Tax Under-Sheltering in Chinese Companies

A substantial body of literature believes that Chinese companies engage in aggressive tax avoidance, while the macro data show that the corporate sector is heavily taxed. This paper is focused on understanding the tax positions of the Chinese corporate sector, and addressing the conflict between macro data and corporate tax avoidance research. We construct a sample of all Chinese listed companies from 2012 to 2017 and adopt a modified cash effective tax rate (ETR) tax avoidance measurement model. We find that on average, Chinese listed companies are under-sheltering. Specifically, most companies in China do not avoid taxes, even pay higher taxes. In further study, we interpret the generation mechanism of tax under-sheltering. We conduct a grouping OLS regression to test managerial decisions for external reporting incentives. We then examine the moderating effects of corporate ownership on managerial reporting incentive. To make our explanation more robust, we discuss the effects of loss firms. Our study enriches the research on enterprises' tax avoidance and earnings management.