Divide and Conquer:Organizational Structure of Tax Authorities and Enterprise Tax Evasion Using Related Party Transactions
Cracking down on tax avoidance is a core issue in tax policies and a major issue around the world.Tax au-thorities face a variety of problems such as information frictions,insufficient incentives,and coordination difficulties in policing tax evasion.A multi-level organizational structure exacerbates these problems.Improving the efficiency of tax authorities by optimizing organizational structure has become a focus of reform of tax agencies worldwide.Under the established organizational size,a flat structure can reduce information frictions between higher and lower levels,which is conducive to longitudinal control.However,with a reduction of management levels,the span of control may become too large,which is not conducive to the coordination across levels to carry out horizontal cooperation.When the span of control is too large,it is difficult for the higher-level tax authorities to give full play to their leadership and co-ordination role,which is reflected in the insufficient enthusiasm and ineffective cooperation of lower-level tax authorities.One possible solution is to add an intermediate level between the higher-level and lower-level tax authorities,thus reduc-ing the span of control,in order to improve the detection and punishment of cross-jurisdiction tax evasion.The State Taxation Administration of China set up six special agencies(SAs)in 2017 and 2019.From the perspec-tive of organizational structure,the establishment of the SA essentially adds a level between the State Taxation Adminis-tration and the provincial tax service department,dividing the thirty-six provincial tax administrative units into six small-scale organizations,and greatly reducing the span of control to improve the efficiency of tax organization.Using the large data sample of company pairs formed by A-share non-financial listed companies and their parent and subsidiary compa-nies from 2015 to 2021,this paper examines the governance effect of the organizational structure optimization on con-glomerates'tax avoidance using related party transactions.The study finds that SAs have improved the efficiency of cross-regional tax inspection by optimizing the span of control and effectively inhibiting conglomerates'tax evasion us-ing related party transactions.Furthermore,for the companies with strong tax avoidance motives,the above effect is more obvious.Mechanism analysis shows that SAs effectively inhibit conglomerates'tax avoidance using related party transac-tions which take advantage of differences in effective tax rates between the parent and subsidiaries.These differences re-sult from tax policies favoring high-tech,small,and micro enterprises,as well as tax carry-overs of loss-making enter-prises.Moreover,we find that establishing SAs significantly improves local tax capacity.This paper has two main contributions.We first provide evidence from the tax department on how the span of con-trol affects organizational performance.The research on the span of control mostly focuses on corporate organizations and multi-level government organizations.The essence of these organizational structure reforms of administrative depart-ments in China is an adjustment of the organizational power structure,which rarely involves substantive changes in the structure of organizational management.The conclusion of the research on SAs shows that when facing the difficulty of horizontal coordination with the superior and the subordinate,the measure to reduce the span of control by adding the lev-els helps improve organizational performance.In addition,we enrich the research on the efficiency determinants of tax evasion policing in enterprises'related party transactions.Many papers discuss how to achieve strict tax law enforcement using digital technologies and promoting tax authority cooperation on related party transactions.However,there is a lack of research from the perspective of tax organization structure.This paper uses detailed data at the company pair level of related party transactions and studies the effectiveness of tax organization structure optimization on reducing tax evasion for cross-regional related party transactions.
Organizational StructureSpecial Agency of State Taxation AdministrationRelated Party TransactionEnter-prise Tax Evasion