Exploring the Interactions of Supervision, Sanctions, and Law Enforcement

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OPTIMIZING TAX COMPLIANCE: AN ANALYSIS OF SUPERVISION, SANCTIONS, AND LAW ENFORCEMENT INTERACTIONS ON INDIVIDUALS WITH A MODERATION FOCUS

Riki Supriyani*, Arik Sutiawan, dan Reskino

1,2Department, University, City, Country

ABSTRACT

This research aims to analyze tax compliance moderated by Law Enforcement. It also highlights the inconsistency of previous findings and introduces the moderating variable of Law Enforcement in the context of tax compliance for individual taxpayers in Jakarta, especially High Wealth Individuals with assets exceeding Rp. 10 billion. Focusing on 293 individual taxpayers for the tax years 2017-2022, the results of panel data analysis indicated that supervision, tax sanctions, and law enforcement have a significant positive effect on taxpayer compliance.

Law enforcement also plays a moderating role in the influence of supervision and tax sanctions, emphasizing its role in achieving optimal taxpayer compliance. Theoretical and practical implications enrich the understanding of factors influencing taxpayer compliance. This research makes a significant contribution to strengthening the tax system. The Directorate General of Taxes (DJP) can leverage these findings to enhance the effectiveness of tax policies and optimize supervision and law enforcement strategies, thereby increasing tax revenue for development and public services.

1. INTRODUCTION

Tax payments have an important role in creating social welfare. It is emphasized that greatly tax subjects and objects can make significant tax contributions, and the funds collected are utilized to provide facilities for those who are less privileged, with the aim of reducing social inequality.

Sri Mulyani explained that development and social assistance provided by the government is very dependent on state income, especially from the tax sector. On one occasion in early January 2022, she emphasized that questions regarding the reasons for paying taxes should be answered with the understanding that paying taxes, which is a form of involvement with society to advance Indonesia. Taxes, as the country's largest source of income through the State Revenue and Expenditure Budget (APBN), are not only an obligation, but also evidence of community collaboration in developing Indonesia and providing assistance to others¹.

The Directorate General of Taxes (DJP) noted that the number of new Taxpayers/Wajib Pajak (WP) increased by 400 thousand people in the third quarter of 2022, which shows an increase from the previous year, from 3,4 million to 3,8 million new Taxpayers. However, tax revenues have decreased by IDR 4,5 trillion from total revenues in 2021, which previously reached IDR 7,7 trillion, and now only reaching IDR 3,2 trillion².Based on the DJP Annual Report (2022), in 2022, the taxpayer compliance level had reached 83,2%, with the lowest level recorded in 2012 at 53,7% and the highest in 2021 at 83,2%. There was a significant increase of 11,76% from 2016, which previously reached 60,82%, to 72,58% in 2017. In addition, the highest average level of compliance occurred in Individual Employees, while the lowest level of compliance occurred in Non-Employee Individuals.

According to Asia Pacific data, it is known that there is an increase in population of High

*Corresponding author.

E-mail: [email protected](First Author) ARTICLEINFO

Article history:

Received March 19, 2021 Revised April 03, 2021 Accepted May 01, 2021 Available online May 25, 2021

Keywords:

Tax Compliance; Law Enforcement; High Wealth Individuals; Tax Policy

This is an open access article under theCC BY-SAlicense.

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International Journal of Social Science and Business, Vol. xx, No. xx 2022, pp. xx-yy 2

Wealth Individuals (HWI) in Indonesia, individuals with wealth of more than USD 1 million, and there has been significant growth from 2016 to 2017⁴.Based on references from The World Wealth Report 2019, The US Securities and Exchange Commission, the Wealth-X High Net Worth Handbook 2019, and High Wealth Individuals in Indonesia can be defined as individuals or Individual Taxpayers who meet one of the following criteria: (i) Have net assets above IDR 10 billion and total income above IDR 3 billion per year in the last three years. (ii) Registered in the list of rich people published by trusted media. (iii) Become the owner of a business group. Based on DJP data in 2017 and 2018, the data distribution for the largest number of High Wealth Individual Taxpayers located in the DKI Jakarta area⁵.

Taxpayer compliance is influenced by several factors. According to research by Sari et al.

(2022), supervision carried out by the Tax Authority has an important role in influencing the level of mandatory tax compliance. Supervision in this context refers to activities aimed at supervising and reminding taxpayers whether they have fulfilled their tax obligations correctly and appropriately. Furthermore, supervision also means improving and straightening out so that goals in accordance with planning can be achieved. In the context of taxation, tax supervision is a process of clarifying tax data that is analyzed to ensure that taxpayers have fulfilled their tax obligations.

Supervision carried out by Account Representatives has a positive impact on the level of Taxpayer compliance. This means that the more intensive the supervision carried out by the Account Representative, the higher the level of Taxpayer compliance. An Account Representative must understand the situations and conditions faced by Taxpayers and find the best solutions for them, with the aim of providing satisfaction and comfort for Taxpayers. This situation will contribute to the level of taxpayer compliance in fulfilling their tax obligations⁷. Moreover, according to research by Dewi & Merkusiwati (2018), tax sanctions have an influence on taxpayer compliance, where taxpayers become more compliant in reporting their tax obligations. Tax sanctions can act as an alternative solution for taxpayers who violate tax regulations⁹.

Based on research by Alm et al. (2020), Pijnenburg et al. (2017), Reschiwati et al. (2019), Sulistyari et al. ( 2022), and Dewi & Merkusiwati (2018) stated that supervision has a positive effect on Taxpayer compliance. On the other hand, there is research which indicates that supervision has no influence on Taxpayer compliance¹³. The next factor that has a positive influence on taxpayer compliance is tax sanctions. This finding is in line with the research by Dewi & Merkusiwati (2018), Alshira'h & Abdul-Jabbar (2020), Paramaduhita & Mustikasari (2018), Intrada et al. (2019), Rahmayanti et al. (2020), Sari et al. (2022), Dewi & Merkusiwati (2018), Karnedi & Hidayatulloh (2019), Asterina & Septiani, (2019), and Handayani (2019). On the other hand, there is research which stated that Tax Sanctions do not influence Taxpayer compliance (Mulyati, ( 2021) and ²¹.

Therefore, the researchers are interested in re-examining the inconsistency of these findings. In addition, this research adds the moderating variable of Law Enforcement, which is the action taken by tax officials to guarantee the obligations of taxpayers in fulfilling their obligations based on tax regulations²².By adding the Law Enforcement moderating variable based on a theoretical hypothesis, it indicates that the level of supervision and Tax Sanctions can have different effects on tax compliance depending on the level of effectiveness of tax law enforcement represented by the Law Enforcement variable. With the moderating variable, Law Enforcement can also help to identify whether supervision has a stronger or weaker effect on tax compliance in different legal situations. Another difference in this research is the difference

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²⁹

and

¹³

. The data processing and analysis technique in this research uses panel data regression analysis as a test tool to test supervision, tax sanctions, and law enforcement on taxpayer compliance. Then, using moderated regression analysis to test the moderating variable, namely law enforcement. The analysis was carried out using three model approaches, namely the common effect model, fixed effect model, and random effect model. Next, a series of tests were carried out, including the Breusch Pagan Lagrangian Multiplier test and the Hausman test to determine the model that best suited the context of this research. After model selection, classical assumption tests were carried out, such as multicollinearity, heteroscedasticity, and autocorrelation tests, which were evaluated on the selected model. The data analysis process was carried out using Stata statistical calculation software.

3. RESULTS AND DISCUSSIONS

The descriptive analysis used in this research aims to provide an overview of the data to be tested through the average value (mean), standard deviation, minimum value, and maximum value m. The following are the results of the descriptive analysis carried out in this research:

Table 1. Descriptive Analysis

First Author/ Title Manuscript

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within .426543 -.3919226 1.274744 T = 6 between .2548599 .1666667 1 n = 293 law overall .4414107 .4966967 0 1 N = 1758

within .3545246 -.0455063 1.62116 T = 6 between .2041607 .1666667 1 n = 293 sanction overall .7878271 .408963 0 1 N = 1758

within .2727072 .0608646 1.727531 T = 6 between .1426553 .1666667 1 n = 293 superv~n overall .894198 .3076716 0 1 N = 1758

within 1.508277 .907281 5.907281 T = 6 between .8397199 1.666667 4.5 n = 293 compli~e overall 3.407281 1.725695 0 7 N = 1758 Variable Mean Std. Dev. Min Max Observations

Source: Secondary data processed by STATA software

Based on the results of the descriptive analysis above, it shows that the average value of taxpayer compliance, supervision, and tax sanctions is greater than the standard deviation, which means that the data distribution for these variables is homogeneous. Different things occurred to law enforcement, which has an average value smaller than the standard deviation.

This situation means that the distribution of data on this variable is heterogeneous.

Table 2. Model Testing Results

Model Estimation Prob Model Selection Model Equation 1

Langrangian Multiplier Test CEM vs REM/FEM 0,0000 BRAKE/ FEM

Hausman Test FEM vs REM 0,0000 FEM

Model Equation 2

Hausman Test CEM vs REM/FEM 0,0000 BRAKE/ FEM

Langrangian Multiplier Test FEM vs REM 0,0000 FEM

Source: Secondary data processed by researchers (2023)

Based on the results of testing the model above using the Breusch Pagan Lagrangian multiplier test and the Hausman test, it can be concluded that to test both the equation model 1 and equation model 2, the best test used the fixed effect model. This is because the Hausman test result value is 0,00 00 <0,05, which means the selected model is a fixed effect model.

Table 3. Common Effect Test Results (Model 1)

Adj R-squared = 0.4398 Residual 2926.36584 1,754 1.66839557 R-squared = 0.4407 Model 2306.02097 3 768.673656 Prob > F = 0.0000 F(3, 1754) = 460.73 Source SS df MS Number of obs = 1,758

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International Journal of Social Science and Business, Vol. xx, No. xx, 2022, pp. xx-yy 5

_cons 1.248443 .0972711 12.83 0.000 1.057663 1.439222 law 1.657015 .0684665 24.20 0.000 1.52273 1.791299 sanction .9246201 .0900647 10.27 0.000 .7479747 1.101265 supervision .7816765 .1118157 6.99 0.000 .5623705 1.000983 compliance Coef. Std. Err. t P>|t| [95% Conf. Interval]

Total 5232.3868 1,757 2.97802322 Root MSE = 1.2917 Adj R-squared = 0.4398 Residual 2926.36584 1,754 1.66839557 R-squared = 0.4407

The regression results show that the adjusted R2 value is 0,4398 or 43,98 %, which means the independent variable consists of supervision, tax sanctions, and law enforcement able to explain Taxpayer compliance of 43,98 % while the other of 56,02 % is explained by other variables.

Fixed Effect Model Test Results (Model 1)

corr(u_i, Xb) = -0.2734 Prob > F = 0.0000 F(3,1462) = 910.88 overall = 0.4402 max = 6 between = 0.0496 avg = 6.0 within = 0.6515 min = 6 R-sq: Obs per group:

Group variable: wp Number of groups = 293 Fixed-effects (within) regression Number of obs = 1,758

Table 4. Fixed Effect Model Test Results (Model 1)

F test that all u_i=0: F(292, 1462) = 5.51 Prob > F = 0.0000 rho .49860644 (fraction of variance due to u_i)

sigma_e .97615601 sigma_u .97343912

_cons .8596532 .0814374 10.56 0.000 .6999065 1.0194 law 2.078091 .0594824 34.94 0.000 1.961411 2.194771 sanction 1.171853 .079237 14.79 0.000 1.016423 1.327284 supervision .7907851 .0988456 8.00 0.000 .5968908 .9846794 compliance Coef. Std. Err. t P>|t| [95% Conf. Interval]

Source: Secondary data processed by STATA software Fixed Effect Model Test Results (Model 2)

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sigma_e 1.0956097 sigma_u .9446953

_cons 2.270439 .0370843 61.22 0.000 2.197695 2.343183 sanctionlaw 1.372285 .2531263 5.42 0.000 .8757559 1.868814 supervisionlaw 1.260581 .253255 4.98 0.000 .7637994 1.757363 compliance Coef. Std. Err. t P>|t| [95% Conf. Interval]

Table 5. Fixed Effect Model Test Results (Model 2)

sigma_e 1.0956097 sigma_u .9446953

_cons 2.270439 .0370843 61.22 0.000 2.197695 2.343183 sanctionlaw 1.372285 .2531263 5.42 0.000 .8757559 1.868814 supervisionlaw 1.260581 .253255 4.98 0.000 .7637994 1.757363 compliance Coef. Std. Err. t P>|t| [95% Conf. Interval]

Based on the results of data processing using the STATA software above, a summary of the hypothesis test results can be made as follows:

Hypothesis Coefficien

t P-Value Information

H1: Supervision has a positive effect on taxpayer compliance

0.79 0,000 Accepted

H2: Tax sanctions have a positive effect on taxpayer compliance

1.17 0,000 Accepted

H3: Law Enforcement has a positive effect on Taxpayer compliance

2.07 0,000 Accepted

H4: Law Enforcement moderates the influence of

Supervision on Taxpayer compliance 1.26 0,000 Accepted

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has a positive effect on taxpayer compliance. Furthermore, the results of this research have the implication that every 1 unit increase in supervision will result in an increase in taxpayer compliance of 0,79.

This finding is in line with Attribution Theory²³,which emphasizes that a person's behavior can be influenced by environmental or external factors. In this case, supervision can influence how individuals attribute behavior related to Taxpayer compliance. These results also support previous research, including research by Alm et al. (2020), Pijnenburg et al. (2017), Reschiwati et al. (2019), Sulistyari et al. (2022), and Dewi & Merkusiwati (2018), which show that supervision has a positive impact on taxpayer compliance, although the level of significance may vary due to other influencing factors, such as service factors. It should be noted that the results of this test are different from the Yap & Mulyani (2022) findings, which show that supervision has no influence on taxpayer compliance. These differences may be due to variability in study context, methodology, or other factors that may have influenced the results of the study.

Therefore, further research is required to understand the factors that may be responsible for the differences in results between these studies.

The second hypothesis (H2) which states that Tax Sanctions have a positive influence on Taxpayer compliance was found to be proven based on test results, with a probability value of 0,000<0,05 and a coefficient of 1,17. The results of this research provide an interpretation that every increase in tax sanctions by 1 unit will result in an increase in taxpayer compliance by 1,17.

This finding is in line with the Theory of Planned Behavior²⁵,which states that behavior is influenced by behavioral intentions, and they are influenced by the individual's attitude towards the behavior (attitude). In this context, if someone is aware of the consequences of tax sanctions that may be received if they do not comply, then the individual's attitude towards taxpayer compliance tends to become more positive because the individual wants to avoid these sanctions. The results of this test are in line with a number of previous studies, including research by Dewi & Merkusiwati (2018), Alshira'h & Abdul-Jabbar (2020), Paramaduhita &

Mustikasari (2018), Intrada et al. (2019), Rahmayanti et al. (2020), Sari et al. (2022), Dewi &

Merkusiwati (2018), Karnedi & Hidayatulloh, (2019), Asterina & Septiani, (2019), and Handayani (2019).

However, these findings are different from research conducted by Mulyati (2021) and Listyowati et al. (2018), which shows that tax sanctions have no influence on taxpayer compliance. These differences may be due to different contextual or methodological factors between the studies. Therefore, further research needs to be carried out to understand more deeply the variability in results that appears in these various studies. The next test is the third hypothesis (H3), that Law Enforcement has a positive effect on Taxpayer compliance. This hypothesis can also be proven based on test results, where the probability value is 0,000<0,05 and the coefficient value is 2,07. It means that every 1 unit of law enforcement will result in an increase in taxpayer compliance of 2,07. This is also in line with theory²⁵that if an individual feels that Law Enforcement is needed to ensure Taxpayer compliance, then that individual will become more compliant and positive. The results of this test are in line with research by Kurniawan & Limajatini (2023), Sauh Hwee et al. (2023), and Martian Dawn (2014), which supports that Law Enforcement has a positive effect on compliance.

The next test was carried out on the third hypothesis (H3), which states that Law Enforcement has a positive influence on Taxpayer compliance. This hypothesis received support based on test results, with a probability value of 0,000<0,05 and a coefficient of 2,07. These findings indicate that every increase in the Law Enforcement aspect of 1 unit will have an impact on increasing Taxpayer compliance by 2,07. This confirmation is in line with the Theory of Planned Behavior²⁵,which states that if an individual feels that Law Enforcement is a necessary aspect to ensure Taxpayer compliance, then individual will become more compliant and have a positive attitude towards this compliance. In other words, the effectiveness of implementing Law Enforcement can encourage individuals to comply with their tax obligations.

This finding also received confirmation from other relevant research, such as Kurniawan &

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Limajatini (2023), Sauh Hwee et al. (2023), and Martian Fajar (2014). These studies consistently show that Law Enforcement plays an important role in increasing taxpayer compliance. This means that the existence of effective legal mechanisms and regulations, as well as consistent enforcement, can be a key factor in ensuring better tax compliance from the public or taxpayers.

Thus, it is crucial to achieve optimal levels of tax compliance, effective implementation and enforcement of laws by the authorities.

The next test focuses on the fourth hypothesis (H4), which states that Law Enforcement moderates the influence of Supervision on Taxpayer compliance. The test results provide confirmation, with a probability value of 0,000<0,05 and an increase in the coefficient value from 0,79 to 1,26. This finding has very important implications, that the role of Law Enforcement is crucial in increasing the impact of Supervision on Taxpayer compliance.

Interpretation of these results illustrates that the effectiveness of Supervision in increasing Taxpayer compliance becomes more significant when Law Enforcement is involved. In this context, Law Enforcement acts as a moderator that strengthens the relationship between supervision and taxpayer compliance. An increase in the coefficient value shows that Law Enforcement not only makes a direct contribution to Taxpayer compliance, but also increases the positive impact of Supervision on that compliance. This concept is in line with literature, which emphasizes that the existence of sanctions or effective law enforcement can be an additional incentive for taxpayers to comply with tax regulations. In other words, the threat of sanctions or punishment from the authorities (Law Enforcement) can increase the effectiveness of Supervision in achieving Taxpayer compliance. This is important because the purpose of tax audits is to increase tax compliance, which in turn can have an impact on increasing state tax revenues.

This research creates new insights and makes a significant contribution to our understanding of the interaction of factors that influence taxpayer compliance behavior. The practical implications emphasize the importance of considering the role of Law Enforcement in designing supervisory strategies and policies to achieve higher levels of tax compliance.

Therefore, optimizing tax audits needs to be supported by strict rules and sanctions on taxpayers who violate statutory provisions²⁷.

The fifth hypothesis (H5) states that Law Enforcement moderates the effect of Tax Sanctions on Taxpayer compliance. This hypothesis was found in the test results, with a probability value of 0,000<0,05 and an increase in the coefficient value from 1,17 to 1,37. This finding means that law enforcement can play a moderating role in the influence of tax sanctions on taxpayer compliance.

The Theory of Planned Behavior²⁵provides a foundation for understanding these results.

This theory asserts that individual attitudes and intentions towards behavior are influenced by several factors, such as perceived behavioral control, where the effectiveness of law enforcement or supervision can moderate the influence of these factors. In this context, the existence of Law Enforcement can strengthen the influence of tax sanctions on taxpayer compliance. Along with these findings, Heru Tjaraka (2020) noted that tax law enforcement has a positive impact on tax compliance attitudes and behavior. Implementing effective tax penalties or sanctions can provide additional encouragement for taxpayers to comply with tax regulations. Thus, these results support the idea that the existence of Law Enforcement not only increases the effectiveness of tax sanctions in influencing Taxpayer compliance but also acts as a moderating element that strengthens the correlation between the two. The implication is that a strong tax law

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supervision, tax sanctions, and law enforcement have a significant positive influence on taxpayer compliance. Supervision contributes to increasing taxpayer compliance, which means that if taxpayers are properly supervised, taxpayers tend to fulfill their tax obligations. Tax sanctions, which are punishments for non-compliance with tax regulations, are also very influential in encouraging people to be more compliant. This means, if someone realizes that there are consequences or penalties, they are more motivated to pay and report taxes correctly. In addition, law enforcement has a significant positive impact, confirming that implementing penalties effectively can increase taxpayer compliance. An interesting finding is the ability of law enforcement to moderate the influence of tax supervision and sanctions on compliance, indicating that law enforcement has an additional role in strengthening the effectiveness of tax supervision and sanctions. Therefore, the overall results of this research highlight the importance of a combination of supervision strategies, tax sanctions, and law enforcement in achieving optimal taxpayer compliance.

This research achieved significant results supporting key theories, such as Attribution Theory²³and Planned Behavior Theory²⁵. According to Heider (1958), individual behavior is influenced by environmental or external factors to the individual. The results of this research reflect how external factors, such as supervision, tax sanctions, and law enforcement can influence taxpayer compliance. Ajzen's Theory of Planned Behavior (1991) highlights the role of individual attitudes and intentions in shaping behavior. Awareness of supervision, tax sanctions, and law enforcement plays a key role in shaping individual attitudes and intentions towards tax compliance. Effective supervision increases compliance and the existence of tax sanctions and law enforcement has a significant positive impact on taxpayer compliance.

Based on the results of this study, the researchers recommend several suggestions for practical application, theory development, and further research. First, related institutions, such as the Directorate General of Taxes (DGT), should improve their supervisory strategy by focusing on more efficient monitoring of individual taxpayers. Proper supervision can increase the level of taxpayer compliance. To develop new theories, further research can be directed at a deeper understanding of the psychological, social and economic factors that influence taxpayer compliance behavior. This can enrich theoretical concepts in the context of individual tax obligations. Finally, for further research, more detailed research is recommended to explore the dynamics between supervision, tax sanctions, and law enforcement. This will help better understand the interactions between variables and provide further insight into how to improve the effectiveness of taxpayer compliance strategies. By implementing these suggestions, it is expected that it can make a positive contribution to interested parties in increasing the overall level of taxpayer compliance.

5. ACKNOWLEDGE

The researcher would like to thank all parties who have played a role in completing this researchas well as the supervisors who have guided this research.

6. REFERENCES