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【Yaqi Wang】Multinationals’ profits in China: Impact of tax avoidance

Published:2024-04-03  Views:

The paper "Multinationals' Profits in China: Impact of Tax Avoidance," co-authored by Associate Professor Yaqi Wang from the School of Finance at Central University of Finance and Economics and Assistant Professor Lu Bing from Beijing Normal University, who was undergraduate student of the Class of 2012 at the School of Finance, was officially published in the prestigious international finance journal, Journal of International Money and Finance, in February 2024.

Our research may have the following contributions. This paper analyzes the profit characteristics of foreign-owned firms in China from the perspective of tax avoidance. By examining how multinational firms exploit China’s favorable tax environment for foreign-owned firms, we seek to offer insights into the mechanisms underlying their profitability. Foreign-owned firms account for a large

share of China’s economy, and their profit indicators have attracted extensive attention from academics and policy circles. However, there are few studies on the profit margin of foreign-owned firms based on micro firm data analysis. None of these studies can explain the profit margins of foreign-owned firms from the perspective of international tax avoidance. The lack of related research is mainly due to data limitations. Our study manually collected equity and source country data for over two thousand foreign-owned firms, which are subsidiaries of multinational firms operating in China. This approach addresses the issue of limited accessibility to source country information for foreign-owned firms in China. We further analyze the profit margin of foreign-owned firms based on the perspective of international tax avoidance, providing a new empirical basis for comprehensively interpreting the profits of foreign-owned firms.

Moreover, our research offers a new perspective on the inconsistent profit performance of foreign-owned firms in China found in existing literature. By utilizing more comprehensive firm information and import-export transaction data, this paper explains the fluctuating profitability of foreign-owned firms from the perspective of tax avoidance. We find that tax avoidance mainly occurs among multinational firms in China that enjoy tax preferences. In the past, China has long attracted foreign-owned firms with supranational treatment, including tax preferences, among which manufacturing foreign-owned firms are a significant group. One of the assumptions behind this policy is that foreign-owned firms perform better than domestic firms and will have a technology spillover effect on domestic firms. Our research shows that part of the high-profit phenomenon of previously introduced foreign-owned firms is related to profit transfer and is not a sufficient statistic of their firms’ performance or technical level.  From the perspective of profit transfer, our paper puts forward the explanation of the zero-technology spillover mystery of foreign-owned firms found in this literature.

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