Social Trust, Market Competition, and Tax Avoidance: Evidence from Contemporary China
Firms pay their fair share of taxes because they want to be perceived as good corporate citizens. However, managers might engage in tax-avoiding activities if such activities are value-maximizing. Using firms in China, this study focuses on the relation between social trust and corporate practice of tax avoidance for the period 2012 to 2016. It investigates whether firms with headquarters in societies with higher level of social trust are less likely to engage in tax-avoiding activities. It also investigates whether this negative relation is more pronounced for firms in industries that are less competitive. Results show that firms located in provinces with higher social trust level engage less in tax-avoiding activities, and the negative relation is more pronounced for firms in industries that are less competitive. Since corporate tax avoidance leads to significant loss of tax revenues, tax authorities in China should engage the services of forensic accountants to identify those corporations that practice aggressive tax avoidance. Furthermore, China needs to provide more forensic accounting training for practicing accountants and auditors. Educational institutions need to offer more forensic accounting courses in order to fill the gap between forensic accounting practices and education.