- Free Essays, Term Papers & Book Notes

Summary of the Paper Domestic Income Shifting

Page 1 of 4


In the recent years, a series of corporate income tax incentives like tax exemptions, reduced tax rates, tax holidays, and tax refunds offered by Chinese Central and local governments to encourage economic development and the fact of companies consolidated not for tax purposes create the conditions for income shifting among consolidated group members.

The paper Domestic Income Shifting by Chinese Listed Firms wrote by Terry Shevlin, Tanya Y. H. Tang, and Ryan J. Wilson tried to examine how it works in Chinese listed firms. They want to find the relationship between the magnitude of income shifting and the level of intangible assets, a dummy variable for whether the firm has a rights offering, their interaction term, tax transform for state-owned firms.

This paper focuses only on Chinese capital markets and allows a more precise estimate of the magnitude of income shifted by exploiting a unique disclosure in Chinese firms’ financial statements, so that avoid correlated omitted variables or inference problems because of unknown and difficult-to-control differences across countries. In addition, examining the incentive effects specific to Chinese markets is another contribution to income shifting literature.

They used Hand-collecting method to obtain English-version annual financial reports of Chinese B-share listed firms from various sources: the official websites of the Chinese Security Regulatory Committee; company websites; and electronic or hard copies from some listed firms upon request if their English reports were unavailable on their website. And then, they finally cut the initial sample of 664 to 320 firm-year observations.

In terms of research methods, they took advantage of descriptive statistics, regression analysis and sensitivity analysis to processing data. From the descriptive statistics, they found a positive Pearson correlation between both measures of income shifting TRD* and TRDA, and the level of intangible assets; a positive and significant Pearson correlation between successful stock rights offerings in any one of the subsequent three years (RIGHTS) and both TRDA and TRD*; and a significant negative Pearson correlation between SOE and TRDA (but not with TRD*).

By regression analyzing, they got little support in the data for income shifting being associated with SOE firms either before or after 2002. In addition, the interaction between INTS and RIGHTS (costs and benefits of shifting) is generally not consistent, but when included on their own without the interaction term, both INTS and RIGHTS exhibit significant coefficients or associations with income shifting. Thus, they interpreted the data to be generally consistent with H1 and H2, but not H3, H4, and H5. Firms facing lower costs (INTS) and receiving larger benefits (incremental to the tax savings, RIGHTS) shift more income.

In the sensitivity analysis, they created an indicator variable set equal to one for firms with an after-tax ROE of between 6 percent and 12 percent, and found a significant positive association between it and TRD* and a positive and marginally significant (p≤0.10) association with TRDA. Moreover, they tried to use the percentage of shares owned by the central government and the local government as alternative measures of government control, and found no association with the level of income shifting. Finally, they scaled both the income shifting variables, TRDA and TRD*, and the INTS variable by shareholders’ equity and then checked the results using total assets as an alternative scalar for these variables. However, the results and inferences are qualitatively unchanged.

Download as (for upgraded members)
Citation Generator

(2016, 02). Summary of the Paper Domestic Income Shifting. Retrieved 02, 2016, from

"Summary of the Paper Domestic Income Shifting" 02 2016. 2016. 02 2016 <>.

"Summary of the Paper Domestic Income Shifting.", 02 2016. Web. 02 2016. <>.

"Summary of the Paper Domestic Income Shifting." 02, 2016. Accessed 02, 2016.