Tax Planning Diffusion, Real Effects, and Sharing of Benefits

70 Pages Posted: 2 Aug 2018 Last revised: 21 Jul 2022

See all articles by Ling Cen

Ling Cen

The Chinese University of Hong Kong

Edward L. Maydew

University of North Carolina at Chapel Hill

Liandong Zhang

Singapore Management University - School of Accountancy

Luo Zuo

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: July 21, 2022

Abstract

We investigate the diffusion of tax planning across firms, and the real effects and sharing of benefits from such diffusion. Using supply chain relationships among firms as a possible diffusion channel, we find that tax planning spreads from principal customers to their dependent suppliers. The diffusion is more pronounced when principal customers have lower effective tax rates and when the trade partners are located near each other. Moreover, we show that tax planning diffusion has real effects on product markets and that both parties benefit. Specifically, as tax planning diffuses from customers to suppliers, suppliers enjoy economic benefits in terms of longer relationships with their principal customers and higher long-term growth of sales to non-principal customers. Evidence suggests that suppliers share the tax savings with their customers by reducing the mark-up on their products. Finally, we show that the real effects of tax planning diffusion are more pronounced when the principal customers have lower effective tax rates.

Keywords: Tax planning, diffusion, real effects, product markets, supply chains.

JEL Classification: H25, H26, L14.

Suggested Citation

Cen, Ling and Maydew, Edward L. and Zhang, Liandong and Zuo, Luo, Tax Planning Diffusion, Real Effects, and Sharing of Benefits (July 21, 2022). Kenan Institute of Private Enterprise Research Paper No. 18-15, Singapore Management University School of Accountancy Research Paper No. 2019-97, Available at SSRN: https://ssrn.com/abstract=3213967 or http://dx.doi.org/10.2139/ssrn.3213967

Ling Cen

The Chinese University of Hong Kong ( email )

CYT Building
Sha Tin
Hong Kong, Hong Kong
Hong Kong

HOME PAGE: http:///sites.google.com/site/cenling/

Edward L. Maydew (Contact Author)

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

Liandong Zhang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

HOME PAGE: http://accountancy.smu.edu.sg/faculty/profile/150531/Liandong-ZHANG

Luo Zuo

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

349 Sage Hall
Ithaca, NY 14853
United States
607-255-4002 (Phone)

HOME PAGE: http://www.johnson.cornell.edu/faculty-research/faculty/lz352/

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