Are financial derivatives tax havens? Evidence from China

Abstract

PurposeThe purpose of this study was to examine whether the use of financial derivatives by business enterprises can avoid taxes and whether tax authorities can detect and effectively enforce measures regarding this emerging tax avoidance method.Design/methodology/approachUsing panel data from the Shanghai and Shenzhen Stock Exchange listed companies from 2008 to 2019, this study used the Heckman self-selection two-stage model and a cross-sectional analysis to test a total of 22,578 samples. Moreover, propensity score matching (PSM), instrumental variable and Heckman MLE methods were conducted in the robustness test.FindingsThe results showed that enterprises could use financial derivatives to avoid taxation. The greater the tax effort is, the more obvious the effect of the company's use of financial derivatives for tax avoidance, which proves challenging for tax authorities to identify and manage.Originality/valueThis study expands on research on corporate tax avoidance and provides a new perspective for the study of financial derivatives. Moreover, it improves relevant research in the field of tax regulation, offering practical guidance for tax authorities to govern the use of financial instruments to prevent potential risks effectively.