Social security premiums collection and corporate tax avoidance: evidence from the enforcement of the Social Insurance Law

XU Hongmei LI Chuntao

【Abstract】Corporate tax avoidance is receiving increasing attention from both practitioners and academics. In China, the problem of corporate tax avoidance is severe: according to the State Bureau of Taxation, 257 companies were involved in tax avoidance or evasion in 2014. The total uncovered amount is approximately CNY 78.85 billion, and the average overdue tax payment is over CNY 306.8 million. The literature has come to the view that tax avoidance is an important corporate strategy and has investigated the determinants of corporate tax avoidance activities such as the corporate governance, ownership structure, executive compensation and institutional environment. However, how external governance mechanisms such as the collection of social security premiums affect firms’ tax avoidance has not been analyzed. Theoretically, it is possible for the tax authorities to use firms’ social security payment data to uncover tax avoidance activities because there is a relationship among social security premiums, individual income taxes and corporate income taxes. The three all relate to employees’ compensation, which is the basis of the social security premiums and individual taxes and can be deducted before the corporate income tax is determined. Tax authorities can use the data on firms’ social security payment basis and actual social security payments to infer firms’ real employment situation and labor costs. The imputed labor costs can be used to verify firms’ income tax payments and uncover tax avoidance activities. If tax authorities find that a firm avoids tax payments by manipulating labor costs, they can further investigate the firm’s tax payment behavior and discover more tax avoidance activities. However, this course of action could not be done easily before the enforcement of the Social Insurance Law in 2011. Since 2011, social security premiums are compulsory for all kinds of Chinese companies, making social security premiums a “quasi tax.” Additionally, the intensity of social security premiums collection has improved, with tax authorities given the responsibility to collect social security premiums in 23 provinces since 1999. These special arrangements make it possible for tax authorities to access a firm’s social security payment basis and its actual payments, enabling them to uncover the firm’s tax avoidance activities. The information technology system of the collection authorities promotes information sharing, which reinforces the effects. Using the enforcement of the Social Insurance Law as an exogenous shock, we investigated the link between social security premiums collection and corporate tax avoidance with a difference-in-differences model. Our results show that the implementation of the law significantly reduces the level of tax avoidance by labor-intensive firms by 1.9%. Additionally, the evidence suggests that the level of tax avoidance decreases more significantly when the tax authorities oversee the social security premiums collection, suggesting that the tax authorities play an important role in uncovering firms’ tax avoidance activities. A test of potential mechanisms suggests that the social security premiums collection lowers the information asymmetry between firms and officials, increasing their cost of corporate tax avoidance. As a result, firms decrease their level of tax avoidance. Our study has made the following contributions to the literature. First, we extended the literature on tax collection and firm behavior. We provided evidence that the collection of a “quasi tax,” the social security premiums, improves firms’ external governance and regulates firms’ illegal behaviors. Second, our study enriched the literature investigating the determinants of tax avoidance. Our findings indicate that improving the collection of social security premiums lowers information asymmetries, which discourages tax avoidance. Lastly, our study suggested that the information sharing between collection authorities plays an important role in regulating firms’ behaviors.

【Keywords】 social security premiums collection; information asymmetry; corporate tax avoidance; information technology construction;


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Vol 55, No. 06, Pages 122-137

June 2020


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