From digitalization to compliance: The mediating role of tax knowledge and financial reporting capability among MSMEs in Indonesia

Abstract

Deploying digital breakthroughs across public tax administrations serves as a foundational strategy to drive higher rates of taxpayer compliance. Nevertheless, utilizing these digital tax portals poses a severe hurdle for small enterprises deficiencies in both their primary tax literacy and practical, day to day financial management proficiency. This research evaluates how Tax Digitalization and Tax Knowledge influence MSME Tax Compliance, while simultaneously examining the mediating function of Financial Reporting Capability. Utilizing a quantitative explanatory framework, this investigation collected primary empirical data by delivering structured questionnaires directly to a sample of 364 purposely chosen MSME owners situated in Bukittinggi City, West Sumatra, Indonesia. The statistical validation of the structural paths and the evaluation of the proposed hypotheses were executed empirically using PLS-SEM within the SmartPLS platform. The structural analysis revealed that Tax Knowledge and Financial Reporting Capability both exert a direct, statistically significant positive impact on MSME Tax Compliance, whereas Tax Digitalization does not directly drive compliance behavior. The statistical output demonstrates that Tax Digitalization acts as a strong driver for Financial Reporting Capability. As a result, this internal organizational capacity functions as a critical bridge that effectively transforms the use of digital tax tools into actual tax compliance outcomes. Conversely, Financial Reporting Capability fails to mediate the link between Tax Knowledge and Tax Compliance. These insights demonstrate that technological shifts in tax systems require robust financial reporting capacities within small businesses to translate digital adoption into actual compliance. From a theoretical perspective, this research enriches the TAM, TPB, and Compliance Theory by confirming that internal organizational capability serves as the missing link between digital exposure and rule adherence. From a practical standpoint, the empirical insights offer a clear framework for regulators to deliberately pair modern digital tax platforms with targeted financial capacity building programs for small businesses