| In 2011,China’s "first case of thin capitalization" was successfully concluded by means of the foreign-funded enterprise paying taxes,triggering people’s concern about the thin capitalization.However,thin capitalization has long been nothing new.With such features as concealment,thin capitalization has long been favored and multinational corporations have long been avoiding taxes through thin capitalization.The tax avoidance of foreign-funded enterprises through thin capitalization is harmful to China’s tax revenue,and it is highly concealed.In order to deal with the tax avoidance of foreign-funded enterprises,China’s thin capitalization rule has been established with the implementation of the 2008 New Enterprise Income Tax Law.Then,does foreign-funded enterprises in China have tax avoidance behaviors through thin capitalization?How does thin capitalization rule of China affect foreign-funded enterprises?Related research is currently not much now in China.Based on the data from Chinese manufacturing enterprises database in 2004-2011,this paper firstly examines the relationship between corporate tax burden and the degree of thin capitalization before the implementation of the thin capitalization rule.The empirical results show that in the absence of a thin capitalization rule,the tax burden of foreign-funded enterprises decreases with the increase in the degree of thin capitalization,indicating that there are acts of tax avoidance through thin capitalization in foreign-invested enterprises in China;The examination of corporate samples confirms that the sensitivity of foreign-funded enterprises’ tax burdens to thin capitalization is significantly higher than that of domestic-funded enterprises.In the absence of thin capitalization rules,foreign-funded enterprises are more motivated than domestic-funded enterprises to avoid tax by weakening their capital.Secondly,this paper uses the Difference-in-Differences Approach to test the real impact of China’s thin capitalization rule on the degree of weakening of capital of foreign-funded enterprises.The empirical result shows that China’s thin capitalization rule effectively reduces the degree of thin capitalization of foreign-funded enterprises.Then we eliminates the interference from other policies or events in the robustness test,which indicating that it is indeed the effect of the thin capitalization rule that reduces the degree of thin capitalization of foreign-funded enterprises in China.Next,this paper further analyzes the actual impact of China’s thin capitalization rule on the tax burden of foreign-funded enterprises.The empirical results prove that the implementation of the thin capitalization rule reduces the tax burden on foreign-funded enterprises,and China’s thin capitalization rule failed to achieve the purpose of appropriately increasing the tax burden of foreign-funded enterprises.Finally,this paper further analyzes the effect of China’s thin capitalization rule on the degree of thin capitalization and the tax burden of foreign-funded enterprises of different natures.The empirical results show that although China’s thin capitalization rule reduces the degree of thin capitalization of foreign-owned enterprises,it has no significant effect on the tax burden of foreign-owned enterprises and companies from Hong Kong,Macao,and Taiwan,and it even has a positive effect on the degree of thin capitalization of companies from Hong Kong,Macao,and Taiwan. |
