Will Anti-tax-avoidance provisions Reduce the

Investment of Multinational Enterprises?

炀骁 项 
Capital University of Economics and Business
宇晨 张 
Capital University of Economics and Business
亚璟 张 
(

835767894@qq.com
)
Capital University of Economics and Business

Research Article

Keywords: Anti-avoidance, Investment, tax burden, Financing constraints, Internal governance

Posted Date: October 27th, 2022

DOI: https://doi.org/10.21203/rs.3.rs-2194099/v1

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Abstract
Quantitative evaluation of the effect of tax policies is of great practical significance for giving play to the
structural adjustment advantages of fiscal and tax policies and strengthening the coordination between
different macro-control measures. This paper takes the announcement [2016] No. 42 of the State
Administration of Taxation in China as a quasi-natural experiment to study how anti-avoidance policies
affect the investment level of multinational enterprises. The research finds that: (1) compared with non-
multinational enterprises, multinational enterprises have significantly reduced their investment level after
the promulgation of the Anti-tax-avoidance provisions; (2) The mechanism analysis shows that after the
policy was issued, the tax burden, financing constraints and internal governance level of the experimental
group enterprises have been improved, and the change of enterprise investment level stems from the
impact of anti-avoidance policies on the above aspects of enterprises to varying degrees. Under the joint
action of different mechanisms, the Anti-tax-avoidance provisions has reduced the level of enterprise
investment. The conclusion of this paper provides a basis and reference for the improvement of the
subsequent Anti-tax-avoidance provisions.

1 Introduction
The tax-avoidance of transnational enterprises has long been one of the problems that have puzzled tax

authorities around the world. In order to deal with the challenge of tax-avoidance by Multinational
enterprises to national tax sovereignty and the distortion of the economy, in recent years, countries have
begun to strengthen anti-avoidance work, and launched a series of international tax cooperation to
combat tax-avoidance by Multinational enterprises.

In the context of the international community's joint fight against international tax-avoidance, China's
anti-avoidance work is also in progress. However, while the principle of fairness and the country's tax
interests are maintained, there are also some concerns, namely, will strict anti-avoidance reduce the
investment level of transnational enterprises? If the strong anti-avoidance work increases the tax burden
of transnational enterprises, it may reduce their investment willingness.

The Anti-tax-avoidance provisions does not only affect the level of enterprise investment through the path
of tax burden. First, the motivation for maximizing the interests of enterprises will not disappear. When it
is difficult for enterprises to seek tax benefits through improper means, they may be prompted to find
more ways to achieve the goal of maximizing benefits; In addition, the Anti-tax-avoidance provisions will
not only reduce the enterprises' speculative behavior of tax avoidance or hollowing out enterprise
resources through related transactions, but also bring about the improvement of the enterprise's internal
governance level (Zeng Y., 2009; Zhu Kai, 2014; Minorov, 2013). The improvement of the internal
governance level will help enterprises identify possible investment opportunities and risks more efficiently,
thus improving the enterprise's investment level (Jiang H., 2022). Therefore, the existence of interest
maximization motivation and the improvement of internal control level make multinational enterprises

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have the motivation and ability to seek other legitimate business methods to obtain benefits. For
example, enterprises that used to invest mainly for tax avoidance in tax havens may turn to investment
based on substantial operations after the state has strengthened its efforts to combat tax avoidance.
Second, strong anti-avoidance measures may also improve the financing constraints of enterprises,
reduce the investment capacity of enterprises, and thus reduce investment.

In theory, anti-avoidance policies can have different impacts on the level of enterprise investment through
multiple paths. Therefore, under the combined effect of the above factors, it is worth discussing how the
Anti-tax-avoidance provisions affects the level of enterprise investment. For this reason, this paper uses
the Announcement on Improving Related Party Declaration and Data Management in the Same Period
(Announcement No. 42 of the State Administration of Taxation in 2016, hereinafter referred to as
“Announcement 42”) issued by China in 2016 as an exogenous policy impact to study the impact of anti-
avoidance on the investment level of transnational enterprises and explore its mechanism.

The marginal contribution of this paper mainly includes the following two points: First, based on the
analysis of Anti-tax-avoidance provisions, this paper expands the research on the micro effects of tax
policy. The existing literature has analyzed the positive impact of tax policies such as tax rebate policy
(Liu J., 2020; Wu Y., et al., 2021) and VAT reduction (Fan Z., & Zhao R., 2021) on enterprise investment.
However, few scholars pay attention to the possible negative impact of tax policy on micro behaviors
such as enterprise investment. This paper expands the research on the micro effect of tax policy by
studying the possible negative impact of Anti-tax-avoidance provisions on the level of enterprise
investment. Second, the research conclusion of this paper provides the effect expectation of further
promoting the anti-avoidance work, and provides the basis and reference for the subsequent Anti-tax-
avoidance provisions legislation. Based on the quasi-natural experiment of the promulgation of
“Announcement 42”, this paper analyzes the actual impact of anti-avoidance policies on enterprises,
including tax burden, financing constraints, internal governance level and investment level. The
evaluation of the effect of Anti-tax-avoidance provisions in this paper, under the general trend of global
international tax cooperation, provides experience and reference for China to make a good connection
between domestic tax law and international tax reform.

2 Review
2.1 The review of literatures      

The anti-avoidance legislation process in China can be divided into three stages with 2008 and 2015 as
the dividing point (Liu F., 2019). Before 2008, only a few policies regulated tax-avoidance in China. 

The Enterprise Income Tax Law, which was implemented in 2008, marks a new chapter in China's anti-
avoidance legislation. For the first time, it introduces provisions such as cost sharing agreements, thin
capitalization, controlled foreign enterprises, general anti-avoidance, and the addition of interest for tax
avoidance adjustment. This marks that China's anti-avoidance management has entered a new stage of
scientific and standardized management.
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In the following years, with the development of the digital economy, enterprise tax avoidance activities
became increasingly rampant, causing losses to the country's tax revenue. Against this background, the
Organization for Economic Cooperation and Development (OECD) began to launch the BEPS action plan.
In October 2015, OECD released 15 BEPS action plan research results. According to the requirements of
the BEPS Action Plan, the 13th Action Plan, namely transfer pricing documents and country reports, is an
important measure to enhance the transparency of tax enterprise information, and is also one of the four
minimum standards that all participating countries must complete. The Announcement of the State
Administration of Taxation on Improving Related Party Declaration and Data Management in the Same
Period (" “Announcement 42”") issued by China in 2016 is a response to the 13th action plan of BEPS.

Compared with previous documents, the “Announcement 42” has put forward a number of new
requirements in terms of information disclosure compliance requirements, which has made an important
contribution to improving the information asymmetry in the field of international tax collection and
management.

Firstly, “Announcement 42” not only requires enterprises to provide more detailed information about their
organizational structure, operations and related party transactions, but also introduces the country report
template proposed in BEPS Action Plan 13. Country reports can solve the problem of information
asymmetry between the tax authorities of various countries about the tax information of transnational
enterprise groups operating globally. The establishment of an effective tax information exchange
mechanism on a global scale through national reports can effectively improve the global tax information
transparency of large transnational enterprise groups, so as to prevent large-scale transnational
enterprise groups from using information asymmetry and other imperfections of the international tax
system to conduct improper tax planning and erode the tax base of countries.

Secondly, “Announcement 42” requires higher disclosure of intangible assets. The tax authorities can
learn about the functional risk arrangements and ownership of the intangible assets in the multinational
enterprise group, so as to facilitate the tax authorities to judge whether the income distribution of
intangible assets of the participating entities in the multinational enterprise group matches the economic
activities of each member entity and the value contribution of each member entity to the intangible
assets.

Thirdly, “Announcement 42” puts forward new disclosure requirements for geographical special factors.
Based on China's experience in transfer pricing management in recent years, “Announcement 42” requires
enterprises to explain the impact of regional special factors on transaction pricing in local documents,
pointing out that regional special factors should be analyzed from labor cost, environmental cost, market
size, market competition, consumer purchasing power, substitutability of goods or services, government
regulation, etc. The tax authorities will be able to calculate the business activities of the enterprise group
in different countries and the reasonable profits that should be distributed to the corresponding countries.

2.2 The review of literatures     

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This research is closely related to two types of literature: first, the related research on the economic
consequences of tax policies, especially anti-avoidance policies; The second is related research on
investment determinants.

The research on the economic consequences of tax regulation mainly focuses on international tax
avoidance, corporate governance and corporate value. (1) International tax avoidance. Anti-avoidance
measures will increase the cost of tax avoidance for enterprises, so it will affect enterprises' decision on
whether to conduct tax avoidance. Bai S. and Chu M. (2010) found that the double taxation agreement,
as an anti-avoidance system of transfer pricing, can significantly inhibit the international tax avoidance
of enterprises. Some scholars also take domestic anti-avoidance legislation as a policy impact. Studies
have found that anti-avoidance laws and regulations effectively inhibit the tax avoidance behavior of
enterprises through related party transactions and capital weakening, and in areas with strong tax
collection and management, this inhibition effect is more obvious (Tang X., 2017; Chen B. 2021). In
addition, He Yang and Xia A. (2019) explained theoretically how the transfer pricing tax system inhibits
tax avoidance of multinational enterprises. (2) Corporate governance and corporate value. According to
existing literature, in companies with poor governance, managers or controlling shareholders can easily
transfer the resources of small and medium-sized shareholders, while anti-avoidance policies can
improve the level of internal governance, reduce the resource transfer behavior of managers or controlling
shareholders, and thus increase enterprise performance and value (Desai, 2007; Zeng Y., 2009; Mironov,
2013). In addition, Wang X. (2020), based on the policy reform research of the "Golden Tax Project Phase
III", found that strong tax enforcement can significantly improve the quality of corporate financial reports.
Some scholars also found that tax collection and management can inhibit the upward earnings
management behavior of enterprises (Ye K., 2011; Sun X. et al., 2021).

The existing research on the influencing factors of enterprise investment decisions mainly focus on
enterprise governance and macroeconomic policies. (1) Corporate governance. In terms of corporate
internal governance, Chen Dong et al. (2021) believed that entrepreneurs' expectations of major risks
would significantly inhibit the scale of enterprise investment, while the independence of the board of
directors and its scope of rights would also have a significant impact on the level of investment (Liu H.,
2012; Liu Jianhua et al., 2015). In terms of external governance of enterprises, Xia and Zheng J. (2015)
found that positive media coverage would affect the financing cost of enterprises, thereby affecting the
level of investment. Wang Y. and Li Y. (2022) found that after the creditors filed a lawsuit, the
underinvestment and overinvestment of listed companies were improved. (2) Macroeconomic policy.
Some scholars (Zhang Chao, 2015; Bai Jun, Qin Xiang, 2017) found that the investment behavior of
enterprises under different macro monetary policies was different, while Liu S. (2018) further studied and
found that macro monetary policies had an impact on enterprise investment decisions by affecting the
financing capacity of enterprises. Tax policy, as one of the important ways of macroeconomic
adjustment, will also have an impact on the investment behavior of enterprises. Liu J. (2020) and Wu Y.
(2021) investigated the impact of the VAT rebate policy on enterprise investment, and the research results
showed that the policy significantly increased the cash flow of enterprises and reduced financing
constraints, which had a positive impact on enterprise investment. In addition, Xiao C. (2021) found that
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the VAT reduction significantly promoted enterprise investment. Zhao R. and Fan Z.(2021) believed that
while VAT was reduced, local governments were forced to increase the collection of non-tax income, thus
curbing the investment of small and micro enterprises and private enterprises.

To sum up, on the one hand, the existing studies on the micro effects of anti-avoidance measures pay
less attention to the level of enterprise investment, and lack of empirical evidence from China in
particular. On the other hand, in the existing literature on the influencing factors of enterprise investment,
many scholars pay attention to the positive impact of tax policy on enterprise investment, but few
scholars pay attention to the possible negative impact of tax policy on enterprise investment and other
micro behaviors. This study is a beneficial combination of the above two aspects. Taking China's Anti-tax-
avoidance provisions issued in 2016 as an exogenous impact, it examines the impact of Anti-tax-
avoidance provisions on corporate investment and its economic mechanism.

2.3 hypothesis   

In this part, we will discuss the impact mechanism of anti-avoidance policies on multinational
enterprises' investment, and we will put forward three assumptions and test them.

First of all, through the investigation and punishment of illegal cases, enterprises can make up taxes and
pay for the overdue payment, which can directly increase the country's tax revenue; Secondly, anti-
avoidance policies can not only plug loopholes that may be used for tax avoidance, but also deter
motivated multinational enterprises from doing so, fundamentally reduce their tax avoidance behavior,
and ultimately increase the country's tax revenue (Fan Yong et al., 2022). According to the website of the
State Administration of Taxation of China, in 2014, anti-avoidance increased tax revenue by 52.3 billion
yuan; In 2015, anti-avoidance increased tax revenue by more than 60 billion yuan. [1]This part of the
increased tax revenue directly comes from enterprises, and the increase of national tax revenue also
means the increase of enterprise tax burden. For a long time, the tax burden has been considered as an
important factor affecting the capital cost and investment income of enterprises (Jorgenson&Hall, 1967).
According to the pecking order financing theory, enterprises give priority to internal financing (Myers,
1984), while the effective tax rate borne by enterprises affects the available internal funds. Therefore,
when the total amount of tax borne by enterprises or the effective tax rate increases, the investment level
of transnational enterprises will decline (Xing Weibo, 2012). Therefore, this paper proposes hypothesis 1.

Hypothesis 1: The Anti-tax-avoidance provisions will increase the tax burden of enterprises, reduce the
available funds within enterprises, and thus reduce the level of enterprise investment.

The tax policy may affect the financing constraints of enterprises, and the investment capacity of
enterprises with high financing constraints is also limited (Wu Y., 2021; Liu Y., 2021). Under the Anti-tax-
avoidance provisions, enterprises' non-standard business behavior may not only be investigated and paid
taxes, but also face high fines and late fees, which will undoubtedly reduce the internal funds of
enterprises. In addition, the Anti-tax-avoidance provisions may also increase the external financing
constraints of enterprises. In large enterprise groups, the global funds of the group are generally allocated
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through the establishment of financial companies (also known as "fund pools"). Group member
enterprises can borrow and lend funds to each other through the Fund Pool. However, this kind of fund
borrowing and lending between member enterprises of the Group belongs to the "financing" behavior
specified in “Announcement 42”, so "related party declaration shall be made on the business transactions
between the member enterprises of the Group and related parties, and the Annual Related Business
Transaction Report of Enterprises of the People's Republic of China (2016 Edition) shall be attached". In
addition, for financing activities that meet certain conditions, the tax authorities should also be provided
with master files, local files and files on special matters. It can be seen from “Announcement 42” that the
financing between the member enterprises of the Group will face stricter tax collection and management
requirements, and the member enterprises of transnational groups will face more severe financing
constraints. Based on this, this paper proposes hypothesis 2.

Hypothesis 2: The Anti-tax-avoidance provisions will increase the financing constraints of enterprises,
thus reducing the investment level of transnational enterprises.

The Anti-tax-avoidance provisions will not only have a negative impact on enterprise investment. Some
studies show that the strengthening of tax law enforcement will improve the level of corporate
governance. On the one hand, enterprises use taxable item manipulation to implement upward earnings
management behavior, which will increase the taxable income of enterprises. While enterprises should
consider the cost and income when carrying out earnings management. when the cost of earnings
management is too high, enterprises will reduce earnings management behavior. The use of non taxable
items by enterprises to manipulate earnings will not increase the taxable income of enterprises, and thus
will not increase the income tax costs of enterprises, but the consequences will be greater tax differences
(that is, the difference between accounting profits and taxable income), which is more likely to attract the
attention of tax authorities, leading to a higher probability of discovery of enterprise earnings
management behavior (Liu Xing, Ye K. 2011). When tax law enforcement is strengthened, it is difficult for
enterprises to use non-taxable items to manipulate earnings, and the cost of using taxable items to
manipulate earnings is too high, thus reducing upward earnings management behavior. On the other
hand, downward earnings management will reduce the enterprise's earnings, thereby reducing the taxable
income of the enterprise and reducing the tax expenditure of the enterprise. The strengthening of tax law
enforcement will make it more likely that the enterprise's downward earnings management activities will
be discovered. The increase in the cost of violations will reduce the probability of downward earnings
management of the enterprise (Li G., Jia F., 2019).

In addition, large shareholders also have the motivation to "hollow out" the enterprise in the form of cross-
linked transactions in order to seek benefits, but such behavior will undoubtedly have a negative impact
on the enterprise and damage the interests of small shareholders. However, under strict tax law
enforcement, the "tunneling" of large shareholders to enterprises through related transactions will also
face higher costs and risks.

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To sum up, both earnings management and "big shareholder tunneling" and other speculative behaviors
will be restrained under strict tax law enforcement, which will improve the level of corporate governance.
However, the inhibition of speculation does not mean that the motivation of maximizing the interests of
market participants will disappear. When speculation is restrained and the level of corporate governance
is improved, rational economic people are more likely to turn to other legitimate and reasonable
investment opportunities to obtain benefits. Based on this, this paper proposes hypothesis 3.

Hypothesis 3: The Anti-tax-avoidance provisions will reduce the speculation of transnational enterprises,
improve the internal governance level, and ultimately increase the investment level.

On the one hand, the Anti-tax-avoidance provisions will increase the tax burden and financing constraints
of enterprises, thereby inhibiting the level of enterprise investment; On the other hand, the Anti-tax-
avoidance provisions will improve the internal governance of enterprises, promote them to find and
realize other investment opportunities, and improve the level of enterprise investment. Under the effect of
both, the change of the overall investment level of enterprises depends on the relative size of the two
aspects. Therefore, this paper can propose hypothesis 4a, hypothesis 4b and hypothesis 4c for empirical
testing.

Hypothesis 4a: The Anti-tax-avoidance provisions has significantly improved the level of enterprise
investment.

Hypothesis 4b: The Anti-tax-avoidance provisions has no significant impact on the level of enterprise
investment.

Hypothesis 4c: The Anti-tax-avoidance provisions significantly reduces the level of enterprise investment.

3 Econometric Strategy
3.1 Model
As mentioned above, “Announcement 42” specifically regulates tax avoidance through cross-border
connected transactions. Therefore, enterprises with high cross-border related transactions are more
affected by “Announcement 42” than enterprises with low cross-border related transactions. This provides
us with a good quasi experiment to use DID method.

As it is difficult to obtain the data of cross-border connected transactions, the operating income of cross-
border connected transactions will be reflected in the overseas operating income. Therefore, this paper
uses the proportion of overseas operating income in total operating income as the standard to divide the
experimental group and the control group. If the enterprise has no overseas operating income in the
sample period, it is considered that the influence of “Announcement 42” on the enterprise can be ignored
and classified as the control group. If the enterprise has overseas business income in the sample period,

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it is considered that the enterprise will be affected by “Announcement 42” and classified as the
experimental group. The specific regression model is as follows:

Yit = α + βTreatedi*Postt + γXit + µi + λt + εit (1)

Among them, Yi,t is a measure of enterprise investment level. With reference to the methods of Xu Wei
(2016) and Liu Guanchun (2020), this paper uses the following two indicators to study the impact of anti-
avoidance policies on enterprise investment level. (1) investi,t =cash paid for the purchase and
construction of fixed assets, intangible assets and other long-term assets/total assets of the enterprise.
According to the specific objects of enterprise investment, enterprise investment can be divided into
physical asset investment (fixed assets, factory buildings, etc.), intangible asset investment (patents,
trademarks, goodwill, etc.) and financial equity asset investment (funds, securities, etc.). At the same
time, in order to avoid the error caused by the total amount index, this paper defines the enterprise
investment behavior involved as "the cash paid for the purchase and construction of fixed assets,
intangible assets and other long-term assets" in the enterprise cash flow statement in the current period
divided by the total assets of the enterprise to obtain the investment level of the enterprise. (2)
netinvesti,t = (cash paid for acquisition and construction of fixed assets, intangible assets and other

long-term assets - net cash received from disposal of fixed assets, intangible assets and other long-term
assets)/total assets of the enterprise. This indicator will be used as a measure of the net investment level
to further analyze the impact of anti-avoidance policies on the net investment of enterprises.

Treatedi*Postt is the core dependent variable of this paper, representing the policy effect of anti-
avoidance policies. treatedi is the dummy variable of the experimental group. If there is no overseas
business income in the sample period, the value assigned is 0; Otherwise, the value assigned is 1. postt
is the dummy variable of the year, assigned to 0 before 2016 and 1 after 2016.

Xit is the control variable, including asset liability ratio (Lever), return on total assets (ROA), growth rate of
operating revenue, enterprise size, return on net assets (ROE), Tobin Q (Tobin Q); µi is an individual fixed
effect, λt is a time fixed effect, εit is a random perturbation term. The specific definitions and
measurement methods of variables involved in this empirical model are shown in the following table:

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 Table 1
Definition and measurement of variables
Variables measurement

Investment (Cash paid for purchasing fixed assets, intangible assets and other long-term
assets)/total assets of the enterprise

Net (Cash paid for acquisition and construction of fixed assets, intangible assets and other
investment long-term assets - net cash received from disposal of fixed assets, intangible assets
and other long-term assets)/total assets of the enterprise

Treated For enterprises with overseas business income in the sample period, the value is 1

Control For enterprises without overseas business income in the sample period, the value is 0

Anti- The value is 0 before 2016 and 1 after 2016

avoidance

Lever Total liabilities/total assets

ROA Net profit after tax/total assets

Growth (Turnover of the current year - turnover of the previous year)/turnover of the previous
year

Size Ln(total assets)

ROE Net profit after tax/net assets

Tobin Q Enterprise market value/enterprise replacement cost

3.2 Data and descriptive statistics

This paper takes Chinese listed companies as the initial research samples. When analyzing the impact of
anti-avoidance policies on corporate investment, the screening process of the initial research samples is
as follows: (1) exclude the samples from the financial industry; (2) Exclude ST and * ST companies; (3)
Remove some samples with serious data loss. Finally, the sample obtained by model (1) is more than
20000 sample data of more than 2000 companies. Among them, the treated and post variables are
constructed according to “Announcement 42”. The internal control index is from DIB database, and other
data in this paper are from CSMAR database.

Table 2 shows the descriptive statistical results of the main variables in this paper. In the whole sample,
the average value of treated is 0.696, that is, 69.6% of listed companies are in the treated group. From
the perspective of enterprise investment and net investment level, the average value is about 0.05, and the
median is about 0.03, indicating that the investment and net investment level of most enterprises in the
sample is greater than the median. The average value of enterprise scale, asset liability ratio, return on
total assets, return on net assets and other indicators is close to the median, and the standard deviation
is low, indicating that these indicators have little difference in the whole sample. However, the distribution
of the growth rate of turnover is relatively uneven, with its standard deviation as high as 1.873, and the
difference between the maximum and minimum is 97.
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 Table 2
Descriptive statistics of main variables
Var N Mean p50 SD Min Max

Treated 23101 0.696 1 0.460 0 1

Investment 23101 0.0480 0.034 0.046 0 0.642

Net investment 23101 0.0450 0.032 0.048 -0.475 0.642

Lever 23101 0.434 0.429 0.208 0.007 1.698

ROA 23101 0.039 0.037 0.069 -1.130 0.675

Growth 23101 0.250 0.104 1.873 -1.309 96.024

Size 23101 22.261 22.095 1.291 17.641 28.637

ROE 23101 0.061 0.069 0.206 -14.819 1.751

Tobin Q 23101 2.059 1.589 2.342 0 122.189

4 Results
4.1 Investment
This section estimates the impact of anti-avoidance policies on the level of enterprise investment and net
investment.

Table 3 reports the regression results. Among them, columns (1)–(3) and (4)–(6) show the estimated
coefficients of enterprise investment and net investment respectively. (1) and (4) are the estimates
without any control variables; (2) and (5) are the estimates that include the enterprise level control
variables; Columns (3) and (6) continue to control the year fixed effect. It can be found that no matter
whether fixed effect and control variables are added, when enterprise investment and net investment of
enterprises are taken as the dependent variable, the coefficient of the core independent variable
Treatedi*Postt in the model is negative at the significance level of 1%, which indicates that the Anti-tax-
avoidance provisions has a significant inhibitory effect on the investment of enterprises. This result
validates hypothesis 4c.

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 Table 3
Results of benchmark regression
  (1) (2) (3) (4) (5) (6)

Y Invest Invest Invest Net Net Net

investment investment investment

Treated*Post -0.0218*** -0.0149*** -0.0047*** -0.0219*** -0.0166*** -0.0048***

  (-25.2742) (-15.3450) (-2.9132) (-23.9855) (-15.8761) (-2.8525)

Observations 23101 23101 23101 23101 23101 23101

Adjusted 0.0613 0.0837 0.1291 0.0547 0.0721 0.1167

R-squared

Lever   0.0028 -0.0111**   -0.0046 -0.0196***

    (0.6378) (-2.4498)   (-0.9324) (-3.8496)

ROA   0.0561*** 0.0303***   0.0496*** 0.0215**

    (7.2379) (4.1092)   (5.6722) (2.5453)

Growth   -0.0000 -0.0002   0.0002 -0.0001

    (-0.1452) (-1.2772)   (1.0496) (-0.3600)

Size   -0.0089*** 0.0017   -0.0068*** 0.0047***

    (-8.9054) (1.4707)   (-6.2365) (3.6125)

ROE   0.0033* 0.0021   0.0021 0.0009

    (1.7867) (1.2813)   (1.2493) (0.5804)

Tobin Q   -0.0013*** -0.0002   -0.0019*** -0.0008*

    (-4.0585) (-1.0220)   (-3.5345) (-1.6805)

_Cons 0.0553*** 0.2502*** 0.0332 0.0523*** 0.2055*** -0.0292

  (182.3705) (11.6150) (1.3388) (162.7232) (8.8154) (-1.0708)

Individual FE Yes Yes Yes Yes Yes Yes

Year FE No No Yes No No Yes

Observations 23948 23107 23107 23948 23107 23107

Robust standard errors in parentheses

***p < 0.01; **p < 0.05; *p < 0.1

4.2 Parallel trend test

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A precondition for unbiased double difference estimation results is that the experimental group and the
control group meet the parallel trend hypothesis, that is, the experimental group and the control group
should have the same change trend before the event occurs, otherwise the double difference method will
overestimate or underestimate the effect of the event. In order to verify the parallel trend, this paper
constructs the following model:

Investit = α0 + α1d−2 + α2d−1 + α3d0 + α4d1 + α5d2 + α6d3 + α7d4 + γXit + µi + λt + εit (2)

The meaning of d− j is that if the sample is an experimental group and meets the "the period before policy
implementation", the value is 1; otherwise, the value is 0. Similarly, d− j means that the sample is an
experimental group and meets the requirements of "the jth period after the implementation of the policy",
then the value is 1; otherwise, the value is 0. Other variables are the same as regression Eq. (1). Figure 1
shows the results of the parallel trend test. Taking 2016 as the base period, it can be found that the
estimates before the policy, i.e., 2014–2015, are not significant, while the estimates after the policy, i.e.,
2017–2020, are significantly negative. On the one hand, it reflects that the parallel trend hypothesis is
valid before the policy occurs; On the other hand, it also reflects the continuous negative impact on the
investment level of enterprises after the introduction of the Anti-tax-avoidance provisions.

5 Mechanism Analysis
In the benchmark regression part, this paper uses the data of listed companies to examine the impact of
anti-avoidance policies on the level of enterprise investment and finds that anti-avoidance policies have
an obvious inhibitory effect on the level of enterprise investment. As previously assumed, anti-avoidance
policies may affect the level of investment in enterprises by affecting the tax burden, financing
constraints and internal control of enterprises. Therefore, we will discuss the impact of anti-avoidance
policies on the tax burden, financing constraints and internal control of enterprises.

5.1 Tax burden

Under the strict Anti-tax-avoidance provisions, enterprises tend to carry out less tax planning and tax
avoidance activities, thus increasing the tax burden of enterprises. The size of the tax burden of
enterprises directly affects the investment capacity of enterprises. Therefore, this paper expects that the
Anti-tax-avoidance provisions will affect the investment level of enterprises through the tax burden. Based
on this, this paper uses the financial data of listed companies to measure the tax burden of enterprises
and examine the impact of anti-avoidance policies on the tax burden of enterprises: namely, the tax
burden replaces the enterprise investment in regression Eq. (1) as the dependent variable for estimation.
The specific regression model is set as follows:

TBit = α + βTreatedi*Postt + γXit + µi + λt + εit (3)

In the above formula, except for the dependent variable TB, all variables are consistent with formula (1).
TB indicates the tax burden of enterprise i in year t. This paper adopts the practice commonly used in
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academia (Cai C and Tian Y, 2017; Fan Z and Zhao R, 2020), and uses "TB1 = income tax expense/total
profit" to measure the enterprise's income tax burden. The larger the ratio, the heavier the enterprise's
income tax burden. In addition, the overall tax burden of enterprises calculated by "TB2= (taxes paid - tax
refunds received)/gross operating income" is also an important way to measure the tax burden of
enterprises (Liu Jun and Liu Feng, 2014; Li L and Wang C, 2017; Bai Y et al., 2019). Therefore, this paper
also measures this indicator and verifies the relationship between anti-tax-avoidance provisions and it to
ensure the robustness of the results. Table 4 reports the regression results of the model, among which,
columns (1) and (3) only control individual fixed effects and year fixed effects, and columns (2) and (4)
continue to add enterprise level control variables. It can be seen from the regression results that the
coefficients of the core explanatory variables in the two regressions are positive significant at least at the
10% level. This shows that the anti-tax-avoidance provision does increase the tax burden of enterprises,
and the regression results verify hypothesis 1.

 
Table 4
Tax burden
  (1) (2) (3) (4)

Variables TB1 TB1 TB2 TB2

Treated*Post 0.0671** 0.0700** 0.0033** 0.0039**

  (2.3181) (2.2726) (1.9820) (2.3474)

Observations 23101 23101 23101 23101

Adjusted R-squared 0.001 0.0014 0.0233 0.0502

Covariates No Yes No Yes

Individual FE Yes Yes Yes Yes

Year FE Yes Yes Yes Yes

Robust standard errors in parentheses

***p < 0.01; **p < 0.05; *p < 0.1

5.2 Financing constraints

The investment level of enterprises may also be affected by financing constraints. “Announcement 42”
regulates the financing behavior of transnational enterprises within the group, improving the financing
constraints of transnational enterprises. Therefore, it is expected that “Announcement 42” will improve
the financing constraints of the experimental group enterprises, thereby reducing their investment level.

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Based on this, this paper measures the financing constraints of enterprises, and examines the impact of
anti-tax-avoidance provisions on financing constraints: that is, financial constraints replace the enterprise
investment in regression Eq. (1) as the dependent variable for estimation. The specific regression model
is set as follows:

Sait = α + βTreatedi*Postt + γXit + µi + λt + εit (4)

In this formula, all variables except the dependent variable sa are consistent with formula (1). Sa
represents the financing constraint of enterprise i in year t. Using the methods of Song Min et al. (2021)
and Hadlock and Piere (2010) for reference, calculate the Sa index of enterprises in the observation year,
which is used as a measure of financing constraints. The calculation formula is: Sa=-0.737*Sizel + 
0.043*Sizel^2-0.040*Age. Among them, Sizel = ln (asset scale/1000000), Age is the establishment year of
the enterprise. Take the absolute value of the calculated result. The greater the absolute value, the more
serious the financing constraints of the enterprise. Table 5 shows the regression results of Eq. (4). Among
them, column (1) only controls individual fixed effects and year fixed effects, and column (2) continues to
add control variables at the enterprise level. It can be seen from the regression results that the coefficients
of the core explanatory variables in the two regression are positive significant. This shows that the anti-
tax-avoidance provision has indeed increased the financing constraints of enterprises. The regression
results validate hypothesis 2. 

 
Table 5
Financing constraints
  (1) (2)

Variables Sa Sa

Treated*Post 0.0086** 0.0076**

  (2.2818) (1.9722)

Observations 23101 23101

Adjusted R-squared 0.0064 0.0406

Covariates No Yes

Individual FE Yes Yes

Year FE Yes Yes

Robust standard errors in parentheses

***p < 0.01; **p < 0.05; *p < 0.1

5.3 Internal governance

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The anti-tax-avoidance provision may not only have a negative impact on the investment level of
enterprises through tax burden and financing constraints, but also have a positive impact on the
investment level through internal corporate governance.

Considering the influence and availability of data, this paper uses the DIB internal index as the dependent
variable to measure the internal governance level of enterprises to test this hypothesis. The specific
regression equation is as follows:

Governanceit = α + βTreatedi*Postt + γXit + µi + λt + εit (5)

In this equation, DIB's internal control index is composed of 11 indicators set under the five objectives of
internal control and internal control defect indicators, weighted by the arithmetic mean method. Except
for the internal control index (Governance), all variables are consistent with the regression Eq. (1). Table 6
reports the regression results of this equation. Among them, column (1) only controls individual fixed
effects and year fixed effects, and column (2) continues to add control variables at the enterprise level. It
can be seen from the regression results that the coefficients of the core explanatory variables in the two
regression are positive significant at the 5% level. This shows that the anti-tax-avoidance provision has
indeed improved the internal control level of enterprises. The regression results verify hypothesis 3.

 
Table 6
Internal governance
  (1) (2)

Variables Governance Governance

Treated*Post 10.1192** 8.3549**

  (2.4183) (2.1459)

Observations 22883 22883

Adjusted R-squared 0.0559 0.1541

Covariates No Yes

Individual FE Yes Yes

Year FE Yes Yes

Robust standard errors in parentheses

***p < 0.01; **p < 0.05; *p < 0.1

6 Heterogeneous Effects
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6.1 State-Owned Enterprise
First of all, for shareholders, the controlling shareholders of state-owned enterprises are not only the
owners of after-tax profits, but also enjoy the ownership of income taxes paid by enterprises. That is to
say, no matter whether the state-owned enterprises have tax avoidance or not, the benefits obtained by
shareholders of state-owned enterprises will not make a big difference in the end. In addition, from the
perspective of managers, managers of private enterprises may also be shareholders of enterprises. At the
same time, as an incentive measure, the enterprise will also give the managers part of the equity of the
enterprise. Therefore, for the managers of private enterprises, their personal interests are directly related
to the interests of enterprises.

Therefore, whether from the perspective of managers or shareholders, this paper expects that non-state-
owned enterprises will conduct more active tax avoidance activities than state-owned enterprises (Zheng
H., & Han M., 2008; Wu L., 2009). This means that the anti-tax-avoidance provision has a stronger
inhibitory effect on the investment level of non-state-owned enterprises and a weaker inhibitory effect on
the investment level of state-owned enterprises.

According to the ownership of enterprises, the sample is divided into state-owned enterprises and non-
state-owned enterprises. The grouped regression results by ownership are shown in Table 6. Among them,
column (1) is the regression result of the sample of state-owned enterprises, and column (2) is the
regression result of the sample of non-state-owned enterprises. It can be found that the anti-tax-
avoidance provision has less inhibitory effect on the investment level of state-owned enterprises than on
non-state-owned enterprises. On the one hand, it may be that state-owned enterprises have less tax
avoidance motivation, so they are less affected by “Announcement 42”; On the other hand, even if the tax
avoidance of state-owned enterprises is affected by “Announcement 42”, compared with non-state-owned
enterprises, state-owned enterprises can more easily obtain bank loans for investment. Therefore, the
restraining effect of anti-tax-avoidance provision on the investment level of state-owned enterprises is
less than that of non-state-owned enterprises.

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 Table 7
State-Owned enterprise
  (1) (2)

Variables Invest Invest

Treated*Post -0.0280*** -0.0376***

  (-8.5794) (-10.6993)

Observations 5630 10441

Adjusted R-squared 0.1297 0.1724

Covariates Yes Yes

Individual FE Yes Yes

Year FE Yes Yes

Robust standard errors in parentheses

***p < 0.01; **p < 0.05; *p < 0.1

6.2 Overseas sales

According to the provisions of “Announcement 42”, the enterprise shall provide the same period materials
of its related transactions, namely the Master files, local files and special matters documents, as required
by the tax authorities. Local documents shall be prepared if one of the following conditions is met: (1)
The amount of ownership transfer of tangible assets exceeds 200 million yuan; (2) The transfer amount
of financial assets exceeds 100 million yuan; (3) The amount of ownership transfer of intangible assets
exceeded 100 million yuan. From the above provisions, it is not difficult to find that when the amount of
connected transactions of enterprises reaches a certain threshold, they will be particularly concerned by
the tax authorities. Therefore, this paper expects that enterprises whose scale of connected transactions
reaches a certain threshold will be more affected by “Announcement 42”, while enterprises with smaller
scale of connected transactions will be less affected by “Announcement 42”.

Although the amount of related party transactions of enterprises can be directly obtained in the CSMAR
database, this data does not distinguish between domestic activities and overseas activities. Cross
border connected transactions are the main tool for tax avoidance activities, and there is little possibility
of tax avoidance activities in domestic connected transactions. In view of the fact that the amount of
related party transactions carried out by transnational enterprises for the purpose of transnational tax
avoidance will be reflected in their overseas operating income, this paper selects the scale of overseas
operating income to group the samples. In addition, as the income from the transfer of the ownership of
intangible assets and financial assets should be included in non-operating income, not operating income,

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this paper takes 200 million yuan as the grouping basis according to Paragraph 1 of Article 13 of
“Announcement 42”. That is to say, the enterprises with overseas operating income of more than
200 million yuan will be classified into one group, and the enterprises with overseas operating income of
less than 200 million yuan will be classified into another group. And then group regression is carried out
to examine and analyze how the scale of external business income affects the relationship between anti-
tax-avoidance provisions and enterprise investment.

The grouping regression results by overseas operating income scale are shown in Table 8. Among them,
column (1) is the regression result of the sample with overseas operating revenue scale exceeding 200
million yuan, and column (2) is the regression result of the sample with overseas operating revenue scale
below 200 million yuan. It can be found that the anti-tax-avoidance provision has a greater inhibitory
effect on enterprises with high overseas business income (3.77%) than on enterprises with low overseas
business income (2.95%), which is in line with the expectation of this paper. As mentioned above, this is
because high overseas operating income may also mean high cross-border connected transactions, and
enterprises with high cross-border connected transactions are bound to be more concerned by tax
authorities and more affected by “Announcement 42”.

 
Table 8
Overseas sales
  (1) (2)

Variables Invest Invest

Treated*Post -0.0378*** -0.0296***

  (-10.4488) (-9.2562)

Observations 7324 8747

Adjusted R-squared 0.1633 0.1334

Covariates Yes Yes

Individual FE Yes Yes

Year FE Yes Yes

Robust standard errors in parentheses

***p < 0.01; **p < 0.05; *p < 0.1

6.3 Investment in tax havens

In addition to ownership and overseas business income scale, whether an enterprise invests in tax havens
may also affect the relationship between anti-tax-avoidance provisions and enterprise investment level.
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For enterprises investing in tax havens, subjectively, it can be speculated that they may have a stronger
tax avoidance motivation, and objectively, it can also be determined that it is less difficult for them to use
their affiliated enterprises located in tax havens to achieve tax avoidance purposes. Therefore, enterprises
that have invested in tax havens may be more affected by “Announcement 42”, while enterprises that
have not invested in tax havens may be less affected.

This paper divides the sample into two groups of enterprises, tax havens and non tax havens, according
to whether the enterprises have affiliated enterprises located in tax havens during the sample period. The
grouping regression results by enterprise size are shown in Table 9. Among them, column (1) is the
regression result of enterprises investing in tax havens in the sample period, and column (2) is the
regression result of enterprises not investing in tax havens in the sample period. It can be found that the
anti-tax-avoidance provision has a greater inhibitory effect on the investment level of enterprises
investing in tax havens than on the investment level of enterprises not investing in tax havens. The above
regression results are in line with the expectation of this paper. 

 
Table 9
Investment in tax havens
  (1) (2)

Variables Invest Invest

Treated*Post -0.0359*** -0.0304***

  (-8.4587) (-11.0090)

Observations 4693 11378

Adjusted R-squared 0.1988 0.1392

Covariates Yes Yes

Individual FE Yes Yes

Year FE Yes Yes

Robust standard errors in parentheses

***p < 0.01; **p < 0.05; *p < 0.1

Conclusions
This paper discusses the relationship between the implementation of “Announcement 42” and the level of
enterprise investment, empirically analyzes the impact of anti-tax-avoidance provisions on enterprise
investment, and further discusses the mechanism and ways of this impact.
Page 20/24
First of all, this paper distinguishes the experimental group from the control group according to the
proportion of overseas sales revenue of listed companies in total sales revenue, and uses the double
difference model to regression find that the promulgation of anti-tax-avoidance provision significantly
reduces the level of enterprise investment and net investment. Secondly, this paper calculates the tax
burden and financing constraints of listed companies. It is found that the anti-tax-avoidance provision
has indeed increased the tax burden and financing constraints of listed companies. Thirdly, this paper
uses the DIB internal control index to study and finds that the introduction of anti-tax-avoidance
provisions has improved the internal governance level of enterprises. This shows that anti-tax-avoidance
provisions can affect the level of enterprise investment through tax burden, financing constraints and
internal governance. Finally, according to the nature of enterprise property rights and the size of
enterprises, this paper conducts group regression, and finds that the anti-tax-avoidance provision has no
significant impact on the investment level of state-owned enterprises and large enterprises, but has a
significant inhibition effect on the investment level of non-state-owned enterprises and small and
medium-sized enterprises, which is in line with theoretical expectations.

The conclusions of this paper have implications for understanding the current adjustment and future
effects of anti-tax-avoidance. First, the formulation and implementation of anti-tax-avoidance provisions
should avoid additional negative impacts on the level of enterprise investment as much as possible. For
example, while strictly implementing the anti-tax-avoidance provision, the threshold for submitting master
files, local files and documents on special matters should be appropriately raised, or the conditions and
time limit for submitting relevant materials should be relaxed. To reduce the negative impact of anti-tax-
avoidance provisions on the investment level of transnational enterprises. Second, enterprises should
actively respond to the challenges brought by the new regulatory environment, reduce tax avoidance and
improve their tax compliance. For example, the promulgation of “Announcement 42” is used to promote
enterprise groups to establish systematic transfer pricing policies and review their own transfer pricing
arrangements from the perspective of global operations, so as to prevent transfer pricing tax risks in
international market operations and help enterprises "go global". Third, introduce other relevant
supporting policies to reduce the inhibition of anti-tax-avoidance provisions on investment. For example,
appropriate credit policies should be established to provide enterprises with sufficient funds for
investment and stimulate their investment vitality.

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Figures

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Figure 1

Parallel trend test

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