1

Title: Cultural diversity and tax compliance of SME entrepreneurs Despite the economic importance of the tax collection process undertaken by SMEs, little is known about their tax compliance behaviour particularly in relation to cultural factors. With the increasing cultural diversity of SMEs in most OECD countries, there is a need to understand how they comply with the tax regulations. This knowledge is important for both tax authorities and the business community in identifying factors that may hinder successful tax compliance by SMEs. This study aims to examine the tax compliance dynamics of the four largest ethnic SME groups in New Zealand. Additional perspectives were sought from tax practitioners and business experts to provide insights into the cultural influences of networks and time and risk orientations. Collectivistic Maori, Asian and Pacific groups prefer face-to-face relationship building and consequently, 59 SME entrepreneurs, tax practitioners, and business experts were interviewed between 2006 and 2010. Using Hofstede’s (1980) cultural framework as the theoretical lens, this study found some collectivistic groups experienced greater challenges with their record keeping. Ethnic groups with greater reverence towards authorities perceived the tax authority as exerting greater punishment for non-compliance. Finally, ethnic groups that were future oriented experienced fewer tax compliance difficulties. This study showed that some ethnic groups experienced more tax compliance difficulties due to the cultural incompatibility with the New Zealand tax requirements. Consequently, there is a need for the business community and tax authorities to be aware that culture can impinge on the ethnic entrepreneurs ’ tax compliance perceptions and practices.