VAT Neutrality and Corporate Cash Holdings —Based on the Research of Uncredited VAT Refund Policy

This paper regards the uncredited value-added tax (VAT) refund policy promulgated in 2018 as an exogenous shock to improve the neutrality for VAT. Based on the statistics of listed companies in the non-financial sectors from 2013 to 2020, this paper applies the difference-in-differences (DID) approach to study the impact of the uncredited VAT refund policy on corporate cash holdings. The study finds that the policy has eased the impact of non-tax-neutral impact of non-refundable tax credits and lowered the level of corporate cash holdings. Furthermore, the analysis of capital sources verified that the policy has optimized the corporate capital conditions. These findings have proved to be robust after a series of tests. At the level of cross-sectional differences, the uncredited VAT refund policy exerts both “resource effect” and “signal effect”, enabling companies to reduce cash holdings in the dimensions of both tax endowment and market expectation. At the level of policy effects, the policy improved the corporate behavior of high cash holdings for the production and operation cycle, with more notable impact on enterprises with higher tax credit rating. At the level of economic consequences, the adjustment of corporate cash holdings induced by uncredited VAT refund policy has significantly improved operating performance and reduced performance volatility, with a greater impact on enterprises with high capital intensity. The research findings evaluate the uncredited VAT refund policy from the perspective of tax neutrality, laying a theoretical foundation for further optimizing the uncredited VAT refund policy and the modern fiscal, tax and financial systems.