Environmental regulation and corporate tax avoidance: A quasi-natural experiment based on the eleventh Five-Year Plan in China

Highlights: • The impact of environmental regulation on corporate tax avoidance is explored. • Environmental regulation makes firms become more tax aggressive. • Two channels identified are the operating risks and the financing constraints. • Environmental regulation has spillover effects on firms in low-emission industries. Taking the 11th Five-Year Plan in China as a quasi-natural experiment, this paper explores the impact of environmental regulation on corporate tax avoidance based on firm-level data and the difference-in-difference-in-differences (DDD) method. We find that: (1) Environmental regulation has a significant positive effect on corporate tax avoidance, and several robustness checks confirm our findings; (2) Heterogeneity analysis show that this effects are more significant for private firms and for firms in the regions with less fiscal stress and that in the east part of China; (3) Two channels identified are the operating risks and financing constraints; (4) Further analysis show that the 11th Five-Year Plan has spillover effects on firms in low-emission industries. The increased tax avoidance of firms in high-emission industries contributes to a raised tax burden on firms in low-emission industries. Our study provides implications for the formulation of environmental policies in developing countries