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Tax Loss Carryovers in a Competitive Environment

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  • Anja De Waegenaere
  • Richard Sansing
  • Jacco L. Wielhouwer

Abstract

The fact that incumbent firms can immediately deduct research and development (R&D) investments from taxable income is generally believed to give them a strategic advantage over new firms that cannot deduct the investment cost, but instead generate a net operating tax loss carryover. Using an analytical model, we show that this conventional wisdom need not hold in a competitive environment. We examine operating and investment decisions in a duopolistic industry in which an initial investment in R&D yields an immediate tax benefit for one firm, but creates a net operating loss carryover for the other firm. If both firms invest in R&D, the firm with the net operating loss carryover makes more aggressive capital investment decisions following successful R&D. This may deter the incumbent firm from investing in R&D despite the lower aftertax costs of this investment. Changing the tax loss carryover rules would thus not only affects start‐up or loss firms, but would also affect the investment decisions of profitable firms in the same industry. Reports de pertes fiscales dans un environnement concurrentiel Le fait que les sociétés établies puissent déduire immédiatement de leur revenu imposable leurs investissements dans la recherche et le développement (R‑D) leur confère, estime‐t‐on généralement, un avantage stratégique par rapport aux nouvelles sociétés qui ne peuvent déduire le coût de l'investissement mais obtiennent plutôt un report de perte fiscale nette d'exploitation. À l'aide d'un modèle analytique, les auteurs montrent que cette idée reçue ne tient pas nécessairement dans un environnement concurrentiel. Ils étudient les décisions d'exploitation et d'investissement en situation de duopole dans un secteur d'activité où un investissement initial en R‑D produit un avantage fiscal immédiat pour une société, mais crée un report de perte nette d'exploitation pour l'autre société. Si les deux sociétés investissent en R‑D, la société qui affiche le report de perte nette d'exploitation prend des décisions plus audacieuses en ce qui a trait aux dépenses d'investissement lorsque les activités de R‑D sont fructueuses. Cette situation risque de dissuader la société établie d'investir dans les activités de R‑D malgré le coût après impôt plus faible de cet investissement. La modification des règles relatives au report des pertes fiscales aurait donc une incidence non seulement sur les sociétés en démarrage ou les sociétés affichant des pertes, mais également sur les décisions d'investissement des sociétés rentables appartenant au même secteur d'activité.

Suggested Citation

  • Anja De Waegenaere & Richard Sansing & Jacco L. Wielhouwer, 2021. "Tax Loss Carryovers in a Competitive Environment," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 180-207, March.
  • Handle: RePEc:wly:coacre:v:38:y:2021:i:1:p:180-207
    DOI: 10.1111/1911-3846.12627
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    References listed on IDEAS

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    3. Chen, Hanwen & Liu, Siyi & Wang, Junjie & Wu, Zhijuan, 2022. "The effect of geographic proximity on corporate tax avoidance: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 72(C).

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