Tax avoidance opportunity for multinational enterprises: effects of digitalized tax administration in China

Yilan Chen and Shaohai Lei

Journal of International Financial Markets, Institutions and Money, 2025, vol. 102, issue C

Abstract: This study investigates the impact of digitalized tax administration (DTA) on multinational enterprises’ (MNEs’) tax avoidance, with a specific focus on outward foreign direct investment (OFDI) in tax havens. Using a quasi-natural experiment based on the implementation of Golden Tax Project III (GTP III) in China, we find that home country DTA significantly reduces the difference between nominal and effective tax rates for MNEs by 1.2%. This reduction is primarily driven by a contraction in OFDI breadth in tax havens, which restrains MNEs’ tax avoidance. We demonstrate an asymmetric effect wherein DTA does not significantly influence domestic firms’ tax avoidance, which is attributed to their ability to facilitate cross-regional investment. We also explore the various responses to cross-border tax avoidance approaches employed by MNEs to mitigate the adverse effects of DTA on corporate tax avoidance. Overall, our findings highlight the critical role of home country DTA in managing MNEs’ tax avoidance, particularly in the context of developing countries.

Keywords: Digitalized tax administration; Multinational enterprises; Tax avoidance; Outward foreign direct investment (search for similar items in EconPapers)
JEL-codes: F23 H26 H32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:102:y:2025:i:c:s1042443125000678

DOI: 10.1016/j.intfin.2025.102177

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