Social trust environment and firm tax avoidance: Evidence from China

The effect of Confucian culture on corporate tax avoidance: evidence from China

“…Third, this study supports the views of ethics literature by elaborating that informal institutions lessen unethical practices in corporations, i.e., tax avoidance, in which corporate insiders seek personal benefits under the shade of tax avoidance. Specifically, our findings provide support the views of the studies that indicate the influence of informal institutions on tax avoidance (Boone et al, 2013;Xia et al, 2017).…”

“…However, in emerging economies, for example, China, the formal mechanisms are less influential to alleviate unethical practices (Du, 2015;Jebran, Chen, & Tauni, 2019). Therefore, studies are recognizing that informal institutions (culture, religion, social norms, etc.,) can supplement standard governance systems and lessen unethical corporate practices (Boone et al, 2013;Xia et al, 2017). In this study, we examine whether and how Confucian culture can alleviate tax avoidance behavior in China.…”

“…First, although China is the largest emerging economy, the corporate governance practices are still weak and under construction. It is well documented in the literature that managers easily extract private benefits due to the weak formal institutional environment (Allen et al, 2005;Cao et al, 2016;Du, 2015;Xia et al, 2017). Therefore, studies have identified that when formal systems are weak, informal institutions (religion, social trust, culture) can play a supplementary role in mitigating unethical corporate practices (Chen, Cai, et al, 2019;Du, 2013;Richardson, 2008;Xia et al, 2017).…”

“…We further argue that tax enforcement efforts can moderate the relationship between Confucian culture and tax avoidance. It is because studies suggest that informal systems are less influential in influencing corporate decisions when formal mechanisms are prominent (Chen, Ye, et al, 2019;Du, 2015;Jebran, Chen, Ye, et al, 2019;Xia et al, 2017). Chinese firms are known to have a distinct feature which is the nature of enterprise, i.e., state-owned enterprises (SOEs) and non-SOEs.…”

“…Second, this study contributes to literature that seeks to identify factors alleviating tax avoidance behavior. Although most of the studies focus on formal mechanisms, only a few studies (Boone et al, 2013;Xia et al, 2017) investigate whether informal system is associated with tax avoidance behavior. We contribute to this literature by illustrating that Confucian culture is an important determinant of tax avoidance in the Chinese context, where formal mechanisms are still under construction, and less influential in reducing tax avoidance incidences.…”