Does access to credit reduce SMEs’ tax avoidance? Evidence from a regression discontinuity design

Abstract

This study investigates the effect of targeted reserve requirement ratio cuts (TRRRCs) on tax avoidance among small and micro enterprises (SMEs) with operating revenues below specific cutoffs in China. Using a regression discontinuity design, we causally show that, by increasing loan availability, TRRRCs significantly alleviate the financial constraints and cash dependence of SMEs and consequently reduce tax avoidance. This is especially the case among firms with lower market power and higher entertainment and travel costs. Our findings provide evidence for the real effect of TRRRCs on corporate tax avoidance and show the inclusive effect of TRRRCs on SMEs. In doing so, we indirectly reveal a rent-seeking channel underlying bank lending, thus offering clear policy implications for regulators.

Gender, Perception of Audits, Access to Finance, and Self-Assessed Corporate Tax Compliance

“…However, firms often have difficulties acquiring finance (Kong et al 2021), even though access to finance can increase productivity (Lim and Foster 2020;Ferrando and Ruggieri 2018;Galasso et al 2018). The owner's willingness to allow firm access to finance is significantly influenced by risk assessment, which, among other things, may be found in their financial statements.…”

“…Companies that have easy access to finance will have increased finances for operating costs, resulting in a sense of financial security and a willingness to cooperate with tax authorities (Kong et al 2021). However, firms that face financial constraints grab the opportunity to compensate for their limited resources by decreasing costs, including tax costs, in a variety of ways, including through tax non-compliance (Luo et al 2020;Elbannan and Farooq 2020); taxes are often considered as costs that do not bring economic benefits (Tomkiewicz and Marta 2020).…”

“…According to previous research, tax compliance is also influenced by financial access (Kong et al 2021;Alm et al 2019). Companies with easy access to finance will be more financially secure and cooperative in fulfilling their tax obligations (Kong et al 2021).…”

“…Companies with easy access to finance will be more financially secure and cooperative in fulfilling their tax obligations (Kong et al 2021). Firms with easy access to finance will be more financially secure and cooperative in meeting their tax obligations (Kong et al 2021).…”

“…Second, access to finance is used as a moderating factor between financial statement audits and voluntary tax compliance. Previous research has established a direct association between financial statement audits and access to finance (Alrashidi et al 2021), financial statement audits and tax compliance (Kasper and Alm 2020), and access to finance and tax compliance (Kong et al 2021;Alm et al 2019). Third, the gender of company managers can be used to predict differences in the impact of financial statement audits on private companies' access to finance and tax compliance.…”