Accounting Seminar（2018-10）

Topic: The Unintended Effect of Tax Avoidance Crackdown on Corporate Innovation

Speaker: Mark (Shuai) Ma, Kogod School of Business, American University

Time: Thursday, June 21st, 10:00-11:30

Place: Room 217, Guanghua Building 2

Abstract:

To constrain the use of intangible assets in tax-motivated income shifting and thus crackdown on corporate tax avoidance, many U.S. state governments adopted addback statutes. Addback statutes require firms to add back intangible-related expenses paid to related parties in other states to the taxable income reported in the state taxable income. The addback reduces the benefits that firms and managers can gain from creating intangible assets such as patents. In this study, we examine the potential unintended effect of addback statutes on corporate innovation. First, we find that the adoption of addback statutes significantly reduces a firm’s innovation, measured by the number of patents or patent citations. Second, the “disappeared patents” resulting from tax avoidance crackdown do not seem to be of lower quality than other patents. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in Delaware, where income generated by intangible assets is free of state income tax. Finally, affected firms do not have lower innovation prior to the adoption of addback statues. Overall, these findings suggest that the adoption of addback statutes impedes corporate innovation. Our study has important implications for policy makers who are interested in understanding the consequences of policies that constrain tax-motivated income shifting using intangibles and prevent income base erosion.

Introduction:

Prof. Mark (Shuai) Ma joined the Kogod School of Business, American University after he received his Ph.D. in Accounting from the University of Oklahoma in 2014. His research interest is broad, including capital market, financial reporting, tax reporting, and corporate governance. He is especially interested in 1) exploring new research ideas, 2) challenging conventional thoughts in accounting research, and 3) utilizing "natural experiments" to better identify the direction of causality. He has published in the Journal of Accounting and Economics, The Accounting Review and Journal of International Accounting Research.

Your participation is warmly welcomed!