Abstract
Corporate tax avoidance activities are prevalent in many countries, some of which have formulated anti-tax avoidance policies to curb such activities. China amended the chapter on special tax adjustment in the Enterprise Income Tax Law in 2008 and implemented Measures for Special Tax Adjustment in 2009. This study applies the Shanghai and Shenzhen A-share securities markets in 2005-2015 to investigate whether the implementation of Measures for Special Tax Adjustment has effectively curbed corporate tax avoidance activities and increased income tax costs. The empirical results indicate that company effective tax rates (ETRs) are increased significantly after the implementation of Measures for Special Tax Adjustment. And, companies with greater amounts of goods (or service) related party transactions significantly increased ETRs after the implementation of Measures for Special Tax Adjustment. The Chinese government continues to issue numerous rules focused on transfer pricing to amend Measures for Special Tax Adjustment. Therefore, we recommend that corporations carefully assess relevant transactions to avoid being subject to Measures for Special Tax Adjustment legislation.
Highlights
In this era of globalization, enterprises seek means of reducing their global tax burden to increase global profit in order to gain a foothold in the global economy
This study investigates whether corporate effective tax rates (ETRs) will increase after the implementation of China’s Measures for Special Tax Adjustment and the interaction effects with goods transactions, inter-financing transactions, and investment income transactions within the related parties
ETR is the effective tax rate; DY09 is the dummy variable of Measures for Special Tax Adjustment period; OPER is the related parties’ goods transaction ratio; SIZE is the size of enterprise; ROA is the profitability; LEV is the leverage of finance; PPE is the capital intensity; TECH is the dummy variable of high-tech enterprises; L_ETR is the pre-period effective tax rate
Summary
In this era of globalization, enterprises seek means of reducing their global tax burden to increase global profit in order to gain a foothold in the global economy. This study investigates whether corporate effective tax rates (ETRs) will increase after the implementation of China’s Measures for Special Tax Adjustment and the interaction effects with goods (or service) transactions, inter-financing transactions, and investment income transactions within the related parties. The ETRs of companies with a greater number of related party transactions of goods (or services) significantly increase after the implementation of Measures for Special Tax Adjustment. In contrast to the related literature on the effect of a single tax policy on tax avoidance, this study investigates, simultaneously, the effect of three regulations from Measures for Special Tax Adjustment on corporate tax burden, including transfer pricing (TP), thin capitalization (TC), and controlled foreign corporation (CFC) rules.
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