The convention on tax mutual administrative assistance and divestment: Evidence from China

Various policy instruments have been employed to combat international tax avoidance by multinational corporations (MNCs), with a focus on corporate tax disclosure. However, corporate tax disclosure to tax authorities alone is insufficient to address the issue. The Convention on Mutual Administrative Assistance in Tax Matters (the Convention) goes beyond tax disclosure by featuring direct international tax administrative assistance and aiming to strengthen governments’ tax enforcement. Intrigued by the uniqueness of the Convention, we examine its effect on Chinese MNCs’ tax avoidance, particularly their investments in tax-haven jurisdictions. We conjecture that Chinese MNCs, anticipating strengthened tax enforcement after the Convention, may reduce tax-avoidance behavior and divest from tax havens. Using the staggered entry of China and other countries into the Convention, we find that after the Convention, Chinese MNCs tend to divest from tax havens, with a stronger effect observed in MNCs whose parent firms are in regions with weak tax enforcement. Additionally, we observe a decline in overall tax aggressiveness following the Convention. Our findings highlight the Convention’s disciplining effect, extend the tax avoidance literature on international collaboration, and help the OECD and other international regulators better understand its impact on countries with limited administrative capacity.