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Tax avoidance opportunity for multinational enterprises: effects of digitalized tax administration in China

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  • Chen, Yilan
  • Lei, Shaohai

Abstract

This study investigates the impact of digitalized tax administration (DTA) on multinational enterprises’ (MNEs’) tax avoidance, with a specific focus on outward foreign direct investment (OFDI) in tax havens. Using a quasi-natural experiment based on the implementation of Golden Tax Project III (GTP III) in China, we find that home country DTA significantly reduces the difference between nominal and effective tax rates for MNEs by 1.2%. This reduction is primarily driven by a contraction in OFDI breadth in tax havens, which restrains MNEs’ tax avoidance. We demonstrate an asymmetric effect wherein DTA does not significantly influence domestic firms’ tax avoidance, which is attributed to their ability to facilitate cross-regional investment. We also explore the various responses to cross-border tax avoidance approaches employed by MNEs to mitigate the adverse effects of DTA on corporate tax avoidance. Overall, our findings highlight the critical role of home country DTA in managing MNEs’ tax avoidance, particularly in the context of developing countries.

Suggested Citation

  • Chen, Yilan & Lei, Shaohai, 2025. "Tax avoidance opportunity for multinational enterprises: effects of digitalized tax administration in China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:intfin:v:102:y:2025:i:c:s1042443125000678
    DOI: 10.1016/j.intfin.2025.102177
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    Keywords

    Digitalized tax administration; Multinational enterprises; Tax avoidance; Outward foreign direct investment;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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