The impact of 2008 tax reform on profit shifting of foreign enterprises in China

Abstract

This paper evaluates the policy effect of the 2008 tax reform on profit shifting of foreign enterprises in China. Employing the micro data from the China Industrial Enterprise Database between 2001 and 2015, the comparison between the pre-tax margin of newly established foreign enterprises which were tentatively and relatively unaffected by the 2008 tax reform and that of the long-standing enterprises shows that, the anti-avoidance rules were not sufficient enough to offset the increased profit shifting motivation of foreign enterprises after 2008. However, the impact of the anti-avoidance rule against thin capitalization on the pre-tax margin was far greater than that against the intangible assets transaction, though not great enough to reverse the overall impact.