Does digital development inhibit corporate tax avoidance? Evidence from the national big data comprehensive pilot zone policy in China

• The policy analysis shows that digital development inhibits corporate tax avoidance. • Digital governance and corporate digital transformation are key mechanisms. • Corporate governance and regional legal development strengthen the policy effect. • Political connection and industry competition weaken the policy effect. Since tax is crucial for social welfare and economic development, how to improve firms’ tax avoidance behaviors has been a key concern for scholars and practitioners. While prior studies have examined various antecedents of corporate tax avoidance, there is a limited understanding of how it is affected by digital development which plays a pivotal role in transforming corporate behaviors. Thus, using the implementation of the National Big Data Comprehensive Pilot Zone policy as a quasi-natural experiment, we examine the effect of digital development on corporate tax avoidance. Our difference-in-difference estimation shows that digital development inhibits firms’ tax avoidance behaviors. Digital governance and corporate digital transformation are two main mechanisms of this relationship. In addition, we find that the inhibitory impact of digital development is stronger for well-governed enterprises and firms without political connection. This policy effect also works better in regions with better legal environment and industries with lower competition. Overall, our study suggests that promoting regional digital development is a good way to inhibit local firms’ tax avoidance behaviors.