Tax evasion through trade intermediation: Evidence from Chinese exporters

Many production firms use intermediary trading firms to export indirectly. Using Chinese export data, we provide strong evidence that production firms can effectively evade value-added taxes (VATs) by exporting through intermediary trading firms, especially when selling differentiated products. Indirect exporting can save export taxes by 14.5% compared to direct exporting even if no intentional price under-reporting occurs, and even more when domestic purchasing price paid by a trading firm to a production firm is under-reported purposely. We also find that such under-reporting behavior through domestic intermediaries may be associated with cross-border evasion through under-reporting export values to foreign partners.