Domestic Income Shifting by Chinese Listed Firms

Abstract

To encourage economic development in specific regions and industries, the Chinese Central and local governments offer a series of corporate income tax incentives (tax exemptions, reduced tax rates, tax holidays, and tax refunds). In China, parent and subsidiary companies are consolidated for financial reporting, but not for tax purposes. We take advantage of a unique disclosure in the tax footnotes of Chinese listed firms to examine income shifting among consolidated group members in response to these incentives. We find that intangible-intensive groups (“firms”), and firms concerned with meeting minimum earnings thresholds to issue equity, shift greater amounts of income. We find no evidence that high concentrations of either Central or local government ownership affect the level of income shifting.

Earnings Persistence and Stock Market Reactions to the Different Information in Book-Tax Differences: Evidence from China

“…invoices (see Shevlin, Tang, & Wilson, 2012;Tang & Firth, 2011). In contrast, U.S. income tax laws allow the accelerated method for tax depreciation, tax loss carry-backs, and carryforwards for 20 years.…”

“…19 The tax rate differential itself is unrelated to different revenue and expense recognition in book and tax reporting. However, it affects the calculation of NBTDs when separate tax reporting is used in contrast to the consolidation book reporting (see Shevlin et al, 2012 for a detailed discussion). Therefore, "TAX_DIFF it " is included to control for the mechanical effects on NBTDs.…”

“…By analyzing a line item in Chinese BTD disclosures, Shevlin et al (2012) provide evidence that firms expecting to make rights issues shift income among the consolidated subsidiaries to reduce the tax burden as one means of keeping their return on equity (ROE) above the threshold. Chan, Lin, and Mo (2010) find that tax noncompliance increases as the regulatory differences in accounting and tax reporting increase.…”

China’s secondary privatization: new evidence on controlling shareholders tunnelling

“…This strand of literature often utilizes information on related-parties transactions as proxy measures of tunnelling to overcome the identification and measurement problems (see Lo, Wong, and Firth 2010;Lo and Wong 2011;Shevlin, Tang, and Wilson 2012;Peng, Wei, and Yang 2011;Fu 2009, 2010; for reviews). A number of studies led by Jiang, Lee and Yue (2010) have focused on fund transfer from listed firms to their related-parties or 'intercorporate loans' captured by the proxy variable 'other receivables' disclosed in balance sheets.…”

Transfer pricing e income shifting: evidências de empresas abertas brasileiras

“…Em geral, tais proxies são utilizadas quando não é possível obter dados específicos sobre as transações com partes relacionadas, devido à falta de divulgação ou ao seu difícil acesso. Consistem, essencialmente, no exame da relação entre os incentivos que as empresas possuem para a manipulação dos preços de transferência e para a prática de income shifting e as informações de lucro e tributação disponíveis nas demonstrações financeiras das empresas (Jacob, 1996;Conover & Nichols, 2000;Langli & Saudagaran, 2004;Jung, Kim, & Kim, 2009;Lo, Wong, & Firth, 2010;Klassen & Laplante, 2012a;Shelvin, Tang, & Wilson, 2012;Dharmapala & Riedel, 2013 …”