Tax compliance behaviour of Malaysian SMEs: the role of psychological empowerment and service quality as a moderating effect

Small and medium-sized enterprises (SMEs) play a significant role in driving Malaysia's economic growth. However, they are often perceived as a high-risk group for low income tax compliance. Despite this concern, limited empirical research has been conducted on the tax compliance behaviour of SMEs in Malaysia. This study aims to investigate the key determinants influencing SME tax compliance in the country. Previous research on this topic has produced mixed and inconsistent findings. Therefore, this study integrates Social Influence Theory, Social Exchange Theory, and Social Cognitive Theory within Fischer’s model to provide a comprehensive explanation of SME tax compliance behaviour. This study examines the relationships between psychological empowerment, tax transparency, peer influence, tax knowledge, tax incentives, tax fairness, and tax compliance behaviour among SMEs in Malaysia. It also explores whether service quality moderates the relationships between peer influence, tax knowledge, tax incentives, tax fairness, and tax compliance behaviour. Adopting a quantitative approach, the study utilizes a self-administered questionnaire survey distributed to 491 SMEs listed in the Federation of Malaysian Manufacturers (FMM), yielding 230 usable responses for analysis. The Analysis of Moment Structure (AMOS) was employed to test the proposed hypotheses. The results revealed that psychological empowerment, tax transparency, peer influence, tax incentives, and tax fairness significantly influence tax compliance behaviour among SMEs in Malaysia. Furthermore, service quality was found to moderate the relationships between peer influence, tax incentives, tax fairness, and tax compliance behaviour. These findings provide valuable insights for tax authorities, policymakers, and SMEs in understanding and enhancing tax compliance behaviour within the SME sector.