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| Foreign Ownership Networks, Corporate Tax Avoidance and Effective Tax Burden |
| YANG Lianxing, WANG Qiushuo, ZHANG Zhi, ZHAN Zhimin
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School of Economics and Management & Institute of China Free Trade Strategy Research, East China Normal University;
School of Economics, Fudan University;
School of Economics, Southwestern University of Finance and Economics |
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Abstract In recent years, the global environment for foreign direct investment (FDI) has become increasingly complex. On the one hand, intensified tax competition and international reforms, most notably the global minimum tax, have limited the scope for multinationals to shift profits to low-tax jurisdictions. On the other hand, emerging economies continue to seek high-quality FDI as a means of upgrading industrial structures and integrating more deeply into global value chains. China presents a particularly interesting case: despite unifying corporate income tax rates for domestic and foreign enterprises, it remained the world's second-largest FDI destination in 2023. This phenomenon suggests that the role of foreign ownership networks, forged through cross-shareholding structures, is central to understanding how external uncertainties are mitigated and how firms adapt their tax planning strategies in a changing international environment.
At the domestic level, institutional frictions in China's tax incentive system persist. Approval processes remain complex, tax authorities retain broad discretion, and firms often face information asymmetries in accessing preferential policies. Moreover, regional tax competition has exacerbated the uneven allocation of capital and widened disparities in effective tax burdens. These challenges highlight the need for a more comprehensive framework to assess how foreign ownership networks influence corporate taxation outcomes.
This paper addresses the limitations of existing research, which often relies upon incomplete indicators of tax burden and pays insufficient attention to firm-level mechanisms, particularly among small and medium-sized enterprises (SMEs). We combine China's National Enterprise Tax Survey (2013-2020), which covers a broad spectrum of firms, including micro and small enterprises, with ownership data from the Bureau van Dijk Orbis database. By constructing refined measures of effective corporate tax burden and developing indicators of foreign ownership networks, such as network embedding and degree centrality, we provide a systematic examination of the relationship between network participation and firms' effective tax burden. Furthermore, by distinguishing between tax motivation and tax capacity, we uncover the channels through which foreign capital linkages affect firms' tax outcomes.
The study makes three major contributions. First, it introduces a macro-open economy perspective to explain persistent heterogeneity in effective tax burdens across firms, especially non-listed and smaller enterprises, which traditional datasets and theories have struggled to account for. Second, it advances the measurement of foreign ownership by capturing overlapping, interdependent equity linkages that reflect the complex nature of capital networks, thus reducing biases associated with conventional FDI proxies. Third, it offers policy-relevant insights, showing how institutional barriers in the current tax regime hinder the attraction and upgrading of FDI quality, while also suggesting how policy tools can be redesigned to remain effective under the global tax reform wave.
Empirical analysis provides strong evidence in support of these arguments. First, embedding in foreign ownership networks significantly reduces firms' effective tax burden, with the effect driven by endogenous advantages generated within the network rather than parent company size or exogenous preferential policies. Second, the reduction in tax burden functions through two distinct channels: stronger motivation to engage in tax optimization and enhanced capacity to implement tax planning strategies. These effects are especially pronounced among upstream firms and medium-to-large enterprises. Third, participation in foreign ownership networks not only lowers tax burdens but also improves firm performance, strengthens long-term value creation, and indirectly enhances the host country's attractiveness for high-quality FDI inflows.
The findings carry clear policy implications. Policymakers should prioritize attracting foreign investors with extensive network linkages and nurturing hub enterprises within these networks. At the same time, tax authorities should reinforce cross-border monitoring of tax sources, leverage big data and blockchain technologies to identify profit-shifting activities, and implement risk-based classification to allocate enforcement resources more efficiently. Simplified cross-border VAT procedures, automated preferential policy matching, and accelerated rebates for foreign affiliates engaged in technology transfer would further reduce compliance costs and strengthen innovation incentives.
By linking foreign ownership networks to effective tax burdens, this paper contributes to a more comprehensive understanding of corporate taxation in the era of global tax reform. It also provides concrete pathways for emerging economies to stabilize FDI inflows, upgrade FDI quality, and integrate more effectively into global industrial and financial networks.
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Received: 10 March 2025
Published: 13 October 2025
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