Import tax compliance: a study of customs agents in Malaysia utilising the theory of planned behaviour

Unlike tax accountants and advisors within direct tax, Customs law in many countries requires importers to employ licensed Customs agents. This study extends the tax literature by examining the role of Customs agents in import tax compliance. In Malaysia, as an example of a country where Customs are responsible for about one-third (MYR30 billion on average between 2005 to 2014) of total government revenue collections, the function of Customs agents is to: assist importers in meeting their import tax liabilities; prepare and submit all necessary import documentation to Customs; as well as collect and pay all revenue to the Customs administration. Customs agents are bound by the Customs Act 1967 and are required to pass a public exam before becoming formally qualified and licensed Customs agents. Exploratory interviews with senior Customs officers at The Royal Malaysian Customs Department (RMCD) suggest that a significant amount of tax revenue is lost because Customs agents do not pay the full amount of import duty and tax due. Most interviewed officers felt that tougher penalties and sanctions are required to improve compliance and root-out fraud; though some indicated that other measures may need to be developed in order to improve compliance practice. Drawing on the tax compliance literature within the direct tax domain, the Theory of Planned Behaviour (TPB) has been identified as one of the most robust social cognitive theories to explain compliance decision making. A key output from this research is a compliance behaviour model (based on the theory of planned behaviour) that depicts various economic and non-economic variables to predict compliance behaviour. Building on the model, a large scale survey of Customs agents across Malaysia was conducted. Overall, the response rate was 42% (n=650), representing 12.8% of the total Customs agents population located at Malaysia’s primary ports of entry. The results indicate that psychological, sociological, structural / institutional factors, which consist of attitude, ethical beliefs, social norms, law, enforcement, complexity of procedure and quality of tax assessment service, are significant in explaining Customs agents’ behavioural intention to comply with import tax law. However, they also suggest inconsistencies in the relationship between behavioural intention and behaviour, and the need to incorporate other factors and moderating variables. In particular, the findings identified the influence of two referent groups (subjective norms): (i) the importers who influenced Customs agents’ import tax compliance directly through instructions, as well as indirectly by sharing their ethical beliefs; and (ii) other Customs agents (their peers) who influence Customs agents’ ethical beliefs. Overall this study highlights the importance of incorporating behavioural elements and facilitating elements (such as better quality of tax assessment service and less complex procedures) together with economic variables to achieve an optimum compliance level. The findings indicate that simply applying sanctions to improve Customs agents’ compliance, as is Royal Malaysian Customs current enforcement strategy does not optimise revenue yield. Appropriate reforms that go beyond sanctions and enforcement are recommended. It also identifies another essential but largely neglected strategy for improving compliance which is to work on improving the ethics of Customs agents, possibly by offering access to trade facilitation measures, or through coercion (e.g. public naming and shaming) and sanctions (e.g. withholding access to trade facilitation measures). Finally, this study also demonstrates the wide applicability of the TPB, including its application in tax compliance research and specifically in the context of import tax. The method (exploratory sequential mixed method) used in this study could also be used to replicate further studies to generate a more holistic compliance behaviour model.