Tax, Financial Reporting, and Tunneling Incentives for Income Shifting: An Empirical Analysis of the Transfer Pricing Behavior of Chinese-Listed Companies

Posted: 19 Oct 2009

See all articles by Agnes W. Y. Lo

Agnes W. Y. Lo

Lingnan University

Raymond M. K. Wong

City University of Hong Kong (CityU) - Department of Accountancy

Michael Firth

Lingnan University - Department of Finance and Insurance

Date Written: October 9, 2009

Abstract

This study examines tax, financial reporting, and tunneling incentives on the transfer pricing decisions of Chinese listed companies. We use the relative gross profit ratios of related- and unrelated-party transactions to measure transfer pricing strategies. We find evidence supporting the view that transfer pricing is used to (i) increase a listed firm’s profits as the corporate income tax rate decreases, (ii) increase a listed firm’s profits if its management’s compensation is determined by reference to reported profits, and (iii) decrease a listed firm’s profits as the percentage of shares owned by the government increases (i.e., the tunneling effect). For those firms that face both tax and tunneling incentives we find that the incentives tend to offset each other such that there is no discernable earnings management.

JEL Classification: M41, M45

Suggested Citation

Lo, Agnes W. Y. and Wong, Raymond M. K. and Firth, Michael, Tax, Financial Reporting, and Tunneling Incentives for Income Shifting: An Empirical Analysis of the Transfer Pricing Behavior of Chinese-Listed Companies (October 9, 2009). Journal of American Taxation Association, Fall 2010, Available at SSRN: https://ssrn.com/abstract=1485931

Agnes W. Y. Lo (Contact Author)

Lingnan University ( email )

Department of Accountancy
Tuen Mun
Hong Kong
Hong Kong

Raymond M. K. Wong

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Michael Firth

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China
+852 2616 8160 (Phone)
+852 2466 4751 (Fax)

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