VAT Adoption and Corporate Income Tax Avoidance

Agnes C.S. CHENG, Chih-Chieh HSIEH*, Kenny Z. LIN

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review


This study provides evidence of the relationship between adopting a value-added tax (VAT) and corporate income tax avoidance. Our analysis exploits the staggered replacement of retail sales tax with VAT in China between 2012 and 2019. Based on a sample of 6,948 firm-years, we find that firms affected by the VAT reform are associated with an increase in their book (cash) effective income tax rates by 1.4 (2.2) percentage points. Such an effect is more pronounced among firms that make the most of their sales to businesses than individuals and among those that are located in regions with low social trust and tax enforcement levels. Additional test results show that changes in ETRs are not mechanically driven by changes in sales and costs and consumption taxes brought about by the reform. While aiming to eliminate double taxation, the VAT reform generates a positive externality for income tax collection.
Original languageEnglish
JournalJournal of the American Taxation Association
Early online date8 Sept 2023
Publication statusE-pub ahead of print - 8 Sept 2023

Bibliographical note

The authors are thankful for comments and suggestions from two anonymous referees, James Ohlson, Katherine Schipper, Grace Pownall, Albert Tsang, and the research seminar participants at The Hong Kong Polytechnic University, Lingnan University, Guangzhou University, National Taiwan University, and NEOMA Business School. Kenny Z. Lin acknowledges partial financial support from Lingnan University.


  • VAT
  • self-enforcement
  • deterrence effect
  • corporate income tax avoidance

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