Business Group Taxation and R&D Activities

Masanori Orihara
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Masanori Orihara: Economist, Policy Research Institute, Ministry of Finance, Japan, University of Illinois at Urbana-Champaign

Discussion papers from Policy Research Institute, Ministry of Finance Japan

Abstract: Economic theory dating to Domar and Musgrave (1944) suggests that the tax treatment of gains and losses can affect firms f incentives to undertake high-risk investments. Exploiting a 2002 tax law change in Japan that allows business groups to adopt a consolidated taxation system (CTS) and using an IV strategy, I identify the causal impact of mitigating tax loss asymmetry on R&D activities. With unique firm-level panel data between 1997 and 2011, I show that CTS adoption increases total R&D expenses among individual business groups. More specifically, CTS adoption increases the following, especially among parent companies of business groups: the number of employees engaging in R&D; expenses for property, plant, and equipment for R&D; and expenses for R&D outsourcing. Evidence of ex-ante efficiency of CTS adoption measured by market-to-book ratio is limited, while CTS adoption improves expost efficiency measured by income from patent transactions. These findings support that mitigating tax loss asymmetry facilitates efficient developments of high-risk investments in line with Domar and Musgrave.

Keywords: business group; corporate income tax; loss treatment; R&D activity; instrumental variable method (search for similar items in EconPapers)
JEL-codes: G30 H25 O30 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2013-11
New Economics Papers: this item is included in nep-acc, nep-ino, nep-pbe and nep-tid
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