State ownership, performance evaluation and tax avoidance

Abstract

ABSTRACTIn 2004, the central and local State-owned Assets Supervision and Administration Commission (SASAC) announced how to evaluate the performance of management of state-owned enterprises (SOEs) that are under its control. This article examines how the different performance evaluation systems in different provinces influence the tax avoidance behaviour of SOEs. We find that only four of them – Shanghai, Guangdong, Zhejiang and Fujian – adopt after-tax profit as the evaluation index, while all the other provinces use before-tax profit. We believe that SOEs which use after-tax profit as an evaluation index have higher incentives to reduce the tax burden than those which use before-tax profit as an evaluation index. Following previous literature, two measurements of tax avoidance are used in this paper: effective tax rate and book-tax difference. Based on 8426 observations from 2007 to 2015, we have two main conclusions: (1) compared with SOEs that are evaluated using before-tax profit as the evaluation index, SOEs that are evaluated using after-tax profit have lower effective tax rate (ETR) and higher book-tax difference (BTD); (2) compared with SOEs that are evaluated using before-tax profit as the evaluation index, SOEs that are evaluated using after-tax profit have a higher level of substitution between debt financing and tax avoidance.