Abstract: Fiscal incentives, as an important means of regulating the distribution of finance among governments, have a profound impact on the decision-making behavior of local governments. The tax sharing reform presents different fiscal incentive effects, triggers local tax competition that transmits to enterprises, and has a crucial impact on the coordinated development of regional economy. Taking the 2016 VAT 50/50 sharing reform as an exogenous shock variable of fiscal incentives, this paper empirically test how the incentive effect brought by the tax sharing reform affect the nonlocal investment of the enterprises by constructing an intensity difference model. It is found that an increase in the VAT sharing ratio will incentivize local governments to actively support local firms in retaining tax sources and discourage firms from investing in other places. Further research shows that the changes in VAT sharing ratio exhibit strong inhibiting effects across regions with higher fiscal self-sufficiency rates or lower fiscal self-sufficiency rates, which is greater in the lower groups. Local governments are more inclined to control the local state-owned enterprises with direct control and the enterprises with a higher proportion of investment in other regions. The incentive changes brought about by the reform will promote the acquisition of corporate credit and the increase of government subsidies. Thus, it is recommended that the centralized concentration of the mobile tax base be increased to weaken the local governments’ incentive to intervene in enterprises’ nonlocal investments, that an“empowerment-control”fiscal incentive mechanism be established to curb excessive inter-regional tax competition and market segmentation, and that the transformation of the local government from a“management-type”to a“service-type”government be promoted to reduce the intervention in, and control of, enterprises’nonlocal investments.

Key words: tax sharing, financial incentives, nonlocal investment of enterprises, 50/50 VAT sharing