Determinants of Effective Tax Rate of China Publicly Listed Companies

[Abstract]This research studied cash effective income tax rate (cash ETR), GAAP effective income tax rate (GAAP ETR), and sales tax and addition effective tax rate (STA ETR) for China publicly listed companies. The data is from 2007-2011. The mean for cash ETR, GAAP ETR, and STA ETR are 23.07%, 19.98%, and 5.29%, respectively. We do not document any influence of the big four auditors on ETRs in all categories. We also do not document any influence of international ownership on ETRs in all categories. Industry, asset mix, leverage, size, and state ownership are factors that affect ETRs. [keywords] Tax rate; listed companyIntroductionThe effective tax rate (ETR) implied on companies is a subject of considerable discussion in the US and around the world. There seems to be a competition among countries to lower their ETR in order to attract more business, and thus to improve their economies. The US seems to be losing this competition. According to Controller's Report (2011), Forbes Global 2000 companies headquartered in the US had an average corporate ETR of 27.7 percent for tax years 2006-2009. Similar companies headquartered in other countries had an average ETR of only 19.5 percent. Reportedly, the US statutory corporate tax rate was 14 percentage points higher than the average of the 34 countries in the Organization for Economic Co-operation and Development (OECD). According to the Wall Street Journal (McKinnon & Thurm, 8/28/2012), more US companies are changing their official incorporation location to other countries, largely due to the lower effective tax rates offered abroad. One company estimated that a drop in ETR from 28% to 23%will increase its profit by 100 million USD per year.Although China is not a current OEDC member, many companies have an interest in exploring investments and partnerships in China. Analyzing tax structure in China, and evaluating the ETR levied on companies in China is critical to avail such investment opportunities. The purpose of this paper is to identify the basic types of taxes levied on companies in China and to analyze the factors that influence the sales tax and corporate income tax ETR of Chinese companies, with and without, foreign investment. This paper uses data from China publicly listed companies.There is considerable literature that examines the relationship of ETR with industry, firm size, firm leverage, asset mix, political connections, and ownership structure in various countries. This study examines the influence on ETR of firm size, industry, year, firm leverage, asset mix, auditor and ownership structure. Data were collected for all companies listed on the two major Chinese stock exchanges over the 5 year period from 2007 through 2011. All financial information for this period was prepared based on International Financial Reporting Standards (IFRS), which has been adopted in China since January 1, 2007. These data included information from over 1000 publicly listed companies, and over 4000 company years. We included all industries in our data collection.Chinese Tax SystemChina imposes three major taxes: sales and adjunct tax, value added tax, and income tax. The tax system in China has gone through a major reform. The new tax system that went into effect in 2011 eliminated many favorable tax treatments for international companies. Even before that, in 2007, China streamlined the corporate income tax for domestic and international funded companies to level out the playing field. (Ministry of Finance of People's Republic of China, 2009) Thus, theoretically, our research time period (2007-2011) should show little or no evidence of favorable tax treatment to companies with international ownership.Corporate Income TaxThe basic corporate tax rate currently is 25%. Eligible small business has a lower tax rate of 20%. Eligible high-tech companies enjoy a tax rate of 15%. The tax rate preference for international companies was reduced starting in 2007 and has been eliminated as of 2011. …