The Study on R&D Income Tax Incentive in China
|Keywords||R&D Income Tax Incentive User Cost Profitability Index Real Option|
Research and development (R&D) plays a very important role in improving productivity and promoting the economic growth. However, the market fails to provide sufficient quantities of R&D as it has the characteristics of high input, high risk and public goods, which can lead to spillovers that the private return is lower than the social return of R&D investment. Therefore, many countries adopt income tax policy to bridge the gap between the private and social rate of return of R&D investment. In China, the problem of insufficient quantities of R&D is more serious, so R&D income tax incentive becomes more important. In China the income tax policies had been induced since 1985, which includ a lower tax rate, tax holidays, depreciation and write-offs, R&D incremental tax allowances, tax credit for purchasing domestic R&D equipments. New Corporate Income Tax Law came into effect on January 1, 2008, which re-regulated R&D income tax policy. The effectiveness of income tax incentive is concerned, but there are rare researches on this field in china. Therefore, this dissertation will explore if R&D income tax policy in China can incentive enterprises to have more R&D investment by adopting traditional approaches, such as R&D user cost model and profitability index model, and real option approach.The main conclusions of this dissertation are as follows. Firstly, the findings from traditional approaches show that a more generous R&D income tax policy, either a lower corporate income tax rate or a longer tax holiday can incentive R&D investment. But it is not the case by adopting an option approach. The conclusion under the real option approach implies a more generous R&D income tax policy leads to a higher trigger value of investment opportunity, which means it provides more opportunity to wait but not to invest immediately. Secondly, a higher depreciation rate can be more incentive when the fixed assets are long-lived under the analysis of option approach. Thirdly, the analysis under the user cost approach shows that the new income tax policy increases the user cost for the repeal of tax credit item for purchasing domestic R&D equipment, but a lower tax rate can be more incentive than that in the old policy. Fourthly, the analysis under the profitability index model distinguishes the tax rates at which the initial investment is deductible and the future cash flows are taxed. When R&D projects are invested, the investor prefers to the higher tax rate at the time of initial investment and the lower tax rate when the cash flows are gained.The academic contribution of this dissertation might be as follows. Firstly, the real option approach is introduced to evaluate the effectiveness of R&D income tax policy and present the explanation for the conclusion from the view of real option. Secondly, numerical examples are demonstrated in this dissertation and the value of tax parameter is assigned according to income tax policy in China, which can present the stronger evidence for evaluating R&D income tax incentive. The result of this dissertation increases the evidences to the study in this field, provides ideas for the regulators to make the more effective income tax policy and also presents the theory of tax planning for enterprises when the investment decision is made.