The Moderating Role of Internal Control in Tax Avoidance: Evidence From a COSO-Based Internal Control Index in China

The Journal of the American Taxation Association, Forthcoming, doi:10.2308/atax-52408

58 Pages Posted: 29 Dec 2018 Last revised: 16 Mar 2019

See all articles by Hanwen Chen

Hanwen Chen

University of International Business and Economics

Daoguang Yang

University of International Business and Economics (UIBE)-Business School

Xinmin Zhang

University of International Business and Economics (UIBE) - Business School

Nan Zhou

University of Cincinnati - Lindner College of Business

Date Written: November 29, 2018

Abstract

We study the role of internal control in tax avoidance by evaluating the efficacy of the COSO framework in tax risk management. First, we use a comprehensive COSO-based index in China that covers a firm’s internal control over not only financial reporting, but also operations and compliance. Second, we perform quantile regressions to account for the entire tax avoidance distribution. These two key features enable us to find a nonlinear relation between internal control and tax avoidance, with the former having a moderating effect on the latter. Specifically, we show that internal control quality enhances tax avoidance for under-sheltered firms but curbs tax avoidance for over-sheltered firms. This nonlinear pattern continues to hold when we decompose internal control into its five COSO components. Moreover, the moderating role of internal control in tax avoidance alleviates tax volatility, supporting the accounting firms’ recommendation to use COSO-based internal control in tax risk management.

Keywords: Tax Avoidance; Internal Control; COSO Framework; Quantile Regression

JEL Classification: H26; G32; M42

Suggested Citation

Chen, Hanwen and Yang, Daoguang and Zhang, Xinmin and Zhou, Nan, The Moderating Role of Internal Control in Tax Avoidance: Evidence From a COSO-Based Internal Control Index in China (November 29, 2018). The Journal of the American Taxation Association, Forthcoming, doi:10.2308/atax-52408. Available at SSRN: https://ssrn.com/abstract=3300188

Hanwen Chen

University of International Business and Economics ( email )

10# Huixin East Street,Chaoyang District
Beijing, Beijing 100029
China

Daoguang Yang (Contact Author)

University of International Business and Economics (UIBE)-Business School ( email )

#10 Huixindong St.
Chaoyang District
Beijing, 100029
China

Xinmin Zhang

University of International Business and Economics (UIBE) - Business School ( email )

Beijing
China

Nan Zhou

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States

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