This paper examines the interaction between the different indicators of the business environment and tax evasion. First, we develop a simple theoretical model linking tax evasion to the business environment. Second, we test the model predictions using the World Bank Enterprise Survey data for Uganda. Findings indicate that the extent of tax evasion is associated with bureaucratic bribery, the quality and efficiency of the legal systems, and the inadequate provision of public capital. Our results are robust to alternative estimation strategy, choice of instruments, treatment of outliers, and missing data.