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Political Status and Tax Haven Investment of Emerging Market Firms: Evidence from China

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Abstract

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.

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Notes

  1. The annual consequent corporate income tax loss is estimated to be roughly USD100–240 billion, which is equivalent to 4–10% of the global corporate income taxes (OECD 2017). In June 2018, 115 countries have joined the OECD/G20 multilateral coordination framework, representing 95% of global GDP (OECD 2018).

  2. They include Bahamas, British Virgin Islands, Isle of Man, Guernsey, Jersey, Bermuda, Argentina, Cayman Islands, San Marino, and Liechtenstein.

  3. All historical Chinese OFDI in tax havens accounted for nearly 78% of the value of all Chinese OFDI during 1980–2016. Hong Kong (57.5%), the Cayman Islands (7.7%), the British Virgin Islands (6.5%), and Singapore (2.5%) were the top four destinations (Ministry of Commerce of China 2017).

  4. Some auxiliary empirical results not reported for brevity, but they are available upon request.

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Acknowledgements

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).

Funding

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).

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Authors and Affiliations

  1. Renmin Business School, Renmin University of China, Beijing, China

    Ziliang Deng & Jiayan Yan

  2. Darla Moore School of Business, University of South Carolina, Columbia, SC, USA

    Jiayan Yan

  3. School of Management, Fudan University, Shanghai, China

    Pei Sun

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Appendix

Appendix

See Tables 6, 7, 8, and 9.

Table 6 Effects of political hierarchy on tax haven propensity and project (private share to measure political hierarchy)
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Table 7 Effects of political hierarchy on tax haven propensity and project (Hong Kong excluded)
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Table 8 Moderating effect of extant tax haven investment
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Table 9 Effects of foreign investments into tax havens on effective tax rate
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Deng, Z., Yan, J. & Sun, P. Political Status and Tax Haven Investment of Emerging Market Firms: Evidence from China. J Bus Ethics 165, 469–488 (2020). https://doi.org/10.1007/s10551-018-4090-0

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