The Indirect Effect of Import Competition on Corporate Tax Avoidance

Abstract

The role of competition in corporate tax avoidance is theoretically unclear in the existing literature. This paper empirically clarifies this role, with a focus on import competition. I exploit financial statements to measure tax avoidance of US-listed firms and the conferral of Permanent Normal Trade Relations status on China as a quasi-natural experiment to establish causality. The results reveal that import competition fosters corporate tax avoidance. The average effect is mainly driven by multinational enterprises implanted in tax havens. They invested in intangible assets to escape competition pressures, but these intangibles also allowed them to intensify their profit shifting activities. The findings shed light on the determinants of corporate tax avoidance. More generally, they help understand the decline in the average effective tax rate of US-listed firms, the current backlash against large corporations and globalization, and the calls for reform of the international tax system.