Limits of Tax Regulation: Evidence from Strategic R&D Classification and the R&D Tax Credit (original) (raw)

Limits of tax regulation: Evidence from strategic R&D classification and the R&D tax credit

Journal of Accounting and Public Policy, 2019

We investigate a tax avoidance strategy where firms use the ambiguity inherent in tax reporting to classify indirect costs as research and development (R&D) expenditures to take advantage of the R&D tax credit. We label this tax practice ''strategic R&D classification". We find a one standard deviation increase in strategic R&D classification leads, on average, to a 1.7% (1.5%) reduction in GAAP (cash) effective tax rates, suggesting this practice provides significant tax savings. However, we also find strategic R&D classification is related to both the level and changes in uncertain tax benefit liabilities required to be recognized under FIN 48, suggesting this practice comes with financial reporting costs. Our study contributes to the literature by documenting some of the costs and benefits associated with a previously unexplored tax strategy, and highlights the limitations faced by tax authorities in monitoring firms' R&D tax credit.

Why Expanding the R&D Tax Credit Is Key to Successful Corporate Tax Reform

2017

The United States has not overhauled its tax code since 1986. Since then, increased global competition has led other countries and U.S. states to lower their corporate tax rates while also introducing or expanding incentives to encourage investment and production. As a result, the United States has fallen behind other nations, both in the level of its statutory corporate tax rate and in the incentives it gives to productive investment, including scientific and engineering research. In fact, the United States currently has the highest statutory corporate rate among OECD countries and now ranks just 25th in the generosity of its incentives for research.

The private return of R&D tax credit

Research Papers in Economics, 2021

This article examines the private return on R&D tax credit, defined as the ratio of total tax reliefs obtained by a firm through R&D tax credit to real R&D spending. Based on a dataset merging different sources for French companies, we first show that the distribution of this private return is dispersed. We then use clustering analyses to identify six mutually exclusive types of firms' R&D strategies. We finally show in a regression setting that these strategies explain part of the variance in the private return on R&D tax credit. This study contributes to a better understanding of the heterogeneity of firms' R&D strategies. It also seeks to open new directions in debates surrounding the proper design and reforms of R&D tax credit schemes.

Determinants of corporate R&D expenditures: the role of taxes

Central European Economic Journal, 2020

The paper aims to find the relationship between corporate expenditures on R&D and tax burdens comparing German with French R&D incentives. We use the OLS method for the financial and patent cross-sectional data retrieved from the Amadeus database. The results confirm that firms with higher tax spread (the difference between the nominal and effective tax rates) spend less on R&D. These are in line with findings of a positive relationship between corporate R&D investment and tax burdens. Thus, firms that invest in R&D more pay higher taxes. However, they are less profitable as the return on R&D investment is visible only in the long run. German corporate expenditures on R&D are significantly sensitive to internal funds (proxied by cash flow) and depend on debt, contrary to French. The results indicate that the French firm's age (a phase of life cycle) has a significant impact on spending on R&D compared to German. Whereas in both countries, corporate expenditures on R&D are sensitive to the number of obtained patents. The capability of reducing the level of tax burdens below the nominal tax rate in the case of older German firms stimulates them to increase their R&D expenditures. However, German firms can decrease tax due to the use of R&D grants (revenues without taxation) in the absence of other tax incentives related to R&D.

Tax policies affecting R&D: an international comparison

Technovation, 1993

As more and more emphasis is being given to the role of government in supporting innovation-related activity, a clearer understanding of the historical intent of R&D-related tax policies (by far the most common mechanism for support of R&D) and of the effectiveness of these policies appears warranted. The purpose of this paper is threefold. First, it provides an overview of the history of R&D-related tax policies, both in the USA and in twenty-two other industrial countries Second, it reviews the extant empirical evidence on the effectiveness of R&D tax credits. And third, it offers a critique of R&D tax policies per se.

In-Process R&D (Iprd) Write-Off Misclassifications in Compustat: An Econometric Evaluation

Journal of Business and Leadership, 2006

In 38% of these cases, Compustat overstated R&D expense by including the IPRD write-off Comparative econom etric estimates obtained show larger parameter coefficients wh en th e Compu stat 's R&D expense data was used. This suggests prior research on R&D tax credit eff ectiveness based on Compustat data may have been upwardly biased, overstating th e ULl: credit's incentive effects. Policy implications and directions for future research are discussed.

Issues in the design and implementation of an R&D tax credit for UK firms

R&D tax credits have become a popular policy tool for encouraging research and development (R&D) spending by business, with many countries offering subsidies of this form. 1 The divergence between private and social rates of return to R&D expenditure by private firms provides one of the main justifications for government subsidies to R&D. 2 In order to achieve the optimal level of R&D investment, government policy aims to bring private incentives in line with the social rate of return. An R&D tax credit does this by reducing the cost to the firm of doing R&D. Recent empirical evidence suggests that R&D tax credits are an effective instrument in stimulating additional R&D. However, in order to be desirable, a policy needs to be cost-effective and implementable.

Who Benefits from R&D Tax Policy?

This paper explores which types of firms benefit more from the R&D fiscal incentives and the effect of this type of instrument on the performance of R&D activities. Spain is considered the most generous countries in the OECD in fiscal treatment of R&D, yet our data reveal that tax incentives are little known and, especially, seldom used by firms. Restricting our empirical analysis to those firms that do report knowing about such incentives, we investigate the average effect of tax incentives on innovation, using both nonparametric methods (matching estimators) and parametric methods (Heckman's two-step selection model). First, we find that large firms, especially those that implement innovations, are more likely to use the tax incentives, while small and medium enterprises encounter some obstacles to using them. Secondly, the average effect of the policy is positive, but significant only in large firms. Our main conclusion is that tax incentives increase innovative activities by large and high-tech sector firms, but may be used only randomly by small medium enterprises.

Do the effects of R&D tax credits vary across industries? A meta-regression analysis

Research Policy, 2015

This paper presents a survey of the micro-econometric literature on the effects of R&D tax credits on firms' innovation activities. We focus on one specific aspect that has not received sufficient attention in previous research: the sectoral dimension. Our meta-regression analysis (MRA) sets up a new database collecting a large number of firm-level studies on the effects of R&D tax credits and investigates the factors that may explain differences in the estimated effects that are reported in the literature. The main result of the MRA analysis is indeed that sectors matter. Micro-econometric studies that have focused on a sub-sample of high-tech industries have on average obtained a smaller estimated effect of R&D tax credits. The paper proposes a simple framework to investigate why the effects of R&D tax credits vary across sectors and points out new directions and hypotheses for future research.