Does Information Exchange Affect Cross‐border Tax Avoidance? Evidence from the Common Reporting Standard

• Published date: 01 July 2024
• Author: Muhan Wang,Kezhong Zhang,Sihan Gao
• Date: 01 July 2024
• DOI: http://doi.org/10.1111/cwe.12544

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 179–228, Vol. 32, No. 4, 2024 179

Does Information Exchange Af‌f ect Cross-border

Tax Avoidance? Evidence from the

Common Reporting Standard

Muhan Wang, Kezhong Zhang, Sihan Gao*

Abstract

Using panel data from 2012 to 2020 for publicly traded Chinese companies, we explored

the efficacy in mitigation of tax information asymmetry to combat profit shifting and

transnational tax avoidance. Our empirical analysis revealed that, after the implementation

of the inaugural multilateral automatic information exchange system known as the Common

Reporting Standard, there was a statistically significantly increase in the effective tax rate

by 1.4 percentage points, accompanied by an increase in instances of tax compliance. These

trends were discernibly associated with a reduction in profit shifting and notable changes

in reported profit margins, particularly influenced by actions related to debt shifting and

strategic management of intellectual property assets. These findings underscore the strong

connection between these effects and various factors such as investment destinations,

asset portfolios, and industry classifications. The results imply a prospective decline in the

incidence of cross-border tax avoidance by Chinese multinational entities and demonstrate

the potential of emerging international tax cooperation frameworks for curbing the global

tax avoidance practices of multinational corporations.

Keywords: cross-border tax avoidance, Common Reporting Standard, profit shifting, tax

information

JEL codes: F23, F42, H26, H87

I. Introduction

The global reduction in barriers to the international movement of goods and factors of

production has intensified the process of global economic integration. This phenomenon,

*Muhan Wang, PhD Candidate, School of Public Finance and Taxation, Zhongnan University of Economics

and Law, China. Email: wangmuhan0716@hotmail.com; Kezhong Zhang, Professor, School of Public Finance

and Taxation, Center for International Cooperation and Disciplinary Innovation of Income Distribution and

Public Finance (111 Center), Zhongnan University of Economics and Law, Public Finance and Development

Research Center of Hubei, China. Email: zkzdr@zuel.edu.cn; Sihan Gao (corresponding author), Associated

Professor, Center for International Cooperation and Disciplinary Innovation of Income Distribution and

Public Finance (111 Center), Zhongnan University of Economics and Law, Public Finance and Development

Research Center of Hubei, China. Email: victoriagao@zuel.edu.cn. The authors are grateful for the support of

the National Social Science Foundation of China (No. 23ZDA097).

Muhan Wang et al. / 179–228, Vol. 32, No. 4, 2024

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

180

however, has also given rise to the issue of cross-border tax avoidance by corporations.

There is a consensus among a substantial number of economists regarding the

critical importance of adequate tax information exchange to deter tax avoidance by

multinationals and to encourage compliance with corporate tax obligations; however,

empirical evidence remains contentious due to the intricacies of exchange mechanisms

and inherent data and policy challenges. Furthermore, some research findings have

indicated that the tax information exchange agreements (TIEAs) may not be effective in

increasing tax compliance. This ineffectiveness is primarily attributed to insufficiencies

in the exchange processes and incomplete enforcement of previous tax information

exchange agreements (Johannesen and Zucman, 2014; Pomeranz, 2015; Caruana-

Galizia and Caruana-Galizia, 2016).

Given the complexities associated with TIEAs, this paper focuses predominantly on

assessing the efficacy of the most potent multilateral information exchange agreement

to date, namely the Common Reporting Standard (CRS), for the mitigation of tax

information disparities and for enhancing tax compliance among Chinese corporations.

Although bilateral agreements, such as TIEAs, have become increasingly prevalent, their

effectiveness has been a matter of ongoing debate. These agreements typically operate

on a “request-based” model, in which tax authorities, upon detecting tax irregularities,

request relevant tax-related information. Conversely, the CRS has established an automatic

information exchange process, adhering to the “penetration principle,” which discloses

the true beneficiaries and considerably enhances information accessibility (Casi et al.,

2020). In this context, corporations face greater risks when engaging in cross-border

profit shifting, potentially leading to an overall improvement in tax compliance

practices.

The widespread adoption of the CRS across more than 100 tax jurisdictions

introduced an exogenous shock in cross-border tax avoidance patterns for Chinese

corporations. This offers a unique opportunity to explore the causative relationship

between improvements in tax information exchange and tax compliance status. The

implementation of the CRS across diverse jurisdictions is conducted under the guidance

of the Organization for Economic Cooperation and Development (OECD) and G20, as

described in official announcements. Nevertheless, the on-ground execution from the

effective date is largely under the jurisdiction of the tax authorities in each respective

region. Thus, for Chinese companies operating across multiple jurisdictions, the specifics

of changes affecting their offshore subsidiaries remained uncertain until the policy was

actually implemented. This aligns with the effective dates of the bilateral information

exchange relationships with China, as outlined in Table 1. These circumstances suggest

that the policy introduced an external shock that affected the level of access tax authorities

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Common Reporting Standard and Cross-border Tax Avoidance 181

had to offshore tax information, thereby influencing the tax compliance status of companies.

We can therefore employ the difference-in-differences (DID) methodology to identify the

causal effect of additional offshore tax information on cross-border tax avoidance.

Table 1. Activated bilateral exchange relationships with China

Jurisdiction Ef‌f ective date

(Implementation

year)

Jurisdiction Ef‌f ective date

(Implementation

year)

Jurisdiction Ef‌f ective date

(Implementation

year)

Albania January 1, 2017

(2019)

Finland January 1, 2017

(2018)

Montserrat January 1, 2017

(DTY) (2019)

Andorra January 1, 2017

(2018)

France January 1, 2017

(2018)

Nauru January 1, 2017

(DTY) (No RFIs)

Anguilla January 1, 2017

(2018)

Germany January 1, 2017

(2018)

Netherlands January 1, 2017

(2018)

Antigua and

Barbuda

January 1, 2020

(2018)

Ghana January 1, 2017

(2018)

New Zealand January 1, 2017

(DTY) (2019)

Argentina January 1, 2017

(2018)

Gibraltar January 1, 2017

(DTY) (2019)

Nigeria January 1, 2017

(2020)

Aruba January 1, 2017

(2018)

Greece January 1, 2017

(2018)

Norway January 1, 2017

(2018)

Australia January 1, 2017

(DTY)

(2019)

Greenland January 1, 2017

(2018)

Oman January 1, 2021

(2022)

Austria January 1, 2017

(2018)

Grenada January 1, 2019

(2020)

Pakistan January 1, 2018

(DTY) (2020)

Azerbaijan January 1, 2017

(2018)

Guernsey January 1, 2017

(2018)

Panama January 1, 2018

(2019)

Bahamas January 1, 2019

(2020)

Chinese Hong

Kong SAR

Bilateral CAA, 2018

(2018)

Poland January 1, 2017

(2018)

Bahrain January 1, 2019

(2020)

Hungary January 1, 2017

(2018)

Portugal January 1, 2017

(2018)

Barbados January 1, 2017

(2018)

Iceland January 1, 2017

(2018)

Qatar January 1, 2020

(2021)

Belgium January 1, 2017

(2018)

India January 1, 2017

(2018)

Romania January 1, 2017

(2018)

Belize January 1, 2018

(2019)

Indonesia January 1, 2017

(2018)

Russia January 1, 2017

(2018)

Bermuda January 1, 2017

(2018)

Ireland January 1, 2017

(2018)

Saint Kitts and

Nevis

January 1, 2017

(2018)

Brazil January 1, 2017

(2018)

Isle of Man January 1, 2017

(DTY) (2019)

Saint Lucia January 1, 2018

(2019)

British Virgin

Islands

January 1, 2017

(2018)

Israel January 1, 2017

(2018)

Saint Vincent

and the

Grenadines

January 1, 2017

(2018)

Brunei

Darussalam

January 1, 2020

(2021)

Italy January 1, 2017

(2018)

Samoa January 1, 2017

(2018)

Bulgaria January 1, 2017

(2018)

Japan January 1, 2017

(2018)

San Marino January 1, 2017

(2018)

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