Abstract
Due to the digital economy the average taxpayer now has access to other income streams where the majority of transactions
can be virtual transactions. Even though these transactions are virtual or takes place in the shared economy, it might still have
a taxation effect for the taxpayer and they need the necessary taxation knowledge to be able to account for these transactions
on their tax returns. Likewise, tax administrations are increasingly making use of advanced technologies to prevent and detect
non-compliance. For some taxpayers this brings new challenges and knowledge requirements in respect of their interaction
with revenue authorities.
Empirical findings has shown that taxpayer knowledge is a factor influencing tax compliance and accordingly, taxpayer
education is generally one of the key approaches adopted by tax authorities to improve taxpayer compliance. The concept of
‘tax literacy’ is however proposed to be a wider concept than tax knowledge alone and needs further investigation in the context
of its role in taxpayer compliance.
The aim of this paper is to illustrate the usefulness of a conceptual framework of tax literacy as a tool in identifying tax
compliance risks for individuals in the digital economy. The risks addressed in this paper are limited to those which could result
from deficits in taxpayers’ knowledge and skills, as well as a lack of information resources.
Using fundamental concepts from the literature on ‘literacy’ and drawing on established theories in especially the ‘financial
literacy’ domain, the concept of ‘tax literacy’ is explained in this paper and presented as a three-dimensional framework.
Understanding that tax literacy is a process of ‘making meaning’ from the interaction between tax awareness and contextual
knowledge. The framework illustrates three elements of tax literacy, namely 1) tax awareness, 2) contextual knowledge and
skills, and 3) meaning making or informed decision making. The first element, tax awareness, refers to individuals’
understanding of their role in the fiscal exchange or social contract with government. This awareness forms the basis of the
framework, as it is a necessary condition for being tax literate. The second element proposes procedural as well as a legal
component of contextual knowledge and skills. The procedural context allows for a consideration of the knowledge and skills
required to interact with tax authorities and having your records for tax purposes in order. The legal context refers to an
understanding of how you are taxed. The third element propose that taxpayers’ engagement in fulfilling their tax obligations is
the result of a social construction of their awareness and knowledge, based on own perceptions. In other words, a combination
of awareness, knowledge, skills and attitude are necessary to make decisions on acting in a tax compliant manner or not.
The usefulness of the proposed framework as a tool in identifying tax compliance risks for individuals in the digital economy
was illustrated with highlighting examples of specialised knowledge requirements on a procedural and legal level as it pertains
to individuals as taxpayers in the digital age.