Political Status and Tax Haven Investment of Emerging Market Firms: Evidence from China
Tax haven investment has become an increasingly important topic in business ethics. Given the considerable tax haven investments from emerging market firms, understanding how home-country institutions shape their investments in tax havens is theoretically intriguing and practically crucial. By integrating resource dependence and institutional theories, we hypothesize the existence of a negative relationship between firms’ home-country political status and tax haven investment. State-owned enterprises (SOEs) controlled by the central government dominate the political hierarchy. Compared with other types of enterprises, central SOEs receive the strongest institutional support and are the most prone to institutional oversight, thereby exhibiting the weakest tendency to invest in tax havens. This top group is followed by SOEs controlled by local governments, politically connected private firms, and private firms without political connections. These groups exhibit an increasing tendency to invest in overseas tax havens. The empirical analysis of Chinese listed firms during 2003–2013 supports our hypotheses. This research contributes to the business ethics literature by identifying institutional drivers of overseas tax haven investment by emerging market firms, thereby adding to the ethical debate on international tax avoidance.
KeywordsTax avoidance Tax haven Political status Resource dependence theory Institutional theory Emerging market China
We express our appreciation for the comments from the Section Editor Suhaib Riaz, three JBE reviewers, Alvaro Cuervo-Cazurra, Lorraine Eden, the audience, and reviewers on the earlier versions of this paper at SMS Special Conference 2016 (Hong Kong), Renmin University of China, AOM Annual Meetings 2017 (Atlanta), and SMS Annual Conference 2017 (Houston).
This study was funded by the National Natural Science Foundation of China (Grant Numbers 71772175 and 71672040) and Foundation of Humanities and Social Sciences, Ministry of Education, China (Grant Number 17YJA630011).
Compliance with Ethical Standards
Conflict of interest
The authors declare that they have no conflict of interest.
This article does not contain any studies with human participants or animals performed by any of the authors.
- Al Karaawy, N. A. A., & Al Baaj, Q. M. A. (2018). Taxation of international business organizations. Academy of Accounting and Financial Studies Journal, 22(1), 1–16.Google Scholar
- Bearak, M. (2016). How global tax evasion keeps poor countries poor. The Washington Post. April 8. https://www.washingtonpost.com/news/worldviews/wp/2016/04/08/how-global-tax-evasion-keeps-poor-countries-poor/?noredirect=on&utm_term=.51c4e33508be.
- Contractor, F. J. (2016). Tax avoidance of multinational companies: Methods, policies, and ethics. AIB Insights, 16(2), 10–13.Google Scholar
- Fan, G., Wang, X., & Zhu, H. (2011). NERI index of marketization of China’s provinces 2011 report. Beijing: Economic Science Press (in Chinese).Google Scholar
- Guillén, M. F. (2000). Business groups in emerging economies: A resource-based view. Academy of Management Journal, 43(3), 362–380.Google Scholar
- Hoskisson, R. E., Eden, L., Lau, C. M., & Wright, M. (2000). Strategy in emerging economies. Academy of Management Journal, 43(3), 249–267.Google Scholar
- Huang, Y. (2003). Selling China: Foreign direct investment during the reform era. New York: Cambridge University Press.Google Scholar
- Marriage, M. (2017). Paradise papers line up Big Four accountancies for criticism. Financial Times. November 15. https://www.ft.com/content/90befed2-c954-11e7-ab18-7a9fb7d6163e.
- Marriage, M. (2018). Big four paid millions to advise Brussels on tax policy. Financial Times. July 9. https://www.ft.com/content/56f862ee-8392-11e8-96dd-fa565ec55929.
- Ministry of Commerce of China (2017). Statistical bulletin of Chinese OFDI. Beijing: Ministry of Commerce of ChinaGoogle Scholar
- OECD. (2000). Towards global tax co-operation: Progress in identifying and eliminating harmful tax practices. Paris: OECD.Google Scholar
- OECD. (2017). Background brief: Inclusive framework on BEPS. Paris: OECD.Google Scholar
- OECD. (2018). OECD/G20 inclusive framework on BEPS progress report july 2017-june 2018. Paris: OECD.Google Scholar
- Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations: A resource dependence perspective. Stanford: Stanford University Press.Google Scholar
- State Administration of Taxation of China (2016). China’s tax authorities actively participate in more international tax system reform of G20—contributing China’s wisdom to restructure the new order of international taxation. Retrieved July 27, 2018, from http://www.chinatax.gov.cn/eng/n2367751/c2377992/content.html
- State Administration of Taxation of China (2018). Tax treaties between China and other countries. Retrieved July 27, 2018, from http://www.chinatax.gov.cn/eng/n2367741/index.html
- UNCTAD (2011). World investment report 2011: Non-equity modes of international production and development. Geneva: United Nations Conference on Trade and Development.Google Scholar
- UNCTAD (2015). World investment report 2015: Reforming international investment governance. Geneva: United Nations Conference on Trade and Development.Google Scholar
- UNCTAD (2017). UNCTAD statistics. Retrieved August 14, 2017, from http://unctadstat.unctad.org/.
- United Nations (2016a). After disclosure on Bahamas tax havens, UN experts urge governments to take action. https://news.un.org/en/story/2016/10/542062-after-disclosure-bahamas-tax-havens-un-experts-urge-governments-take-action.
- United Nations (2016b). Convening world conference on tax evasion should be priority for next secretary-general—UN expert. https://news.un.org/en/story/2016/10/542062-after-disclosure-bahamas-tax-havens-un-experts-urge-governments-take-action.
- Waldmeir, P., & MacNamara, W. (2010). Rio Tinto case highlights risks in China. Financial Times. March 23. https://www.ft.com/content/fdd1e036-40d4-11df-94c2-00144feabdc0.
- World Bank (2016a). Database on total tax rate (% of commercial profits). Retrieved August 14, 2017, from http://data.worldbank.org/indicator/IC.TAX.TOTL.CP.ZS.
- World Bank (2016b). Doing business 2016: Measuring regulatory quality and efficiency. Washington, DC: World BankGoogle Scholar
- Zhong, N. (2017). SOEs to take lead role along Belt and Road. China Daily. May 9. https://www.chinadaily.com.cn/business/2017-05/09/content_29258516.htm.