The effect of tighter tax loss offsetting rules on firms' innovation: evidence from South Korea
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 20 November 2023
Abstract
Purpose
This study investigates how the introduction of a stricter loss carryforward offset rule affects firms' innovation.
Design/methodology/approach
This study investigates the overall impact of a Korean tax reform that introduced a tighter loss deduction through a difference-in-differences approach and regression discontinuity design.
Findings
This study finds that firms subject to the more restrictive tax loss offset provisions tend to file fewer patents than firms not subject to the provision. The authors further find that this effect is more pronounced for firms with high R&D intensity, more investment opportunities and weaker monitoring mechanisms.
Research limitations/implications
The results of this study suggest that more restrictive loss carryforward provisions may deter firms from innovation. This study contributes to the literature on the impact of tax loss rules, the effect of tax policies on investments and the real effects of corporate taxation.
Practical implications
This study sheds light on the debate of the consequences of a Korean tax reform. Specifically, the authors examine whether a stricter tax loss offset policy indeed dampens corporate innovation.
Originality/value
This study exploits a unique and infrequent exogenous tax policy change. The South Korean tax reform creates a treatment group of large firms that were affected by the tax reform, and a control group of small and medium-sized firms that were unaffected. This study takes advantage of this setting to examine the research question.
Keywords
Citation
Sim, J.Y., Kim, N.K.W. and Kim, J.-T. (2023), "The effect of tighter tax loss offsetting rules on firms' innovation: evidence from South Korea", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-02-2023-0239
Publisher
:Emerald Publishing Limited
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