Abstract
Local governments play dual, but conflicting, roles in China's tax system. That is, they are both tax collectors and controlling shareholders of firms subject to tax payments. We investigate how local governments balance their tax collection and tax avoidance incentives. We find that the conflicts between central and local governments arising from the 2002 tax sharing reform have led to more tax avoidance by local government-controlled firms, particularly when the local government's ownership percentage of the firms is higher than the tax sharing ratio. We also find evidence that the overall level of tax avoidance by local government-controlled firms in a region is positively associated with local fiscal deficits. As a high level of government ownership of corporations and intergovernmental tax sharing are common phenomena in many transitional economies, this study offers valuable insights into how the dual roles played by local governments affect tax policy enforcement in these economies.
| Original language | English |
|---|---|
| Pages (from-to) | 247-270 |
| Number of pages | 24 |
| Journal | The Accounting Review |
| Volume | 92 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - Mar 2017 |
Bibliographical note
We thank Mark L. DeFond (editor) and two anonymous reviewers for their constructive comments. We also thank seminar participants at Brock University, Concordia University, Miami University, University of New Hampshire, and University of Ottawa for their comments.Funding
Phyllis Lai Lan Mo acknowledges partial financial support from City University of Hong Kong (Project No. 7004554). K. Hung Chan also acknowledges partial financial support of this research from the Hong Kong Institute of Business Studies (HKIBS) of Lingnan University.
Keywords
- agency theory
- intergovernmental agency conflicts
- tax avoidance
- tax collection
- tax policy enforcement
- tax sharing reform