggressiveness as reported by the large organisation, with r = .14 and

R
p < .05 for tax minimization and r = .13 and p < .05 for tax aggressiveness. The answers of the client

SC
coordinators, however, were not significantly related to tax minimization as reported by the large

U
organisation. We believe this to be due to the fact that large organisations and the NTCA view tax

minimization differently. While the NTCA is inclined to see tax minimization and tax aggressiveness
N
as more or less similar ‘antagonistic’ ways by which taxpayers try to minimize tax liabilities, large
A

organisations are likely to view tax minimization as a perfectly acceptable way to lower taxes (cf.
M

Freedman, Loomer, & Vella, 2009).

To assess the extent of any remaining CMB risk, we run a Harman’s one-factor test on the
D

survey items that we used to form the constructs in our model and the items used for tax minimization
TE

and tax aggressiveness (20 items in total). The factor solution (using principal axis analysis without
EP

rotation, details not reported) yields 6 factors with eigenvalues larger than one. The first factor

explains 23.5% of total variance. After oblimin rotation, we find no large cross-loadings (all smaller
CC

than .18). Overall, we conclude that it is unlikely that common method bias is driving our results.

4. Results
A

4.1 Correlations

The Pearson correlation results are presented in Table 3. Trust is positively (negatively) correlated

with voluntary compliance (enforced compliance). Power, on the other hand, is negatively correlated

with voluntary compliance (VC), but not correlated with enforced compliance (EC). Voluntary

compliance (enforced compliance) is negatively (positively) correlated with self-reported tax

19
minimization (TAXMIN) and self-reported tax aggressiveness (TAXAGGR). Also, voluntary

compliance is positively correlated with self-reported tax compliance (TAXCOMP), while enforced

compliance is not correlated with self-reported tax compliance. Finally, self-reported tax

aggressiveness is positively (negatively) correlated with self-reported tax minimization (self-reported

tax compliance) and self-reported tax minimization and self-reported tax compliance are not

correlated. Apparently, our proxies for tax compliance represent different representations of tax

T
behaviour.

IP
[insert Table 3 about here]

R
SC
4.2 Structural model

U
We use structural equation modelling (Amos 22) to test our hypotheses. In our model, we control for
N
correlations between trust and power, voluntary and enforced compliance, our three measures of
A
(non-)compliance, and also for the direct effects of trust and power on the three compliance measures.
M

Since 23% of the sample are not-for-profit organisations, and profit-oriented businesses and not-for-

profit organisations might differ in the way they view tax compliance (for instance due to the absence
D

of shareholder concerns in not-for-profit organisations), we ran a second model omitting not-for-profit

TE

organisations. Results (untabulated) from this smaller sample (n=208) are qualitatively similar to the

full sample findings for most, although not all, of our hypotheses. The few differences that arise
EP

between the two samples are discussed below.

Fit indices for the model all meet recommended thresholds, with Chi2/df=1.27, TLI=.98,
CC

CFI=.98, NNCP= .98 and RMSEA=.04 (see Table 4). Table 4 shows the standardised beta

coefficients of the paths and their significance level. In accordance with our Hypotheses 1 and 4, trust
A

and power have a significant (respectively positive and negative) effect on voluntary compliance. In

line with Hypothesis 2, we find that trust has a negative effect on enforced compliance, although this

effect is only marginally significant (p = .052) when we exclude not-for-profit organisations from our

sample. Contrary to our expectations as postulated in Hypothesis 3, power apparently has no effect on

enforced compliance.
20
 The effects of voluntary compliance on our (non-)compliance measures are mainly in line with

Hypothesis 6. We find a positive (negative) effect of voluntary compliance on self-reported tax

compliance (tax aggressiveness), although we find no effect of voluntary compliance on tax

minimization. Our findings regarding the effect of enforced compliance on the compliance measures,

however, are not in line with Hypothesis 7. We find no effect of enforced compliance on self-reported

tax compliance and tax aggressiveness, and an unexpected positive effect of enforced compliance on

T
tax minimization. However, we do not observe this unexpected association between enforced

IP
compliance and tax minimization in the sample that excludes not-for-profit organisations.

R
[insert Table 4 about here]

SC
To summarize the results, Figure 2 shows all significant paths, the standardised beta

coefficients, and their significance levels.

U
N
[insert Figure 2 about here]
A

To test the mediation paths, we perform a bootstrapping test. Specifically, we test whether
M

enforced and voluntary compliance mediate the effects of trust and power on the three dependent
D

variables. Our effect estimates are based on 2,000 bootstrap samples. This analysis shows that all total
TE

indirect effects of trust and power through enforced and voluntary tax compliance are significant at the

10% level, with the exception of the total indirect effect of power on tax minimization (see Table 5).
EP

[insert Table 5 about here]

CC

To test Hypothesis 5, we assign the large organisations in our study to a low (n=182), medium

(n=55) or high (n=34) perceived power group. The relatively larger number of organisations in the low
A

condition indicates a substantial clustering in the data of observations at the lower end of the scale,

presumably reflecting the general attitude of the NTCA, which is commonly seen as pro-social and

cooperative. We choose the boundaries between the three conditions so as to prevent model

identification issues, and rerun our model for all three groups (see Table 6 for results).

[insert Table 6 about here]

21
The beta between trust and voluntary compliance differs for the low power (β= .22), high power (β= -

.05), and medium power condition (β= .40). However, only the difference between the medium and

high power groups is significant (one-tailed p=.01). Using the unstandardized coefficients

(untabulated), we visualise the moderating effect of power on the relationship between trust and

voluntary tax compliance in Figure 3.

[insert Figure 3 about here]

T
IP
5. Conclusions and discussion

According to the SSF, tax compliance is a function of both trust in the tax authority and the power of

R
the tax authority. In this framework, it is argued that if the level of trust is high, taxpayers are willing

SC
to cooperate and if the level of power is high, taxpayers will feel forced to comply, while both trust

and power are required to achieve sustained compliance. These general postulates of the SFF have

U
been empirically corroborated in prior literature for individual taxpayers and small businesses.
N
Corporate tax compliance, however, has received relatively little attention in the tax compliance
A
literature. A few studies have focussed on the role of power (e.g. detection probabilities) in corporate
M

tax compliance, but the role of trust and the interaction between power and trust have not been studied

before within that context.

D

In line with studies on the tax behaviour of individual taxpayers, we conclude that trust and
TE

power also play an important role in the tax compliance behaviour of large organisations. We find a

positive relationship between trust and voluntary compliance (consistent with Hypothesis 1) and a
EP

negative relationship between trust and enforced compliance (consistent with Hypothesis 2).
CC

Furthermore, we observe a negative relationship between power and voluntary compliance, as

predicted in Hypothesis 4. Contrary to expectations however, we do not find a relationship between

A

power and enforced compliance (Hypothesis 3). We conclude that more perceived power does not

seem to result in more enforced compliance, but that it does in fact lead to less voluntary compliance.

Moreover, our study shows a moderating effect of power on the relationship between trust and

voluntary compliance (Hypothesis 5), supporting the notion that the use of power attenuates the

positive contribution of trust to compliance. Our findings on the relationship between voluntary and

22
enforced compliance and self-reported compliance (Hypothesis 6 and 7) suggest a more complex

picture than found in earlier studies of individuals and small businesses. In our study, voluntary

compliance is positively related to self-reported tax compliance and negatively associated with tax

aggressiveness, both as expected. However, we do not find a relationship between voluntary

compliance and tax minimization, while enforced compliance is positively associated with tax

minimization –although this latter association cannot be observed in an additional analysis that

T
excludes not-for-profit organisations from the sample. vi

IP
The lack of support for the hypothesized relationship between power and enforced compliance

is inconsistent with the findings of studies of private taxpayers and small businesses, which generally

R
confirmed a positive relationship (e.g. Kastlunger et al., 2013; Muehlbacher et al., 2011). A potential

SC
explanation for this difference between large organisations and other taxpayers can perhaps be found

U
in political power theory. Political power theory suggests that large organisations possess superior

economic and political power (Richardson & Lanis, 2007). With this power, a large organisation can
N
provide sufficient counterweight to the power of tax authorities, which may neutralize the latter’s
A

effect on enforced compliance. Thus, even if large organisations perceive tax authorities to be
M

powerful, they may be less likely to feel ‘threatened’ by this power.

D

We find that when trust is low, voluntary compliance is also low, irrespective of the perceived

power of the tax authority. When trust in the tax authority is high, voluntary compliance is high, but
TE

only when perceived power is not high. If perceived power is in fact high, voluntary compliance is low
EP

even if trust is high. Jointly, these findings suggest that power undermines the positive effect of trust

on voluntary compliance. Because perceived power of the tax authority is probably a function of its
CC

enforcement activities, tax authorities should be careful in their reliance on such activities. Beyond a

certain point, power seems to offset the effect of trust on voluntary compliance by reducing the
A

importance of intrinsic motivation (cf. Feld & Frey, 2007). Thus, it seems that tax authorities walk a

tightrope in using power to affect corporate tax compliance. These results should, however, be

interpreted carefully because of our relatively crude measure of power.

We do not find a relationship between voluntary compliance and tax minimization. A possible

explanation for this null-finding may be related to respondents’ interpretation of our measure for tax

23
minimization (‘My organisation explores the limits of tax legislation’). Large organisations might

interpret this as paying as little as possible within the boundaries of the law, and as perfectly legal and

socially acceptable. Then, this result could be consistent with the findings from a survey among tax

directors reported by Freedman, Loomer and Vella (2009). In that study, tax directors of large

organisations professed to be committed to openness, transparency and good governance, but made an

exception for tax planning. In their eyes, tax planning is part of the job and fully acceptable as long as

T
the methods employed are legal. This would suggest that the use of such methods is perceived to be

IP
fully in line with (the moral principles associated with) voluntary compliance.

As reported, we find no significant relationship between enforced compliance and self-

R
reported tax compliance. Neither do we find an effect of enforced compliance on tax aggressiveness.vii

SC
The lack of association between enforced compliance and these two tax compliance measures seems to

U
imply that being or feeling enforced to comply is unrelated to corporate tax compliance. Possibly, the

separation of ownership and control within most large organisations weakens potential effects of
N
enforced compliance on tax compliance. Often, management gains from tax non-compliance, while
A

possible losses (due to detection and punishment by the tax authorities) will be borne by the owners.
M

Management may anticipate to have left the organisation by the time non-compliance is detected; this

is known as the ‘horizon problem’ (Minnick & Noga, 2010). Especially in the case of the use of risky
D

tax structures, detection and punishment of non-compliance can take many years. Thus, even if the
TE

threat of detection and punishment is present for the organisation in the long term, it might not affect
EP

actual behaviour of the manager who seeks to benefit in the short term.

The present study has some limitations that may have implications for the conclusions. Firstly,
CC

relatively straightforward measures for power and trust were used. Recent studies (e.g. Hofmann et al.,

2014) propose a more complex approach to trust and power, differentiating between legitimate and
A

coercive power, and between reason-based and implicit trust. While our measures might not have

covered all dimensions of trust and power, we do think our results provide a valuable starting point for

the study of trust and power and their interaction within the context of large organisations. Future

research can examine whether differentiating between the various types of trust and power provides

additional insight. Secondly, it should be noted that we collected our data by asking just one

24
representative per organisation to report on the perceptions and tax compliance of the organisation.

Therefore, the responses may be considered subjective. However, special care was paid to selecting

the best-informed person in regard to tax matters within the organisation, which should alleviate this

concern. Also, we used several self-reported proxies for tax compliance. An inherent shortcoming of

such measures is that they can only pick up on deliberate (non-)compliance. But then again, trust and

power are not likely to affect unintentional non-compliance anyway; so ignoring this seems only a

T
minor issue in the context of our study.

IP
As with all self-reported (and especially tax related) surveys, social desirability bias may be a

problem. We mitigated this bias as much as possible by ensuring strict anonymity for responders,

R
commissioning the administration of the survey to an external research agency, and by asking about

SC
organisational attitudes instead of personal attitudes (cf. Nielsen & Parker, 2012). These measures

U
should be sufficient to alleviate evaluation apprehension, and should help to elicit more candid

responses. However, the wording of our tax aggressiveness measure refers to abusive behaviour, what
N
might have prevented respondents from answering truthfully, even when protected by anonymity
A

(Speklé & Widener, in press). The relatively low scores of this measure suggest that our measure may
M

not be a true reflection of the degree of tax aggressiveness of large organisations. We encourage future
D

studies to further develop survey items to better measure tax aggressiveness.

We conclude that, despite these caveats, the results could be interpreted as an encouragement
TE

for the change towards trust-based regulatory activities of tax authorities world-wide as a way to
EP

stimulate corporate tax compliance of large organisations. Further exploration of the potential effects

of these trust-based regulatory activities, such as cooperative compliance, on the trust in tax authorities
CC

and, ultimately, the tax compliance behaviour of large organisations is an important avenue for future

research.
A

Acknowledgements

This paper has greatly benefited from comments and suggestions by two anonymous reviewers. We

also appreciate valuable feedback from participants in EIASM’s 5th Workshop on Current Research in

Taxation and a seminar at Nyenrode Business University.

25
References

Alm, J., Sanchez, I., & De Juan, A. (1995). Economic and noneconomic factors in tax compliance.

Kyklos, 48, 3-18.

Anderson, J., & Bodvarsson, E. (2005). Tax evasion on gratuities. Public Finance Review, 33, 466-

487.

T
Andreoni, J., Erard, B., & Feinstein, J. (1998). Tax compliance. Journal of Economic Literature, 36,

IP
818-860.

Ariel, B. (2011). Deterrence and moral persuasion effect on corporate tax compliance: findings from a

R
randomized controlled trial. Criminology, 50, 27-69.

SC
Armstrong, C., Blouin, J., & Larcker, D. (2012). The incentives for tax planning. Journal of

Accounting and Economics, 53, 391–411.

U
Ayres, I., & Braithwaite, J. (1992). Responsive regulation: Transcending the deregulation debate.
N
Oxford University Press, New York.
A

Bachmann, R., & Zaheer, A. (eds.) (2013). Handbook of advances in trust research. Cheltenham,
M

Adward Elgar.
D

Bame-Aldred, C., Cullen, J., Martin, K., & Parboteeah, P. (2013). National culture and firm-level tax

evasion. Journal of Business Research, 66, 390–396.

TE

Benk, S. & Budak, T. (2012). Power and trust as determinants of voluntary versus enforced tax
EP

compliance: Empirical evidence for the slippery slope framework from Turkey. African Journal

of Business Management, 6, 1499-1505.

CC

Bergman, M. (1998). Criminal law and tax compliance in Argentina: Testing the limits of deterrence.

International Journal of the Sociology of Law, 26, 55-74.

A

Bernasconi, M., Corazzini, L., & Seri, R. (2014). Reference dependent preferences, hedonic adaptation

and tax evasion: Does the tax burden matter? Journal of Economic Psychology, 40, 103-118.

Braithwaite, J. (2002). Large business and the compliance model. In: Taxing democracy, V.

Braithwaite (ed.). Aldershot, England.

Braithwaite, J., & Makkai, T. (1994). Trust and compliance. Policing and Society, 4, 1–12.

26
Braithwaite, V. (2008). Tax Evasion. In M. Tonry (ed.). Handbook on Crime and Public Policy,

Oxford: Oxford University Press.

Cebula, R. (2013). New and current evidence on determinants of aggregate federal personal income

tax evasion in the United States. American Journal of Economics & Sociology, 72, 701-731.

Chang, S., Van Witteloostuijn, A., & Eden, L. (2010). Common method variance in international

business research. Journal of International Business Studies, 41, 178–184.

T
Coglianese, C., & Lazer, D. (2003). Management-based regulation: Prescribing private management to

IP
achieve public goals. Law & Society Review, 37, 691-730.

DeBacker, J., Heim, B., Tran, A., & Yuskavage, A. (2013). Legal enforcement and corporate

R
behavior: An analysis of corporate tax aggressiveness after an audit. Working paper,

SC
http://ssrn.com/abstract=2262586.

U
Di Porto, E. (2011). Undeclared work, employer tax compliance, and audits. Public Finance Review,

39, 75-102.
N
Etienne, J. (2011).Compliance theory: A goal framing approach. Law & Policy, 33, 1467–9930.
A

Feld, L., & Frey, B. (2002). Trust breeds trust: how taxpayers are treated. Economics of Governance,
M

3, 87-99.
D

Feld, L., & Frey, B. (2007). Tax compliance as the result of a psychological tax contract: The role of

incentives and responsive regulation. Law & Policy, 29, 102-120.

TE

Fornell, C. & Larcker, D. (1981). Evaluating structural equation models with unobservable variables
EP

and measurement error. Journal of Marketing Research, 18 (February), 39-50.

Freedman, J., Loomer, G., & Vella, J. (2009). Corporate tax risk and tax avoidance: New approaches.
CC

British Tax Review, 1, 74-116.

Frey, B.S., & Jegen, R. (2001). Motivation crowding theory. Journal of Economic Surveys, 15, 589-
A

611.

Gaertner, F. (2014). CEO After-Tax compensation inventives and corporate tax avoidance.

Contemporary Accounting Research, 31, 1077-1102.

27
Gangl, K., Hofmann, E., Hartl, B., & Kirchler, E. (2016). Power of authorities and trust in authorities

determine the interaction climate and tax compliance. In D. Salter and L. Oats (eds.),

Contemporary issues in tax compliance volume 2 (87-102). Milton Keynes, Fiscal publications.

Gangl, K., Hofmann, E., & Kirchler, E. (2012). Tax authorities’ interaction with taxpayers:

Compliance by power and trust. WU International Taxation Research Paper Series No. 2012-

06.

T
Gangl, K., Torgler, B., Kirchler, E., & Hofmann, E. (2013). Effects of supervision on tax compliance:

IP
Evidence from a field experiment in Austria. Economic Letters, 123, 376-382.

Gobena, L., & Van Dijke, M. (2016). Power, justice, and trust: A moderated mediation analysis of tax

R
compliance among Ethiopian business owners. Journal of Economic Psychology, 52, 24-37.

SC
Goslinga. S., & Denkers, A. (2009). Motieven voor regelovertreding: Een onderzoek onder

ondernemers. Gedrag & Organisatie, 22, 3-22.

U
Gunningham, N. (2010). Enforcement and compliance strategies. In R. Baldwin, M. Cave and M.
N
Lodge (eds.), The Oxford Handbook of Regulation (120-145). Oxford: Oxford University Press.
A

Gunningham, N., & Sinclair, D. (2009). Organizational trust and the limits of management-based
M

regulation. Law & Society Review, 43, 865-900.

D

Gunningham, N., Thornton, D., & Kagan, R. (2005). Motivating management: Corporate compliance

in environmental protection.. Law & Policy, 27, 289-316.

TE

Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics,
EP

50, 127-178.

Hartner, M., Rechberger, S., Kirchler, E., & Schabmann, A. (2011). Procedural fairness and tax
CC

compliance. Economic Analysis and Policy, 38, 137-152.

Hasseldine, J., & Morris, G. (2013). Corporate social responsibility and tax avoidance: A comment
A

and reflection. Accounting Forum, 37, 1-14.

Hofmann, E., Gangl, K., Kirchler, E., & Stark, J. (2014). Enhancing tax compliance through coercive

and legitimate power of tax authorities by concurrently diminishing or facilitating trust in tax

authorities. Law & Policy, 36, 290-312.

28
Hoopes, J., Mescall, D., & Pittman, J. (2012). Do IRS audits deter corporate tax avoidance? The

Accounting Review, 87, 1603-1639.

Hulland, J. (1999). Use of partial least squares (PLS) in strategic management research: A review of

four recent studies. Strategic Management Journal, 20, 195-204.

Inkpen, A., & Currall, S. (2004). The coevolution of trust, control, and learning in joint ventures.

Organization Science, 15, 586-599.

T
James, S., & Alley, C. (2002). Tax compliance, self-assessment and tax administration. Journal of

IP
finance and management in public services, 2, 27-42.

Joulfaian, D. (2000). Corporate income tax evasion and managerial preferences. Review of Economics

R
and Statistics, 82, 698–701.

SC
Kamdar, N. (1997). Corporate income tax compliance. Atlantic Economic Journal, 25, 37-49.

U
Kastlunger, B., Lozza, E., Kirchler, E., & Schabmann, A. (2013). Powerful authorities and trusting

citizens: The slippery slope framework and tax compliance in Italy. Journal of Economic
N
Psychology, 34, 36-45.
A

Kirchler, E. Kogler, C., & Muehlbacher, S. (2014). Cooperative tax compliance: From deterrence to
M

deference. Current Directions in Psychological Science, 23, 87-92.

D

Kirchler, E., & Wahl, I. (2010). Tax compliance inventory TAX-I: Designing an inventory for surveys

of tax compliance. Journal of Economic Psychology, 31, 331–346.

TE

Kirchler, E., Hoelzl, E., & Wahl, I. (2008). Enforced versus voluntary tax compliance: The ‘‘slippery
EP

slope’’ framework. Journal of Economic Psychology, 29, 210–225.

Kogler, C., Batrancea, L., Nichita, A., Pantya, J., Belianin, A., & Kirchler, E. (2013). Trust and power
CC

as determinants of tax compliance: Testing the assumptions of the slippery slope framework in

Austria, Hungary, Romania and Russia. Journal of Economic Psychology, 34, 169-180.
A

Kogler, C., Muehlbacher, S., & Kirchler, E. (2013). Trust, power, and tax compliance: Testing the

'slippery slope framework' among self-employed taxpayers. WU International Taxation

Research Paper Series No. 2013 - 05.

Lisi, G. (2012). Testing the slippery slope framework. Economics Bulletin, 32, 1369-1377.

29
Lisi, G. (2014). The interaction between trust and power: Effects on tax compliance and

macroeconomic implications. Journal of Behavioral and Experimental Economics, 53, 24-33.

Liu, X. (2014). Use tax compliance: The role of norms, audit probability, and sanction severity.

Academy of Accounting & Financial Studies Journal, 18, 65-80.

MacKenzie, S., & Podsakoff, P. (2012). Common method bias in marketing: Causes, mechanisms, and

procedural remedies. Journal of Retailing, 88, 542-555.

T
Mas'ud, A., Aziah, N., & Saad, N. (2014). Do trust and power moderate each other in relation to tax

IP
compliance? Procedia - Social and Behavioral Sciences, 164, 49-54.

McBarnet, D. (2002). When compliance is not the solution but the problem: From changes in law to

R
changes in attitude. In: Taxing democracy, V. Braithwaite (ed.). Aldershot, England.

SC
Minnick, K., & Noga, T. (2010). Do corporate governance characteristics influence tax management?

Journal of Corporate Finance, 16, 703-718.

U
Muehlbacher, S., Kirchler, E., & Schwarzenberger, H. (2011). Voluntary versus enforced tax
N
compliance: empirical evidence for the “slippery slope” framework. European Journal of Law
A

and Economics, 32, 89-97.

M

Murray, M. (1995). Sales tax compliance and audit selection. National Tax Journal, 48, 515-530.
D

Nielsen, V., & Parker, C. (2009). Testing responsive regulation in regulatory enforcement. Regulation

& Governance, 3, 376-399.

TE

Nielsen, V., & Parker, C. (2012).Mixed motives: Economic, social, and normative motivations in
EP

business compliance. Law & Policy, 34, 428-462.

Niu, Y. (2011). Tax audit impact on voluntary compliance. Journal of Economic & Social
CC

Measurement, 36, 237-251.

Nur-tegin, K.D. (2008). Determinants of business tax compliance. Journal of Economic Analysis &
A

Policy: Topics in Economic Analysis & Policy, 8, 1-26.

OECD (2004). Compliance risk management: Managing and improving tax compliance. Available at:

www.oecd.org.

OECD (2009). Experiences and practices of eight OECD countries. Available at: www.oecd.org.

30
OECD (2010). Understanding and influencing taxpayers’ compliance behaviour. Available at:

www.oecd.org.

OECD (2013). Co-operative compliance: A framework. Available at: www.oecd.org.

Phillips, M. (2014). Individual income tax compliance and information reporting: What do the U.S.

data show? National Tax Journal, 67, 531-567.

Podsakoff, P., MacKenzie, S., Lee, J., & Podsakoff, N. (2003). Common method biases in behavioral

T
research: a critical review of the literature and recommended remedies. Journal of Applied

IP
Psychology, 88, 879–903.

Powers, K., Robinson, J., & Stomberg, B. (2013). Do CEO performance measures motivate tax

R
avoidance? Working paper, University of Texas at Austin.

SC
Prinz, A., Muehlbacher, S., & Kirchler, E. (2014). The slippery slope framework on tax compliance:

U
An attempt to formalization. Journal of Economic Psychology, 40, 20-34.

Rego, S., & Wilson, R. (2012). Equity risk incentives and corporate tax aggressiveness. Journal of
N
Accounting Research, 50, 775-810.
A

Richardson, G., & Lanis, R. (2007). Determinants of the variability in corporate effective tax rates and
M

tax reform: Evidence from Australia. Journal of Accounting and Public Policy, 26, 689–704.
D

Rousseau, D., Sitkin, S., Burt, R., & Camerer, C. (1998). Not so different after all: A cross-discipline

view of trust. Academy of Management Review, 23, 393-404.

TE

Ruiu, G. & Lisi, G. (2011). Tax morale, slippery-slope framework and tax compliance: A cross-
EP

section analysis. Working paper, available at: http://core.ac.uk/download/pdf/6279366.pdf.

Scholz, J. (1984). Cooperation, deterrence, and the ecology of regulatory enforcement. Law and
CC

Society Review, 18, 179-224.

Shapiro, S., & Rabinowitz, R. (1997). Punishment versus Cooperation in Regulatory Enforcement: A
A

case study of OSHA. Administrative Law Review, 14, 713-762.

Sharma, S., Mukherjee, S., Kumar, A., & Dillon, W. (2005). A simulation study to investigate the use

of cutoff values for assessing model fit in covariance structure models. Journal of Business

Research, 58, 935– 943.

Six, F. (2013). Trust in regulatory relations. Public Management Review, 15, 163-185.

31
Slemrod, J. (2004). The economics of corporate tax selfishness. National Tax Journal, 57, 877-899.

Slemrod, J., Blumenthal, M., & Christian, C. (2001). Taxpayer response to an increased probability of

audit: Evidence from a controlled experiment in Minnesota. Journal of Public Economics, 79,

455-483.

Speklé, R.F., & Widener, S.K. (in press). Challenging issues in survey research: Discussion and

suggestions. Journal of Management Accounting Research, forthcoming.

T
Tyler, T. (1997). The psychology of legitimacy. A relational perspective on voluntary deference to

IP
authorities. Personality and Social Psychology Review, 1, 323–345.

Tyler, T. (2006). Psychological perspectives on legitimacy and legitimation. Annual Review of

R
Psychology, 57, 375-400.

SC
Van der Hel-Van Dijk, L., & Siglé, M. (2015). Managing compliance risks of large businesses: A

U
review of the underlying assumptions of co-operative compliance. eJournal of Tax Research,

13, 760-783.
N
Van Dijke, M., & Verboon, P. (2010). Trust in authorities as a boundary condition to procedural
A

fairness effects on tax compliance. Journal of Economic Psychology, 31, 80-91.

M

Verboon, P., & Van Dijke, M. (2007). A self-interest analysis of justice and tax compliance: How
D

distributive justice moderates the effect of outcome favorability. Journal of Economic

Psychology, 28, 704-727.

TE

Verboon, P., & Van Dijke, M. (2011). When do severe sanctions enhance compliance? The role of
EP

procedural fairness. Journal of Economic Psychology, 32, 120-130.

Voermans, W. (2013). Motive-based enforcement. Working paper, http://ssrn.com/abstract=2238329.

CC

Wahl, I., Kastlunger, B., & Kirchler, E. (2010). Trust in authorities and power to enforce tax

compliance: An empirical analysis of the “Slippery Slope Framework”. Law & Policy, 32, 383-
A

406.

Weigel, R., Hessing, D., & Elffers, H. (1987). Tax evasion research: A critical appraisal and

theoretical model. Journal of Economic Psychology, 8, 215-235.

Zaheer, A., McEvily, B., & Perrone, V. (1998). Does trust matter? Organization Science, 9, 141-159.

32
Figures and tables

Figure 1: Visualisation of the hypotheses

T
R IP
SC
U
N
A
VC=voluntary compliance, EC=enforced compliance
M

Figure 2: Significant results of the structural equation model (* p<.05 ** p<.01)

D
TE
EP
CC
A

VC=voluntary compliance, EC=enforced compliance, TAXCOMP= self-reported tax

compliance, TAXAGGR=tax aggressiveness, TAXMIN=tax minimization

33
Figure 3: The moderating effect of power

T
IP
R
SC
U
N
A
M
D
TE
EP
CC
A

34
Table 1: Sample descriptives (n=271)
n % Domestic n %
Turnover (€)
organisations organisations employees organisations organisations
<10 million 26 10% < 100 90 33%
10-25 million 76 28% 100-249 85 31%
25-50 million 75 28% 250-499 39 14%
50-200 million 64 24% ≥500 57 21%
>200 million 30 11% Total 271
Total 271

Quoted on a public n % Not-for- n %

T
stock exchange organisations organisations profit organisations organisations

IP
yes 33 12% yes 63 23%
no 238 88% no 208 77%
Total 271 Total 271

R
SC
n %
Stratum
organisations organisations
Cooperative com-
78 29%
pliance participant
Not participating
Not a large
134 49%

U
N
organisation up until 59 22%
the end of 2013
Total 271
A
M
D
TE
EP
CC
A

35
Table 2: Descriptive statistics and reliability estimates (n=271) a

Variable Item coding Item wording b M SD

The tax office makes sure to have the necessary information

Trust Trust1 5.33 1.14
available to take decisions
CR=.88 Trust2 The tax office treats everyone in the same manner 4.93 1.45
EV=3.78 The tax office takes the circumstances of individual taxpayers
Trust3 4.98 1.30
AVE=.54 into account when taking decisions
Trust4 The tax office acts accurately 5.10 1.21
People who disagree with the tax office are allowed to explain
Trust5 5.47 1.10

T
their point of view
Trust6 The tax office acts fairly 5.32 1.20

IP
How large or small do you think the chances are that the tax
Power

R
office discovers, at a similar organisation as yours, that…
CR=.98 Power1 …cash payments are kept off the books 2.17 1.69

SC
EV=2.85 Power2 …non-existing deductions are claimed 2.39 1.76
AVE=.93 Power3 …income is not fully stated in the tax return 2.34 1.76

Enforced
compliance
My organisation pays taxes…
U
N
CR=.77 EC2 …because the risk of being audited is too large 2.01 1.17
EV=2.20 EC3 …because tax evasion is punished severely 3.00 1.87
A
AVE=.53 EC5 …to avoid hassles 2.68 1.69
M

Voluntary My organisation…
compliance VC1 …would also pay taxes if there were no audits 6.27 1.05
CR=.83 VC2 …sees paying taxes as something natural 6.15 1.08
D

EV=2.15 VC3 …pays taxes because it sees it as its duty 5.94 1.18
AVE=.62
TE

Tax
How important do you think it is that the tax office…
compliance
CR=.91 TAXCOMP1 …receives the tax returns of your organisation on time? 6.26 1.04
EP

…receives complete and correct tax returns from your

EV= 2.53 TAXCOMP2 6.48 0.85
organisation?
AVE= .77 TAXCOMP3 …receives timely payments from your organisation? 6.34 1.00
CC

Tax mini-
TAXMIN My organisation explores the limits of tax legislation 2.83 1.54
mization
Tax aggres-
TAXAGGR My organisation uses risky tax structures 1.50 0.82
A

siveness
a All items were measured on a seven-point scale (1=very small; 7=very large for the three power items, 1=very
unimportant; 7=very important for the three self-reported tax compliance items and 1=completely disagree;
7=completely agree for all other items)

36
b All translations from Dutch by authors
CR=Composite Reliability, EV=eigenvalue, AVE=average variance extracted

Table 3: Bivariate correlations (Pearson), square root of the AVE score in diagonal
Trust Power VC EC TAXCOMP TAXMIN TAXAGGR
Trust .74
Power -.07 .96
VC .22** -.17** .79
EC -.15* .00 -.34** .73

T
TAXCOMP .17** .01 .34** -.13 .88
TAXMIN .04 .07 -.17* .16** .04 -

IP
TAXAGGR -.02 .06 -.27** .14* -.16* .38** -
** p< 0.01 * p< 0.05

R
VC=voluntary compliance, EC=enforced compliance, TAXCOMP=self-reported tax compliance
TAXAGGR= self-reported tax aggressiveness, TAXMIN= self-reported tax minimization

SC
Table 4: results
Hypothesised effects
H1 + Trust → VC .22** Trust → TAXCOMP U
Non-hypothesised effects
.11
N
H2 -/- Trust → EC -.16* Power → TAXCOMP .09
+ Power → EC Trust → TAXAGGR
A
H3 -.03 .05
H4 -/- Power → VC -.17* Power → TAXAGGR .02
M

H6 + VC → TAXCOMP .37** Trust → TAXMIN .11

H7 + EC → TAXCOMP -.02 Power → TAXMIN .05
H6 -/- VC → TAXAGGR -.24**
D

H7 -/- EC → TAXAGGR .07

H6 -/- VC → TAXMIN -.12
TE

H7 -/- EC → TAXMIN .15*

Model fit
EP

Df 142 TLI .98

Chi2 179.68 CFI .99
Chi2/df 1.27 NNCP .99
CC

P .02 RMSEA .03

** p< 0.01 * p< 0.05
VC=voluntary compliance, EC=enforced compliance, TAXCOMP=self-reported tax
compliance, TAXAGGR= self-reported tax aggressiveness, TAXMIN= self-reported
A

tax minimization

37
Table 5: Indirect effects
Total indirect Two-tailed
effect significance
Trust → TAXCOMP .08 .03
Power → TAXCOMP -.06 .03
Trust → TAXAGGR -.06 .02
Power → TAXAGGR .01 .08
Trust → TAXMIN -.05 .07
Power → TAXMIN .02 .43
TAXCOMP=self-reported tax compliance, TAXAGGR= self-reported tax
aggressiveness, TAXMIN= self-reported tax minimization

T
IP
Table 6: Interaction effect
Low Power Medium Power High Power P

R
.22* .40* .17
H5 Trust → VC
.40* -.05 .01

SC
** p< 0.01; * p< 0.05
VC=voluntary compliance

U
N
A
M
D
TE
EP
CC
A

38
i
I.e. the so-called Horizontal Monitoring programme, see Van der Hel-Van Dijk & Siglé (2015).
ii These possible compliance effects are, however, not the central focus of the current study.
iii In 2013 the NTCA evaluated the distribution of taxpayers between the large organisation division and other

divisions. These 75 large organisations that did not qualify as a large up until the end of 2013 were found to meet
the criteria of, and thus transferred to, the large organisation division.
iv 23% of the sample are not-for-profit organisations. Profit-oriented businesses and not-for-profit organisations

may differ in the way they view tax compliance (e.g. due to the absence of shareholder concerns in not-for-profit
organisations). We will address this issue in our analyses.
v
The eliminated item for VC was: My organisation pays taxes to contribute to society. The eliminated items for
EC were: My organisation pays taxes because it is forced to and My organisation pays taxes even though it

T
would rather not do so.
vi
This additional analysis seems to imply that the positive association we observe is driven by the not-for-profit

IP
organisations. However, in the not-for-profit subsample, untabulated further examination reveals that enforced
compliance and tax minimization are not significantly correlated (r= .121, p= .347), which suggests that the
finding might just be an artefact of the analysis. We leave the further explanation of this effect to future research.

R
vii
Recall, however, that we found a positive association between enforced compliance and tax minimization in
our full sample analysis; a finding that cannot be replicated in an additional analysis in a sample that excludes

SC
the not-for-profit organisations. See also note vi on this issue.

U
N
A
M
D
TE
EP
CC
A

39