Tax Transparency Perceptions and SMEs’ Voluntary Tax Compliance in Kampala: The Mediating effect of the Business Environment

Abstract

This paper investigates how perceptions of tax transparency influence voluntary compliance to taxes by Small and Medium Enterprises (SMEs) in Kampala, Uganda, and whether the business environment mediates this relationship. Despite reforms being undertaken by Uganda Revenue Authority (URA), voluntary compliance is still low among SMEs due to negative perceptions about fairness, clarity, and openness regarding tax administration. A cross-sectional design was used with a sample size of 400 SMEs from which data were collected through structured questionnaires. The data were analyzed using SPSS employing correlation and multiple regression techniques. Correlation results revealed significant positive relationships between all dimensions of tax transparency and voluntary compliance (r = .299–.404, p < .01), which means that integrity, clarity, and accessibility of tax information enhance compliance behavior. Regression results indicated that transparency in tax exemptions and incentives as well as rates (β = .237, p < .001) and absence of corruption, favoritism, and arbitrary enforcement (β = .200; p = .003) are the strongest predictors for voluntary compliance though availability of online tax information predictability of rules from URA reports public statements were positively associated with compliance but not statistically significant predictors in this model that explained 25.4% variance in voluntary tax compliance (R² = .254). Tests confirmed stability for multicollinearity among predictors hence further mediation analysis indicated partial mediation by the business environment between perception on tax transparency and voluntary compliance meaning favorable operational conditions strengthen the effect of transparency toward enhancing compliance. The study found that SME voluntary compliance in Kampala is largely driven by transparency particularly in the areas of tax incentives and rate-setting as well as fairness in enforcement. Therefore, improving transparency by eliminating corruption and improving the business environment will significantly strengthen voluntary tax compliance. The study recommends that URA emphasize transparency in disclosing processes for determining tax incentives and rates, strengthening anti-corruption mechanisms, and expanding digital systems such as EFRIS to minimize discretionary interactions that facilitate corruption.