Digital tax administration and conglomerates capital structure adjustment driven by tax planning

Abstract

China has introduced the GTP III system, an advanced digital technology aimed at enhancing tax collection efficiency. However, the system's rollout has varied across provinces, leading to disparities in tax collection capabilities nationwide. This variation has provided conglomerates with opportunities to engage in tax planning by adjusting their capital structure. This paper examines the strategies employed by conglomerates in response to stricter tax enforcement, focusing on how they reallocate interregional debt and expenses. Our findings indicate that conglomerates allocate deductible debts and expenses to provinces where the GTP III system is operational, resulting in significant tax savings. This behavior is more pronounced when conglomerates have strong motivations for tax planning or engage in more aggressive tax strategies. Additionally, conglomerates adjust their debt management strategies, increasing short-term debt to reduce tax liabilities while limiting long-term debt to maintain a well-balanced capital structure.