Impact of the Corporate Income Tax Reform on Capital Structure Choices: Evidence from Data of Chinese Listed Firms
This paper investigates the influence of the corporate income tax reform in 2007 on capital structure choices of firms in China. The results show that corporate income tax reform decreases the effective tax rate of firms totally. The effective tax rate de
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Impact of the Corporate Income Tax Reform on Capital Structure Choices: Evidence from Data of Chinese Listed Firms Qing-mei Tan
Abstract This paper investigates the influence of the corporate income tax reform in 2007 on capital structure choices of firms in China. The results show that corporate income tax reform decreases the effective tax rate of firms totally. The effective tax rate decreases from the year of the reform and then goes up with the increase of the average leverage during the year of 2009–2010. The results also show that the corporate income tax rate is a determinant of capital structure and the change of effective tax rate has positive impact on the change of leverage. There is no evidence that non-debt tax shields are determinants of capital structure and there is not a substitution effect between debt and non-debt tax shields in our sample. Keywords Corporate income tax reform • Capital structure • Effective tax rate
67.1 Introduction The corporate income tax reform is implemented in 2007 in China. On March 16, 2007, National People’s Congress announced Corporate Income Tax Law of China (short for CITLC), which is officially implemented on January 1, 2008 in China. At the same time, Income Tax Law of China for Foreign-invested Enterprise and Foreign Enterprise which is adopted on April 9, 1991 and Provisional Regulations of China on Corporate Income Tax which are promulgated on December 13, 1993 are both repealed simultaneously. As a consequence, the statutory corporate tax rates for all resident taxpayers are 25 % except for some tax preference under CITLC, which means that the statutory corporate tax rate for most resident firms in China decrease by 8 % (from 33 to 25 %) from January 1, 2008. Although firms can avoid
Q. Tan () College of Management and Economics, Tianjin University, Tianjin, China e-mail: [email protected] E. Qi et al. (eds.), The 19th International Conference on Industrial Engineering and Engineering Management, DOI 10.1007/978-3-642-37270-4 67, © Springer-Verlag Berlin Heidelberg 2013
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tax payments using alternative instruments, since interest expenses are deducted before corporate income tax, the corporate income tax reform will decrease the tax advantage of debt relative to equity and may have influence on firm’s financing behavior, financing decision and capital structure choice, and then have impact on firm value. CITLC has been implementing for more than 4 years since January 1, 2008, if the capital structure has been changed since the corporate income tax reform? This paper aims at investigating whether firms adjust their capital structure in response to the corporate income tax reform based on the data of listed firms in China for the period from 2006 to 2010. Our paper sheds light on the understanding of the correlation between corporate income tax and capital structure in emerging markets.
67.2 Literature Review MM theorem shows that a firm can’t create value by choosing a specific capital structure in a world without taxes or other imperfecti
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