Tax Evasion Through Trade Intermediation: Evidence from Chinese Exporters
36 Pages Posted: 11 Sep 2014
Date Written: August 12, 2014
Many production firms use intermediary trading firms to export indirectly. This paper investigates the tax evasion motive through indirect trade, using Chinese export data at transaction level. We provide strong evidence that, under the partial export VAT rebate policy of China, production firms can effectively evade value-added taxes (VAT) by under-reporting their selling prices to domestic intermediary trading firms, especially when they sell differentiated products. Even for a moderate level of under-reporting, the revenue loss is close to one billion U.S. dollars. We also find that such under-reporting behavior through domestic intermediaries may be associated with cross-border evasion through under-reporting export values to foreign partners. In addition, our result indicates that the evasion motive is stronger for larger transactions.
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