Moderating Effect of Tax Audit on Selected Determinants of Corporate Income Tax Compliance Among Manufacturing Companies in the East of Nairobi Tax District, Kenya

Abstract

Taxation is quintessential for nations to achieve financial independence without borrowing. Corporate income tax is one of the requisite sources of revenue for governments in various global jurisdictions that enables the provision of public goods and services to the citizenry. Corporate Income Tax accounts for 10% of the total tax revenues collected across OECD countries and represents 15% and 20% of total taxes in non-OECD countries. In Kenya, it is between 19% and 20% of the total tax revenues collected. Corporate Income Tax compliance in Kenya has been below target. The study sought to establish the moderating effect of tax audit on selected corporate income tax compliance determinants among manufacturing firms in the East of Nairobi Tax District, Kenya. The study's objectives were to determine the effect of system automation, taxpayer awareness, and taxpayer perception on corporate income tax compliance among manufacturing firms in the East of Nairobi Tax District, Kenya. The moderating variable was tax audit. The study was supported by five theories: the Unified Theory of Acceptance and Use of Technology, the Economic Deterrence Theory, the Ability to Pay Theory, the Theory of Planned Behavior, and the Social Learning Theory. An explanatory research design was applied. The target population was five hundred seventy-six (576) respondents among the manufacturing firms in the East of Nairobi Tax District, Kenya, and a sample size of 236 respondents. The questionnaires were distributed to the entire sample size, and 172 respondents correctly filled out and submitted their responses, a 72.9% response rate. Primary data was collected using questionnaires. Regression and Correlation analysis were applied to determine the significance and relationship of the variables. The data analysis was done through descriptive and inferential statistics. The study found that system automation positively affected corporate income tax compliance, with a standardized coefficient of β = 0.133, p = 0.042. Similarly, taxpayer awareness positively and significantly impacted corporate income tax compliance, evidenced by a standardized coefficient of β = 0.090, p = 0.032. Additionally, taxpayer perception significantly positively impacted corporate income tax compliance, with a standardized beta coefficient of β = 0.069, p = 0.019. Further tax audit positively and significantly impacted corporate income tax compliance, with a standardized beta coefficient of β = 0.777, p = 0.009. The study showed that tax audit moderated the effects of system automation, taxpayer awareness, and taxpayer perception on corporate income tax compliance, with β = 0.731, p = 0.006(R2△ =0.022), β = 0.626, p = 0.036(R2△ =0.018) and β = 0.321, p = 0.000(R2△ =0.005) respectively. The study recommends that the Kenyan government invest in and promote automated tax systems by enhancing the availability and functionality of automated platforms. The Kenya Revenue Authority (KRA) could simplify tax processes, reduce reporting errors, and improve compliance. Manufacturing firms' management should prioritize adopting automated tax solutions, as these systems have proven to improve compliance. For KRA, the results recommended enhancing taxpayer awareness initiatives. Additionally, investigating the effect of financial literacy and risk tolerance on corporate income tax compliance within firms could provide insight into the relationship between knowledge, attitude toward risk, and corporate income tax compliance. Further research on the effects of tax incentives on corporate income tax compliance could also positively contribute to the research field.

Key Words: Tax Audit, Compliance, Corporate Income Tax, Manufacturing Companies.

DOI: 10.7176/RJFA/16-6-01

Publication date: July 30^th 2025