Digitalization of Tax Enforcement and Strategic Choices for Corporate Earnings Management

【Authors】

FANG Hongsheng, XIA Kainan

【WorkUnit】

Zhejiang University, 310058.

【Abstract】

The digital transformation of tax enforcement is a key goal of tax reform, particularly in China. In 2021, the “Opinions on Further Deepening the Reform of Tax Collection and Administration” outlined the goal of “governing taxes with data,” emphasizing the comprehensive advancement of digital and intelligent tax enforcement to significantly enhance tax compliance and social satisfaction. Central to this reform is the “Golden Tax Ⅲ” Project （GT3）, a nationwide project launched in 2013 that leverages big data, cloud computing, and cross-agency collaboration to monitor transactions, invoices, and tax filings in real time. While GT3 has been lauded for curbing tax evasion and improving tax compliance, its broader implications for corporate financial reporting—specifically, how firms adapt their earnings management strategies in response to heightened oversight—remain underexplored. 
This paper examines how the digitalization of tax enforcement reshapes corporate earnings management strategies, using panel data from Chinese A-share listed firms （2009-2016） and quasi-natural experiments based on GT3. Employing a staggered difference-in-differences approach, the study yields three key findings. （1） The digitalization of tax enforcement significantly reduced Accrual-based Earnings Management （AEM） and Real Earnings Management （REM） but increased Classification-shifting Earnings Management （CEM）. （2） This shift occurs because digitalization reduces information asymmetry, enhances tax compliance, implements tax incentives, thus inhibiting AEM and REM. However, it cannot restrain CEM, leading firms to replace suppressed AEM and REM with CEM. （3） Heterogeneity analysis shows that the impact of digitalization is more pronounced among non-state-owned enterprises, non-political-affiliated firms, and companies managed by local tax bureaus.
This paper contributes to the literature in several ways. First, it integrates CEM into tax enforcement research, revealing nuanced strategic adaptations by firms in response to digitalization and enriching the research on the economic consequences of tax enforcement and the influencing factors of earnings management. Second, this paper deepens the mechanism analysis of how digitalization affects earnings management, proposing a novel analysis framework of “information asymmetry mitigation-cost difference-strategic substitution” to explain why digitalization suppresses AEM and REM but stimulates CEM. Third, this paper provides insights for advancing tax digitalization and improving corporate governance.

【KeyWords】

Digitalization of Tax Enforcement, China’s “Golden Tax Ⅲ” Project, Earnings Management