Tax Regimes, Regulatory Change and Corporate Income Tax Aggressiveness in China

Abstract

This study uses the ‘natural experiment’ provided by China’s implementation of its 2007 Accounting Standards for Business Enterprises No.18 — Corporate Income Tax Accounting and 2008 Enterprise Income Tax Law to address two questions. Have China’s tax regulatory environment changes had an impact on the corporate tax avoidance of its listed companies? Does ownership structure — i.e., state-controlled, private or foreign-invested — impact on companies’ responses to regulatory change? Drawing on effective tax planning, agency, tax avoidance and legitimacy theories, this study uses a balanced panel-data sample for the 2007 to 2010 period on 1,224 companies listed on the Shanghai and Shenzhen Stock Exchanges. We find that tax avoidance by listed companies, measured by the book-tax gap, has reduced as a result of regulatory reform. Additionally we tentatively support the influence of ownership/control on corporate tax avoidance in China, with state-controlled companies evidencing lower levels of the book tax gap.