Tax incentives and upward R&D manipulation – evidence from the R&D tax deduction policy in China

Abstract

Purpose

This paper investigates whether China's R&D tax deduction policy triggers firms to manipulate their R&D expenditures upward.

Design/methodology/approach

This paper employs the ratio of actual tax savings as a proxy for the benefits of the R&D tax deduction policy based on manually collected and systematically cross-checked data. The relationship between tax benefits and abnormal R&D spending is estimated in a sample of Chinese A-share listed companies for the period 2007–2018.

Findings

The findings suggest that tax deductions lead to positive abnormal R&D spending and that this deviation in R&D spending may be attributed to firms' upward R&D manipulation for tax avoidance. The results also indicate that this behavior is more significant for the period after the policy revision, in non-HNTEs (high and new technology enterprises), and in firms with a high ratio of R&D expenses.

Research limitations/implications

It is difficult to establish a sophisticated and unified model to identify the specific strategy of upward R&D manipulation that firms use to obtain tax benefits.

Practical implications

Managers should take into account upward R&D manipulation when designing governance mechanisms. Policymakers in developing countries may further pursue preferential tax policies that cover every stage of innovation activities gradually; the local provincial governments need to leverage their proximity and flexibility advantages to develop a tax collection and administration system.

Originality/value

This study contributes to the understanding of the complex effect of R&D tax incentives and helps more fully illuminate firms' upward R&D manipulation behavior from the perspective of tax planning strategies, which are underexplored in previous research.

Citation

He, Y., Zhang, X., Hao, P., Dai, X. and Xue, H. (2023), "Tax incentives and upward R&D manipulation – evidence from the R&D tax deduction policy in China", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-02-2022-0254