The Effects of Regional Tax Incentives and Nonlocal Investment on Tax Avoidance

Abstract Tax incentives are important to promote economic growth and coordinate regional development, but the resulting “tax haven” also provides conditions for companies to avoid tax by investing in these places. Based on the 2008-2016 data of listed companies and their subsidiaries, we found that: (1) Nonlocal subsidiaries in places with a lower tax rate will increase the degree of tax avoidance of the parent company, and this effect is mainly driven by subsidiaries enjoying regional tax incentives. (2) Nonlocal subsidiaries in places with a lower tax rate are significantly more profitable than their counterparts, and the bigger the difference in applicable tax rates for the parent company and subsidiaries, the more profit the subsidiaries enjoy than other firms of the same industry in the same region. The parent company’s related party transactions are an important mechanism to achieve tax avoidance. (3) The higher the pre-tax return on assets of subsidiaries, the more obvious the tax avoidance effect. Subsidiaries in the service industry are more likely to help the parent company avoid tax. This study shows that under the current tax incentives and tax declaration system, regional tax incentives will be alienated into a tool for companies to invest in other places to avoid tax, restricting their policy effect. This provides theoretical support for understanding the tax avoidance motivation of group companies’ nonlocal investments, providing an important reference for further improving the tax incentives, reducing companies’ tax avoidance behavior and changing the approach to implementing regional policy.