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Article
Publication date: 29 June 2023

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

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

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.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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