Tax Evasion Through Trade Intermediation: Evidence from Chinese Exporters

45 Pages Posted: 20 Apr 2016

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

Multiple version iconThere are 2 versions of this paper

Date Written: April 6, 2015

Abstract

Many production firms use intermediary trading firms to export indirectly. This paper uses Chinese export data at the transaction level to investigate the tax evasion motive through indirect trade. The paper provides strong evidence that, under China's partial export value-added tax rebate policy, production firms can effectively evade value-added taxes by underreporting their selling prices to domestic intermediary trading firms, especially when they sell differentiated products. Even for a moderate level of underreporting, the revenue loss is close to one billion U.S. dollars. The paper also finds that such underreporting behavior through domestic intermediaries may be associated with cross-border evasion through underreporting export values to foreign partners. In addition, the results indicate that the evasion motive is stronger for larger transactions.

Keywords: National Governance, Government Policies, International Trade and Trade Rules, Youth and Governance

Suggested Citation

Liu, Xuepeng and Shi, Huimin and Ferrantino, Michael J., Tax Evasion Through Trade Intermediation: Evidence from Chinese Exporters (April 6, 2015). World Bank Policy Research Working Paper No. 7232, Available at SSRN: https://ssrn.com/abstract=2591174

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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