Tax System Design,Tax Avoidance and Related Party Transactions:Evidence from China
As a significant form of transaction,inter-company related party transactions are a prevalent phenomenon worldwide.Previous studies have discussed the motivations behind inter-company related party transactions,with tax avoidance being a primary focus.However,establishing a direct relationship between the two has been a challenge in existing research.Based on China's unique excise tax system,this study attempts to reconstruct the causal logic between tax avoidance and related party transactions.China's excise tax system adopts a model of single taxation at the production stage,and transfer pricing through related party transactions is the only method of tax avoidance under this model,providing an opportunity to address the aforementioned challenge.Based on micro data of Chinese listed companies from 2010 to 2019 and taking advantage of the exogenous impact of the adjustment of consumption tax items in 2015,this study examines the tax avoidance motives of Chinese listed companies from the perspective of related party transactions.The study finds that,first,compared with non-tax-related enterprises,the level of outward-related party transactions significantly increased for battery and paint production enterprises after they transitioned from non-tax-to tax-related enterprises due to the scope adjustment of the excise tax.Further,the placebo results reveal that the excise tax policy did not affect the inward-related party transactions or non-commodity-related party transactions of listed companies,consistent with the characteristic of excise tax being levied at the production stage.Second,the study finds that related party transactions are mainly concentrated between parent and subsidiary companies.This is because related party transactions reduce the tax base while lowering production stage profits,necessitating transactions within a controllable range,and making transactions between parent and subsidiary companies undoubtedly the least risky.Third,the conclusions exhibit significant heterogeneity across various dimensions,including tax information audits,internal governance levels,and external regulatory capabilities.After a series of robustness checks,the conclusions remain valid.Lastly,using the cessation(or reduction)of excise tax on cosmetics as a reverse logic,the study's conclusions are further verified.The conclusions have important implications for the current reform of China's excise tax system.First,tax authorities should strengthen tax collection and management,improving the identification mechanisms for related party transactions.With the full implementation of the"Golden Tax Phase Ⅳ"project,tax authorities have a more comprehensive grasp of enterprise tax-related data.They can establish risk warning models for related party transactions based on transaction amounts,parties involved,and transaction proportions and utilize informatized tax management technologies to conduct real-time monitoring and post-event review of transfer pricing behaviors.Second,the government should orderly promote the backward movement of tax collection and steadily decentralize excise tax to local governments.The fundamental approach to solving excise tax evasion lies in transferring the tax collection stage to the consumption end,thereby returning to the essence of excise tax as a levy on product consumption behavior,anchored to the final product consumption price.Thus,transfer pricing behavior and related party transactions will lose their value.Of course,the reform must be carried out under controllable tax administration,implying that the shift of the taxation stage must be based on tax authorities having strong consumption-end tax administration capabilities to achieve overall tax system improvement and optimization,laying the foundation for excise tax to become a potential major local tax.Third,while promoting the backward movement of tax collection,timely adjustments to the excise tax items should be made to reflect the tax's guiding direction.Historically,excise tax has been positioned as a tax tool reflecting macroeconomic regulation and industrial policy direction,mainly levied on luxury goods and polluting products.Nowadays,as the consumption structure shifts from survival-based to development-based,the concepts of"luxury goods"and"polluting products"need to be redefined to truly exert the regulatory function of excise tax.
Tax System DesignTax AvoidanceExcise TaxRelated Party Transactions
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