Tax Evasion Through Trade Intermediation: Evidence from Chinese Exporters

36 Pages Posted: 11 Sep 2014

See all articles by Xuepeng Liu

Xuepeng Liu

Kennesaw State University - Department of Economics and Finance

Huimin Shi

Renmin University of China - School of Economics

Michael J. Ferrantino

World Bank - Trade and Competitiveness Global Practice

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Date Written: August 12, 2014

Abstract

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.

Suggested Citation

Liu, Xuepeng and Shi, Huimin and Ferrantino, Michael J., Tax Evasion Through Trade Intermediation: Evidence from Chinese Exporters (August 12, 2014). Available at SSRN: https://ssrn.com/abstract=2494054 or http://dx.doi.org/10.2139/ssrn.2494054

Xuepeng Liu (Contact Author)

Kennesaw State University - Department of Economics and Finance ( email )

United States

HOME PAGE: http://ksuweb.kennesaw.edu/~xliu6/

Huimin Shi

Renmin University of China - School of Economics ( email )

No. 59, Zhongguancun Street
Beijing, Beijing 100080
China

Michael J. Ferrantino

World Bank - Trade and Competitiveness Global Practice ( email )

Washington, DC
United States

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