Country-by-country reporting and corporate tax avoidance: evidence from China

Abstract

In 2016, China implemented the country-by-country reporting (CbCR) rule established by the Organization for Economic Cooperation and Development. This study investigates whether and how CbCR affects corporate tax outcomes. Employing difference-in-difference models to analyse data from Chinese listed companies during 2011–2019, we document an about 1.7 percentage points increase in effective tax rates among affected firms. We further find that CbCR discourages tax avoidance caused by related party transactions, and its effects vary among different types of related party transactions. Additional analysis shows that CbCR has a greater influence on firms with lower information transparency and higher tax risk. Finally, CbCR changes the profit distribution of multinational companies, leading to a reduction in the proportion of headquarters profits. The results are robust to various measurements of tax avoidance, placebo test, and parallel trends test. To the best of our knowledge, this study is one of the first to examine the association between CbCR and corporate tax avoidance in China. Overall, the findings enrich the theoretical mechanism of CbCR and provide implications for China's participation in global tax governance.