Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.5, No.15 2014 268 Determinants of Tax Compliance Behavior in Ethiopia: The Case of Bahir Dar City Taxpayers Tilahun Aemiro Tehulu Assistant Professor, College of Business and Economics, Bahir Dar University, Ethiopia E-Mail: tilahuntehulu@yahoo.com Yidersal Dagnaw Dinberu Lecturer, College of Business and Economics, Bahir Dar University, Ethiopia E-Mail: tennadag@gmail.com Abstract In the Ethiopian government five year Growth and Transformation Plan, it has been clearly stated that efforts will be geared towards promoting compliance and equipping tax collection institutions with adequate enforcement power which will further boost revenue mobilization at federal and regional levels. The country’s tax mobilization was also the lowest among most African countries and thus, identifying the factors that determine tax compliance behavior has been open for empirical investigation. Accordingly, using one-way ANOVA, two samples and one sample T- test, this study examined the determinants of tax compliance behavior in Ethiopia particularly in Bahir Dar city administration. The data was collected using structured questionnaire. The results revealed that perception on government spending; perception on equity and fairness of the tax system; penalties; personal financial constraint; changes on current government policies; and referral group (friends, relatives etc.) are factors that significantly affect tax compliance behavior. However, gender and probability of being audited have no significant impact on tax compliance behavior. Finally, the findings show that older people will comply less if there is no equity and fairness in the tax system and any changes in government policy on fuel prices, electricity and water rates are not favorable. Keywords: Compliance behavior, Tax payers, Ethiopia. 1. INTRODUCTION A tax is a compulsory levy and those who are taxed have to pay the sums irrespective of any direct corresponding return of services or goods by the government. Government needs financial resources to act as a government and play a role that is expected from it by the public (Bhatia, 1976; James, 2000). So what the government gives it must first take away. The economic resources available to society are limited, and so an increase in government expenditure normally means a reduction in private spending. In this regard James (2000) states that taxation is one method of transferring resources from the private to the public sector. The role of taxes as an instrument stabilizes the economy, and reduces private demand when resources are released for public sector use. Taxes are not payments for some special privilege granted or services rendered and are, therefore, distinguishable from various other charges imposed for particular purposes under particular powers or functions of government (Murphy and Higgins, 2001). Taxes are fundamental to the existence of governments, for the tax revenues help to finance the bulk of services that governments provide including education, welfare, public safety, infrastructure and other basic public services. Improved tax compliance amplifies the revenues available for supporting public services without increasing the current tax burden on compliant taxpayers (Bird & Casanegra, 1992). Tax compliance has been an important subject of research in a large number of developed and a number of developing countries. Since each country has its own approach to managing tax compliance levels and each has different tax laws and regulations, the factors impacting tax compliance behavior appear to vary among countries (Palil, 2010). One measure used to determine a country’s tax mobilization (tax compliance) is tax as a percentage of GDP. When we see the tax to GDP ratio of selected African Countries as reported in a Tax Administration workshop in Kenya, Ethiopia’s tax mobilization is the lowest. Country Year Tax-to-GDP Kenya 2005/06 17.7 Zambia 2005 17.0 Malawi 2005/06 15.6 Rwanda 2006 14.1 Tanzania 2005/06 12.9 Ethiopia 2005/06 12.2 Source: Tax Administration workshop, Nairobi, Kenya, November 3-7, 2008