Page 139 - 35-1

NTU Management Review Vol. 35 No. 1 Apr. 2025

costs. The shift away from multilayered holding structures reflects a strategic adaptation to
the new regulatory environment.
Firms also exhibite a reduction in tax avoidance behaviors after the implementation
of the Economic Substance Act, as reflected by significant increases in both ETRs and

CASHETRs. The results suggest that these companies are willing to undertake higher tax
costs to mitigate the increased risks associated with tax avoidance under the Economic
Substance Act.

Finally, we find that the revenue share reported by subsidiaries in tax havens
decreases, indicating a deliberate reallocation of income-generating activities to
jurisdictions with substantive economic activities. These findings suggest that the
Economic Substance Act has inhibited firms from exploiting tax havens for profit-shifting
purposes.

Nevertheless, we observe that a significant percentage of firms have continued
to maintain tax haven subsidiaries within their offshore investment structures after the
implementation of the act. This suggests that specific tax and nontax advantages of tax

haven subsidiaries remain. In other words, firms may still leverage tax havens for business
strategies or jurisdictional protection.

4. Research Limitations and Implications

This study focuses exclusively on listed companies in Taiwan, limiting the
generalizability of the findings to firms in other regulatory territories or industrial contexts.
Future research could expand the analysis to companies in diverse geographical regions

for broader applicability. Although the study employs two-stage least squares regression
to mitigate endogeneity, various unobservable factors could still have influenced
corporate tax avoidance strategies. We suggest further research to validate the causal
relationships identified in this study. Moreover, Taiwan’s corporate tax reforms during
the study period—particularly the statutory tax rate increase from 17% to 20%—may

have confounded the analysis of the Economic Substance Act’s effects on tax avoidance
behavior.
Companies need to proactively ensure compliance with economic substance
requirements by reassessing the location of core income-generating activities. Simplifying

131