Domestic Income Shifting by Chinese Listed Firms

To encourage economic development in specific regions and industries, the Chinese Central and local governments offer a series of corporate income tax incentives (tax exemptions, reduced tax rates, tax holidays, and tax refunds). In China, parent and subsidiary companies are consolidated for financial reporting, but not for tax purposes. We take advantage of a unique disclosure in the tax footnotes of Chinese listed firms to examine income shifting among consolidated group members in response to these incentives. We find that intangible-intensive groups (“firms”), and firms concerned with meeting minimum earnings thresholds to issue equity, shift greater amounts of income. We find no evidence that high concentrations of either Central or local government ownership affect the level of income shifting.