Country-by-country reporting and corporate tax avoidance: evidence from China

Abstract

In 2016, China implemented the country-by-country reporting (CbCR) rule established by the Organization for Economic Cooperation and Development. This study investigates whether and how CbCR affects corporate tax outcomes. Employing difference-in-difference models to analyse data from Chinese listed companies during 2011-2019, we document an about 1.7 percentage points increase in effective tax rates among affected firms. We further find that CbCR discourages tax avoidance caused by related party transactions, and its effects vary among different types of related party transactions. Additional analysis shows that CbCR has a greater influence on firms with lower information transparency and higher tax risk. Finally, CbCR changes the profit distribution of multinational companies, leading to a reduction in the proportion of headquarters profits. The results are robust to various measurements of tax avoidance, placebo test, and parallel trends test. To the best of our knowledge, this study is one of the first to examine the association between CbCR and corporate tax avoidance in China. Overall, the findings enrich the theoretical mechanism of CbCR and provide implications for China's participation in global tax governance.

The impact of managerial ability on corporate tax risk and long-run tax avoidance: empirical evidence from a developing country

“…Fifthly, policymakers and tax authorities are expected to strengthen the implementation of the country-by-country reporting (CbCR) rule. The CbCR rule, for example, is documented to be capable of suppressing corporate tax avoidance practices in the developing country of China (Yang, 2022). The CbCR rule has a greater impact on companies that have less information transparency and a higher tax risk (Yang, 2022).…”

“…The CbCR rule, for example, is documented to be capable of suppressing corporate tax avoidance practices in the developing country of China (Yang, 2022). The CbCR rule has a greater impact on companies that have less information transparency and a higher tax risk (Yang, 2022). Sixthly, policymakers must establish clear, business-friendly regulations.…”

BEPS 13 No’lu Eylem Planı Kapsamında Transfer Fiyatlandırması Belgelendirme Yükümlülüğü ve Ülke Bazlı Raporlama: Türkiye Uygulamasına İlişkin Bir Değerlendirme

“…The CbCR is then shared with the tax administrations of other countries where the MNE group operates, enabling the assessment of transfer pricing risks and other risks related to BEPS. Along with the master and local files, the CbCR forms the three-tiered structure of documentation obligations, facilitating effective analysis of transfer pricing and BEPS-related risks (Hugger, 2020;Yang, 2023).…”