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 Additional deduction policy, R&D manipulation and independent innovation of private firms

 Wan Yuanxing1, Xu Yongbin1, Xu Wenhan2   

  1.  1. School of Accounting, Zhejiang Gongshang University, Hangzhou 310018, Zhejiang, China;
    2. School of Accounting, Nanjing Audit University, Nanjing 211815, Jiangsu, China
  • Online:2020-02-20 Published:2020-03-10
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Abstract:  The independent innovation and sustainable development of private firm have been highly valued by the Chinese government. At the executive meetings of the State Council in December 2018 and January 2019, Premier Li Keqiang pointed out that increasing support for the private economy and SME must be the first item on the agenda, and the tax burden for private and SME is estimated to be reduced by 200 billion yuan per year. A large number of studies have also proved that tax incentives can reduce innovation cost and make them more market-oriented, which has been widely used in practice (Jia and Ma, 2017; Lee and Bell, 2018; Ni and Wang, 2018). The additional deduction policy is a main policy for the government to encourage firms to innovate, which has been continuously revised from the aspects of preferential intensity, applicable industries, the collection scope of R&D expenses and so on. However, in recent years, some firms have manipulated R&D expenses to obtain the policy benefits, resulting in the capital market failure and the loss of national fiscal and tax resources. Therefore, the research of R&D manipulation is helpful to improve the additional deduction policy, and of a great practical significance for the development of Chinese private economy.

The researches for additional deduction policy are numerous, and most of them have adopted qualitative paradigm in early years (Song et al., 2009; Fan et al., 2011;Lian et al., 2012). In recent years, only a few of them have adopted empirical methods to analyze the impact of the additional deduction policies on the innovation of listed firms, and the research results are controversial. For example, Ren and Song (2017) believed that the additional deduction policy could reduce the innovation cost by indirectly increasing capital supply, which could further encourage firms to make independent innovation. Many other researches, such as Zhang et al. (2016) and Xi (2017), also prove this incentive effect. However, Wang (2017) found that additional deduction policies was not as successful as expected in micro high-tech firms. Furthermore, Wang and Ye (2018) used DID model to find that it is not conducive to independent innovation by using both additional deductions policy and tax rates policy. Therefore, the effect of additional deduction policy remains to be tested.
Different from the above literatures, this paper evaluates the effect of additional deduction policy from the perspective of R&D manipulation. Yang et al., (2017) and Sun (2018) are the documents closest to the topic of this paper. Based on the innovation data of Chinese listed companies from 2008-2014, Yang et al., (2017) found that the effect of tax policy was distorted, and somefirms were encouraged to manipulate R&D expenses by adjusting accounting items, actual business and other means, resulting in a phenomenon that the proportion of R&D investment was clustered near the policy threshold. From the perspective of principal-agent, Sun (2018) explained the formation motivation of R&D manipulation such as "innovation for identification" and "pseudo-high-tech". The above research focused on " Target achieved type " R&D manipulations, which may be just the tip of the iceberg. Just as Wan and Xu (2019) point of view, both capitalized or expended R&D investment can be deducted. In order to reduce tax burden, firms that have reached the policy threshold still have the incentive to participate in R&D manipulation. Different from the above studies, this paper takes the more inclusive additional deduction policy as the evaluation object, trying to systematically and comprehensively analyze the law and consequences of R&D manipulation. The main content of this paper is as follows:
Firstly, this paper discusses the effect of additional deduction policy on private firm independent innovation from the perspective of R&D manipulation,and proposes three hypotheses: H1, there is a positive effect of additional deduction policy on private firm independent innovation; H2, R&D manipulation has a negative moderating effect on the relation between additional deduction policy and private firm independent innovation; H3, the effect of R&D manipulation is more remarkable on the firms which are profitable, non-family controlled, non-high-tech, or in the regions where tax regulation is weak. 
Then, the data of Chinese private listed firms from 2008-2017 is applied for the empirical tests. The test results are as follow: 1. The additional deduction policy encourages private firms to innovate independently. Because of the deductions, the amount of taxable income and innovation cost will be reduced, and meanwhile the profits of R&D products will be increased as well as the innovation willingness; 2. R&D manipulation are not conducive to the stimulation of additional deduction policy. R&D manipulation includes the fees of non-R&D activities fee or non-operation equipment into the R&D expense item, which reduces the allocation efficiency of firm innovational resources. Meanwhile, senior executives can take advantage of the regulatory vacuum and information advantages brought from R&D manipulation to realize their personal interests, resulting in the firm′s short-sighted decision-making; 3. The effect of R&D manipulation is more significant on the firms which are profitable, non-family controlled, non-high-tech, or in areas where tax regulations are weak. The intention of additional deduction policy is to encourage firms to make independent innovations, but this paper finds that additional deduction policy has a stimulation distortion effect, inducing private firms to manipulate R&D expenses.
Finally, based on the previously research, this paper gives the following suggestions: 1. To raise the violation cost. The additional deduction policy should clearly stipulate that the R&D manipulation must be subject to more serious penalties, so as to increase the R&D manipulation costs; 2. To improve the audit quality. With the guidance of industry experts, the government should cooperate with accountants to make a reasonable judgment on the collection scape of R&D expenses; 3. To improve the tax supervision. This paper finds that R&D manipulation is more significant in regions where tax regulations are weak. Therefore, the government should regulate the tax collection activities of the tax departments, and improve the tax supervision reasonably. Policy makers should explore more effective tax incentive policies so as to grasp the new round of scientific and technological revolution and industrial transformation, and further implement the strategy of innovation-driven development.

 

Key words:  additional deduction policy, R&D manipulation, private firm, independent innovation

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