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Working Paper

Publication Date



State-owned enterprises; state capitalism; corporate governance; corporate taxation


This chapter reviews empirical evidence from China that bears on the general theory of the income taxation of state-owned enterprises (SOEs). Prior theoretical literature has offered three conflicting views of SOE taxation. The first is that SOE taxation is superfluous, because the government shareholder can simply demand profit distributions. The second is that SOE taxation is necessary to put state-owned and private firms on an equal competitive footing. The third view holds that the significance of SOE taxation lies in the fact that SOE managers, like managers of private firms, may be dividend averse; in the absence of other effective mechanisms to secure adequate payout, SOE taxation serves the purpose of forcing distributions. These conflicting theoretical views should be empirically testable. In particular, the first view suggests that SOEs should be insensitive to the income tax, that they would not pursue domestic tax planning, and that a firm’s tax sensitivity should rise as it becomes more privatized. By contrast, the third view suggests that SOEs are likely to be tax sensitive, and that such tax sensitivity is as much a function of managerial compensation and the degree of shareholder monitoring as it is of the proportion of government ownership. The chapter shows that recent advanced accounting research on Chinese listed companies augments already strong historical and legal evidence that supports the third view. Chinese SOEs, particularly centrally-owned SOEs, engage in extensive tax lobbying, and display degrees of tax planning similar to private firms. The chapter suggests that further empirical research on SOE taxation should be designed with a more explicit aim of testing the above theories, for example by examining whether countries that encounter greater problems with SOE corporate governance also rely more heavily on SOE income taxation.