Government-Business Relationship and Tax Avoidance: Evidence from China

DOI: 10.5176/2251-1997_AF62

Authors: Hongyan Sun, Desmond C.Y. Yuen and Xu Zhang

Abstract:In this study, we investigate how government-businessrelationship affects firms’ tax avoidance behavior. Using datafrom China, we find that firms with tight relation withgovernment are more likely to avoid tax payment. Specifically,state-owned enterprises (SOEs) and firms in provinces wheregovernments exercise strong control over business avoid taxpayment more. The economic magnitude of this effect issubstantial: on average, SOEs pay 1{6e6090cdd558c53a8bc18225ef4499fead9160abd3419ad4f137e902b483c465} of pre-tax income fewertaxes than non-SOEs. Compared with SOEs affiliated to localgovernment, SOEs affiliated to central government are morelikely to undertake tax avoidance. Our study sheds light on therole that government-business relationship in shaping firms’ taxavoidance behavior.

Keywords: government-business relationship; tax avoidance; taxsharing system