The Effect of CPC’s Participation in Governance on Corporate Tax Avoidance Behaviors

Abstract

The participation of Communist Party of China （thereafter CPC） in corporate governance is an important feature of corporate governance structure in China. CPC organizations play a political core or political leading role in both state-owned and non-state-owned companies. The institution “two-way entry and cross-appointment” combines CPC organizations with governance mechanisms such as the board of directors and the board of supervisors organically and enables CPC organizations to play significant roles in companies’ major production and operation activities. Tax avoidance not only means that more wealth can be left in companies, but also relates higher legal/regulatory risks, reputational risks, agency problems （especially “rent diversion”） and increased opacity. As an important strategic activity of a company, tax avoidance is inevitably affected by corporate governance. Although there is plenty of literature about the relationship between corporate governance and tax avoidance, it is not clear whether CPC’s participation in corporate governance through “two-way entry and cross-appointment” has a significant impact on tax avoidance activities.　　Using the data of A-share non-financial listed companies from 2009 to 2016, this paper examines the impact of CPC’s participation in corporate governance through “two-way entry and cross-appointment” on corporate tax avoidance. The results show that “two-way entry” has little impact on tax aggressiveness, while “cross-appointment” has a significantly negative effect on tax aggressiveness. Further tests show that “cross-representation” can decrease the likelihood that the degree of tax aggressiveness is extremely high, but it could not lead to extremely low tax aggressiveness. The results also show that “cross-appointment” can decrease tax aggressiveness significantly when it is at a high level, while the effect is not significant when it is at a low level. In summary, CPS’s participation in corporate governance has a negative effect on tax aggressiveness only when tax aggressiveness is at a high level. In addition, there is no significant difference in the impact of “cross-appointment” between state-owned and non-state-owned companies, although the authors only find weak evidence to support the negative effect of “cross-appointment” on tax avoidance in non-state-owned companies. There is no significant difference in the effect of “cross-appointment” on tax avoidance before and after 2013 either.　　This paper makes three contributions to the literature: First, it provides empirical evidence on the economic consequences of CPC’s participation in governance from the perspective of corporate tax avoidance behaviors. It is helpful to understand the role of CPC’s participation in governance in suppressing corporate misconduct and promoting better fulfillment of corporate tax obligations. Second, it explores and finds the asymmetric effect of CPC’s participation in governance on tax avoidance. It implies that the participation of CPC in governance will not prevent companies from normal and low risk-related tax avoidance activities. Such results extend the research of Armstrong, et al. （2015） and Li, et al. （2016）, and help to evaluate the consequences of party organizations’ participation in governance more comprehensively and objectively. Third, it enriches the literature on the relationship between corporate governance mechanisms and tax avoidance activities from the perspective of political governance.