Let's get connected: The effect of directors connected to a tax office on corporate tax avoidance in China

Abstract

© 2020 Elsevier Inc. This study examines the effect of directors connected to a tax office on corporate tax avoidance in China. We find a significant positive association between directors connected to a tax office and tax avoidance after controlling for general political connections and other determinants of tax avoidance. Our result is robust to several endogeneity concerns. Additional analysis shows that it is the direct effect of tax office connected directors which drives the association with tax avoidance, rather than the indirect effect of general political connections. We also observe that significant tax savings are achieved when the tax connected directors of a firm previously worked in the same tax office which is currently and officially responsible for the firm's tax payments. Moreover, we find that when a director has acquired local tax office political power in the same province where the firm's head office is located, this leads to substantial tax savings. Finally, we observe that our main result is more pronounced when tax enforcement is low. Overall, our findings are consistent with the revolving door hypothesis.