Customer and Tax Avoidance: How Does Customer Geographic Proximity Affect a Supplier’s Tax Avoidance?

This paper examines the effect of the supplier’s customer geographic proximity on the supplier tax avoidance. Based on a sample of 5,582 firm-year observations from 2007 to 2017, we find that the supplier’s customer geographic distance is positively associated with the extent of supplier tax avoidance. This association is robust after studying potential endogeneity concerns. Cross-sectional analyses suggest that this positive relation is more pronounced in suppliers with high financial risk, suppliers in competitive industrial sectors, and suppliers operating in sound marketization environments. Finally, mediation tests reveal that real earnings management and financial constraints are underlying mechanisms through which customer geographic proximity affects the supplier tax avoidance. Overall, this paper from a novel viewpoint enlightens the real effect of customer geographic localities of a supplier on the supplier tax avoidance.