The Indirect Effect of Import Competition on Corporate Tax Avoidance

62 Pages Posted: 9 Sep 2020 Last revised: 4 Mar 2021

See all articles by Baptiste Souillard

Baptiste Souillard

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Date Written: April 17, 2019

Abstract

The role played by competition in corporate tax avoidance is theoretically unclear in the existing literature. This paper empirically examines this, with a focus on import competition. I exploit financial statements to measure tax avoidance of US-listed firms and the conferral of the Permanent Normal Trade Relations status on China as a quasi-natural experiment to establish causality. The results reveal a positive effect of import competition on corporate tax avoidance. Furthermore, they are entirely driven by multinational enterprises. In response to the China shock, these firms invested in intangible assets to escape competition but these intangibles also allowed them to shift more profits towards low-tax countries. These findings shed light on the determinants of corporate tax avoidance. More generally, they help understand the decline in the average effective tax rate of US publicly listed firms and the recent backlash against large corporations and globalization.

Keywords: Corporate tax avoidance, import competition, multinational firms, profit shifting, intangibles

JEL Classification: F14, F60, H25, H26, L60

Suggested Citation

Souillard, Baptiste, The Indirect Effect of Import Competition on Corporate Tax Avoidance (April 17, 2019). Available at SSRN: https://ssrn.com/abstract=3662998 or http://dx.doi.org/10.2139/ssrn.3662998

Baptiste Souillard (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium

HOME PAGE: http://www.baptistesouillard.com/

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