Social Trust, Market Competition, and Tax Avoidance: Evidence from Contemporary China

Abstract

ABSTRACTFirms pay their fair share of taxes because they want to be perceived as good corporate citizens. However, managers might engage in tax-avoiding activities if such activities are value-maximizing. Using firms in China, this study investigates the relation between social trust and corporate practice of tax avoidance. Results show that firms located in provinces with higher social trust levels engage less in tax-avoiding activities, and the negative relation between social trust and tax avoidance is more pronounced for firms in industries that are less competitive. Since corporate tax avoidance leads to significant loss of tax revenues, tax authorities in China should engage the services of forensic accountants to identify those corporations that practice aggressive tax avoidance. Furthermore, China needs to provide more forensic accounting training for accountants and auditors. Educational institutions need to offer more forensic accounting courses in order to fill the gap between forensic accounting practices and education.