Ownership Structure, Corporate Governance and Tax for Chinese Firms

Abstract

For all companies, profitability is a key objective. Minimization of taxes paid is a critical step in achieving that objective. However, most Chinese companies are in an unusual situation and pay more taxes than they report as tax expense. This unique tax-planning problem has resulted in Chinese firms having a cash effective tax rate being 14% higher than their GAAP effective tax rates. The goal of this paper is to investigate how ownership structure and corporate governance affect tax-planning behavior of Chinese firms. Our results shed light on optimum ownership structure and desirable corporate governance mechanism. We contribute to current literature by researching how top shareholders’ ownership percentage and ownership type affect company tax planning behavior. The Chinese system includes not only a Board of Directors, but also a Board of Supervisors, tasked with monitoring the activities of the board and CEO, and monitoring the financial affairs and business activities on behalf of shareholders. We contribute to current literature by taking into consideration both Board of Directors and Board of Supervisors sizes. The Chinese tax system includes sales tax and addition, a local tax, as well as an income tax. We are the first to investigate ownership structure and corporate governance effects on sales tax and addition.