Customer and Tax Avoidance: How Does Customer Geographic Proximity Affect a Supplier’s Tax Avoidance?

Abstract

This paper examines the effect of customer geographic proximity on supplier tax avoidance. Based on 5135 Chinese firm–year observations from 2009 to 2020, we find a positive association between customer geographic distance and supplier tax avoidance. Moreover, this association is robust after studying endogeneity concerns. We further find that information asymmetry and detection risk are underlying mechanisms. We also find that this positive relation is more pronounced in suppliers with high financial risk, competitive industrial sectors, and weak marketization environments. Overall, our findings suggest that customer geographic localities within a country are an important factor affecting a supplier’s motivation for tax avoidance. Our research sheds light on how the change in a supplier’s information environment caused by differences in customer geographic proximity impacts its tax strategy.