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

Yanan He, Xindong Zhang, Panpan Hao, Xiaoyong Dai and Haiyan Xue

International Journal of Emerging Markets, 2023, vol. 20, issue 4, 1507-1529

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.

Keywords: R&D tax deduction policy; Abnormal R&D spending; Upward R&D manipulation; Tax incentives (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-02-2022-0254

DOI: 10.1108/IJOEM-02-2022-0254

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