Competition and Corporate Tax Avoidance: Evidence from Chinese Industrial Firms

Abstract

This article investigates whether market competition enhances the incentives of Chinese industrial firms to avoid corporate income tax. We estimate the effects of competition on the relationship between firms’ reported accounting profits and their imputed profits based on the national income account. To cope with measurement errors and potential endogeneity, we use instrumental variables, exogenous policy shocks and other robustness analysis. We find robust and consistent evidence that firms in more competitive environments engage in more tax avoidance activities. Moreover, all else equal, firms in relatively disadvantageous positions demonstrate stronger incentives to avoid corporate income tax.

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