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Import Competition And Corporate Tax Avoidance: Evidence From The China Shock

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  • Baptiste Souillard

Abstract

This paper examines the effect of import competition on corporate tax avoidance. I exploit the rapid surge of China’s exports as a competition shock and balance sheets and income statements to measure tax avoidance of US-headquartered publicly listed manufacturing firms. The baseline results reveal that a 1 percentage point increase in the penetration ratio of US imports from China entails, on average, a 0.20 percentage point decrease in the effective tax rate. They are supported by a series of sensitivity tests and robust to using the US conferral of the Permanent Normal Trade Relations status on China in late 2000 as a quasi-natural experiment. Furthermore, the results are entirely driven by multinational firms. In response to the China shock, these firms invested in intangible assets, and these intangibles allowed them to shift more profits towards low-tax countries. These findings shed light on the determinants of corporate tax avoidance. More generally, they help understand the decline in the average effective tax rate of US publicly listed firms and the recent backlash against large firms and globalization.

Suggested Citation

  • Baptiste Souillard, 2020. "Import Competition And Corporate Tax Avoidance: Evidence From The China Shock," Working Papers ECARES 2020-30, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/309985
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    More about this item

    Keywords

    Corporate tax avoidance; multinational firms; import competition; intangibles; profit shifting;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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