Tax Enforcement Independence and Firm Related‐Party Transactions: Evidence From a Quasi‐Natural Experiment

Xiao Chen and Yutong Sun

Australian Accounting Review, 2025, vol. 35, issue 4, 357-375

Abstract: Government intervention in tax authorities, which can compromise enforcement independence and undermine its governance role, remains a common challenge across both developed and emerging economies. This study examines how enhanced tax enforcement independence affects firm‐level related‐party transactions (RPTs) by leveraging China's State Tax Bureaus and Local Tax Bureaus merger as a quasi‐natural experiment. We find that greater tax enforcement independence significantly reduces RPTs, particularly abnormal ones. The effect is more pronounced in regions with lax enforcement and underdeveloped markets, and firms with weaker governance environments. The strengthening of enforcement power by tax authorities is an important influencing mechanism. Furthermore, the merger can filter out improper RPTs, thereby improving firms’ future financial performance and market value. Overall, our findings highlight the critical importance of safeguarding tax enforcement independence for corporate governance worldwide, providing valuable insights for tax system reform in various countries.

Date: 2025
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