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.
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
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 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 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.
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.