The Effect Of Internal Control On Tax Avoidance And Market Reaction

The global capital is constantly changing with the development of economy, and so is in China. At the same time, the tax system is improving. The diversity and complexity of the operating activities of companies further complicates the tax planning and activities. Tax risk has raised the attention of the society so that governments are devising a series of new tax policies to strengthen tax collection and administration.Tax risk is one of the main risks corporations are faced with. Whether a corporation will undertake excessive tax burdens or penalties depends on the dealing of tax risk. This kind of risk also affects the reputation of corporations. Tax planning involves strategic planning, management, normal business and so on. Both external regulatory environment and internal management policy will have an impact on tax planning. Our government has not paid enough attention to tax risk or tax planning.Tax avoidance behavior has always been the focus of tax studies because of its popularity and complexity. There are a lot of reasons that affect tax avoidance. One of these factors is internal control which has been through improvement through recent years.Internal control is a way of company governance and management. It is used to supervise, constrain and balance all kinds of company activities. Internal control has been popularized among all the corporations in recent years. The aim of internal control is to improve a company’s management ability and the level of risk aversion to ensure its sustainable development. But there are few empirical researches on the relationship between tax avoidance and internal control. This article aims to study the correlation between those two subjects. I talked about internal control outside the auditing boundary. In fact, I assumed that internal affects a lot of kinds of policies as well as tax-related activities. For example, a well governed company usually has a good internal control system to effectively regulate tax risk.In the part of my empirical research, I studied the implementations of internal control and tax avoidance. Through my research I found out that there is certain correlation between internal control quality and tax avoidance behavior. The conclusion is that companies with more overall and normal flaws tend to pay more taxes, and there is no such notable correlation between the number of significant flaws and tax avoidance. From these results, we can see that most of Chinese listed companies tend to avoidance more taxes. A perfect internal control mechanism helps to improve the effectiveness of tax planning. The existence of internal control flaws usually means lack and misallocation of resources, which goes against tax planning. Besides, this study finds out that a high-quality internal control system will protect the interests of companies and their shareholders.This article aims to offer reference for the establishment and improvement of both internal control system and tax avoidance activities. It also aims to encourage the development of tax related internal control mechanism.