CORPORATE SOCIAL RESPONSIBILITY AND TAX AVOIDANCE: A LITERATURE

REVIEW AND DIRECTIONS FOR FUTURE RESEARCH

David Stephenson*
Executive Consultant
1213 N. West St.
Naperville, IL 60563
Phone: 407-421-1692
Email: [email protected]

Veselina Vracheva, PhD

Assistant Professor of Management
North Central College
Department of Management & Marketing
30 N. Brainard St.
Naperville, IL 60540
Phone: 630-637-5316
Email: [email protected]

* Corresponding Author

Electronic copy available at: http://ssrn.com/abstract=2756640

CORPORATE SOCIAL RESPONSIBILITY AND TAX AVOIDANCE: A LITERATURE

REVIEW AND DIRECTIONS FOR FUTURE RESEARCH

ABSTRACT

Tax avoidance, as a CSR issue, is critically important to a firm’s long-term viability and

the government’s ability to function. Aggressive tax avoidance schemes for shareholder wealth

maximization are problematic, since governments are left powerless to sustain basic services

when earnings are stripped and sent to lower tax jurisdictions. This paper examines the extant

literature on the subject of tax avoidance as it is presented in the CSR literature. Thirty-seven

articles were analyzed and three overarching themes identified: (1) past developments

establishing tax avoidance as a CSR component, (2) ethical aspects of tax avoidance, and (3) the

role of governance in tax decisions. The academic community is not in agreement on what

constitutes an appropriate managerial course of action regarding tax obligations. Some argue for

the alleviation of the tax burden, others for the payment of statutory taxes. The present work

consolidates the literature of this emerging field to assess its current state and suggest a way

forward.

Key words: Corporate social responsibility, Tax avoidance, Tax aggressiveness, Ethics of tax

avoidance, Corporate governance.

Electronic copy available at: http://ssrn.com/abstract=2756640

 3

That desire for transparency extends to our dealings with the government. We [at
Patagonia] don’t play games with the taxman or auditor. Our tax strategy is to pay our fair share
but not a penny more. We don’t, with clever advice, develop complex schemes to do an end run
around our taxes. The same holds true for our accounting procedures. We know of legal ways to
change how we account for our money, in inventory or expenses, for example that would result in
dramatically different reported earnings from one year to the next. In fact we could, within
accepted and legal accounting practices, like so many public companies, show a profit every
quarter. But our accounting strategy is to use only those techniques that, in the view of our CFO,
provide the most accurate and consistent reflection of our true financial position.

— Yvon Chouinard, Let my People Go Surfing

Benjamin Franklin famously noted “In this world, nothing can be said to be certain, except

death and taxes.” That was 1789. Since then, his prediction about death has yet to be faulted,

but taxes in the corporate world have become anything but a certainty. Often at risk of losing

their reputation, multinational corporations (MNCs) take advantage of disparate tax regimes in

jurisdictions outside of the United States to engage in strategies known as tax avoidance, tax

aggressiveness, strategic tax planning, tax mitigation and effective tax planning (Vonwil &

Wreschniok, 2009). Tax avoidance is as easy as taking up “residence” where firms can get the

best tax rates (Fisher, 2014; Sikka, 2010). This corporate vagrancy has triggered a stakeholder

demand for transparency to determine if firms in low tax jurisdictions are operating ethically.

Ethical performance is the foundation of Corporate Social Responsibility (CSR), a complex

mix of social obligations firms accept as part of their corporate citizenship role (Velasquez,

2012). There is an ongoing debate about what constitutes tax avoidance and if it is a CSR issue

(Hanlon & Heitzman, 2010; Hasseldine & Morris, 2012; Sikka, 2010). Nevertheless, consumers

and investors are increasingly using CSR criteria, including corporate tax behavior, to make

purchasing and investment decisions (Hardeck & Hertl, 2014), and the CSR-tax avoidance link

has become the subject of heated discussions among academics, watch-dogs and think-tanks

alike.
 4

Asserting a role of responsible citizens but avoiding taxes has been equated to “organized

hypocrisy” (Sikka 2010:153) and has prompted a call for research into firms’ tax practices

relative to their socially responsible claims (Sikka, 2010). Yet, many corporate leaders insist that

the government is responsible for taxes, whereas managers should focus on profit maximization

(Friedman, 1970; Hasseldine & Morris, 2012; Timonen, 2008).

To understand the meaning and purpose of tax avoidance, much research linking a range of

CSR activities with tax avoidance is needed (Lanis and Richardson, 2012), as a firm’s tax

decisions affect a wide range of important non-financial stakeholders including the government,

employees and the community. Currently, the research scope of the CSR-tax avoidance

relationship is unclear. This prompts an investigation into the origin of and linkages between

taxation and CSR as presented in the extant literature. Thus, exploring the literature on tax

avoidance and CSR is the thrust of this paper.

This literature review aims to identify (1) key facets of tax avoidance examined in the CSR

literature, and (2) promising areas for future research on the subject. It integrates broader ethics

and governance themes of tax as an element of CSR and, as such, can be enlightening. The

debate about tax and CSR is by no means settled, and more research is needed to resolve open

questions about whether tax avoidance is a smart corporate strategy or a clever transfer of the tax

burden from corporations to society. This review charts the tax avoidance and CSR connection

and is the first known effort to identify and integrate broader ethics and governance themes of

tax as elements of CSR.

DEFINING CSR AND TAX AVOIDANCE

Over the past 50 years, CSR has become strategically important for companies wishing to be

seen as good corporate citizens (Vonwil & Wreschniok, 2009) and is now widely considered an
 5

essential quality of successful firms (Avi-Yonah, 2008). No universal understanding exists on the

subject (Dillard & Murray, 2013), but it is generally agreed that “CSR firms should strive to

make a profit, obey the law, be ethical, and be a good corporate citizen” (Carroll, 2006:22). CSR

is a form of self-regulation (van Eijsden, 2013) which incorporates issues such as

“sustainability, sustainable development, environmental management, business ethics,

philanthropy and community investment, worker rights and welfare, human rights, corruption,

corporate governance, legal compliance and animal rights” (Dillard & Murray, 2013:10). This

literature review adopts a broad definition of CSR activities including domains such as

sustainability, philanthropy, community activities, worker welfare, anti-corruption, governance,

legal compliance and business ethics.

Tax avoidance is “(1) payment of less tax than might be required by a reasonable

interpretation of a country’s laws; (2) payment of a tax on profits declared in a country other than

where they were really earned; or (3) payments somewhat later than the profits were earned”

(Palan, Murphy & Chavagneux, 2010:10). It refers to tax planning strategies for legal tax

reduction ranging from tax inversions to illegal actions such as evasion, unreasonable

aggressiveness and sheltering (Hanlon & Heitzman, 2010). Transfer pricing, tax mitigation, tax

planning, and earnings management are also forms of tax avoidance, but “much like art, the

degree of tax aggressiveness is in the eye of the beholder” (Hanlon & Heitzman, 2010:137). Tax

avoidance at the aggressive end has attracted the most research interest, but assessing the extent

and impact of tax avoidance has been problematic.

The two most common measures are the GAAP Effective Tax Rate (ETR) and the book-tax

difference. The ETR is the total income tax expense divided by worldwide total pre-tax

accounting income (Guenther, 2014; Hanlon & Heitzman, 2010). The amount of tax avoidance
 6

is the difference between the statutory and the GAAP ETR. The book-tax difference is the delta

between the reported GAAP financial income and the worldwide income tax expense marked up

by the statutory tax rate. Which of these measures is better is under debate in academic circles

(Desai & Dharmapala, 2006; Guenther, 2014; Seidman, 2010).

LITERATURE SEARCH AND SELECTION STRATEGY

This literature review synthesizes papers that: (1) expose linkages between tax avoidance and

CSR, (2) are theoretical developments of the CSR-tax avoidance link, and/or (3) report empirical

findings in CSR-tax issues. The focus in this lit review was on peer-reviewed work. In light of

the newness of this field, some advanced works in progress have also been considered. Papers

not explicitly dealing with tax avoidance and CSR were screened for at least one CSR related

term such as ethics, governance, professional conduct, and philanthropy linked to at least one of

the three tax avoidance criteria noted above (Palan et al., 2010).

Articles were identified based on suggestions by Miles and Huberman (1984). First, a

computer search in the ABI/Inform Global and Springer Link was performed combining CSR (or

a synonym such as “corporate social responsibility” and domain components such as

“sustainability”, “philanthropy”, “community activities”, “worker welfare”, “corruption”,”

governance”, “legal compliance” and “business ethics”) and tax avoidance (or a synonym like

“tax”, “tax avoidance”, “tax aggressiveness”, “earnings management”, “tax strategy”, “tax

sheltering”, “tax planning”, “tax evasion”, “tax planning” and “tax mitigation”). Subsequently,

the reference lists of the articles identified were scanned manually for more studies on the topic.

Specific journals in accounting, management and ethics such as the Journal of Business

Ethics, Journal of Accounting Research, Accounting Forum, and Journal of International

 7

Accounting Research were also examined. Thirty-seven articles published in the period 1992-

2015 matched the criteria. A summary of those articles is presented in the table.

___________________
Insert Table about here
___________________

The studies have coalesced around three overarching research questions: (1) how did tax

avoidance become a CSR issue, (2) do executives face an ethical dilemma when making tax

avoidance decisions and (3) how does corporate governance affect tax avoidance decisions?

These are examined below.

TAX AVOIDANCE AS A CSR COMPONENT

Theoretical Arguments

Described as the “new frontier in progressive CSR” (Jenkins & Newell, 2013:378), corporate

taxation practices are increasingly debated in recognition of the significant economic and social

power firms wield with unpaid tax money. The “corrosive impact of tax avoidance” (Sikka,

2013:26) was exposed by the OECD, social advocates, investigative journalists, whistleblowers

and other stakeholders who have pressed firms to inject their tax practices into CSR (Christensen

& Murphy, 2004; Jenkins & Newell, 2013; McIntyre et al., 2011, 2014).

The CSR-tax avoidance link is embedded in two competing views of the firm—shareholder

and stakeholder (Moser & Martin, 2012; Preuss, 2012). The former declares that an executive’s

primary responsibility is to the shareholder; spending shareholders’ money on social projects

taxes shareholders (Friedman, 1970). Shareholder theorists see CSR as a voluntary activity with

moral undertones (Timonen, 2008). Thus, tax avoidance is an issue between the firm and the

government. Tax is viewed strictly as a cost of doing business. This view, however, is a “direct

challenge to the authority of the state” (Sikka, 2010:156). The latter argues that firms have
 8

obligations to a range of stakeholders in the jurisdiction where profits are generated (Avi-Yonah,

2008; Sikka, 2010; 2013); paying taxes in accord with the spirit of the law is a “litmus test for

corporate claims of social responsibility” (Sikka, 2010:154). Additionally, without tax revenue,

governments cannot provide vital infrastructure and community services such as education and

transportation provided to a firm’s employees. Nor, can governments provide the services

demanded by corporations including financial markets, legal systems and oversight. Therefore

firms have an obligation to pay the taxes as demanded (Avi-Yonah, 2008; Sikka, 2010)

Having established this contradiction in Friedman’s position, Avi-Yonah (2008) notes

that regardless of the view of the firm, CSR is connected to tax payments and, therefore, firms

have an obligation to avoid strategic actions designed only to minimize taxes.

In the U.S., tax laws to eliminate tax avoidance “must re-legitimize corporations as

responsible citizens and tax as a meaningful policy instrument” (Desai, 2012:139). Then, tax

practices become a matter of compliance, not profit maximization, but transparency on tax issues

has been problematic. CSR disclosures remain largely voluntary and unverified, raising concerns

about their reliability and comprehensiveness (Jenkins & Newell, 2013; Moser & Martin, 2012).

However, pressures on companies for transparency in financial and CSR reporting are growing

(Desai, 2012). If a firm is unwilling to expose its intent, the action should be avoided (Timonen,

2008).

To alleviate the problem of tax avoidance, governments can change the rules by reducing the

corporate tax rate and adjusting or eliminating taxes on active foreign income (Desai, 2012).

Corporations can publish transparent tax information in their CSR disclosures (Jenkins &

Newell, 2013) to mitigate the reputational risk of being labeled a free rider (Sikka, 2013). The

potential harm to a firm’s reputation can outweigh the financial benefits, and sacrificing profit to
 9

reduce harm to stakeholders is worthwhile (Fisher, 2014). Herein lays the logical link between

CSR and responsible tax practices (Avi-Yonah, 2008; Fisher, 2014).

Empirical Findings

Early CSR-tax avoidance studies assess if corporate codes of conduct mention tax issues. An

OECD (2000) analysis of 118 companies across 24 countries identified 246 voluntary codes of

conduct. While reputation and customer loyalty were commonly discussed, tax was referenced

only once. A similar study of the 200 largest global companies’ codes also identified only one

reference to taxes (Kaptein, 2004). More recently, an investigation of the tax behavior of 26

firms headquartered in tax havens like Bermuda and the Cayman Islands and the implications for

stakeholders revealed that all firms communicated their CSR commitments within their codes

without identifying tax as a CSR component (Preuss, 2010, 2012).

CSR transparency in meeting tax obligations has been another area of interest (e.g., Lanis &

Richardson, 2012, 2013; Hoi, Wu & Zhang, 2013; Davis, Guenther, Kruli & Williams, 2013). In

a study of 408 Australian public companies greater CSR disclosure was associated with lower

tax avoidance and social investment commitments adversely affected tax aggressiveness (Lanis

& Richardson, 2012). Likewise, a longitudinal analysis of 2,620 U.S. firms over the period 2003-

2009 found that socially irresponsible firms are more likely to engage in tax avoidance (Hoi, Wu

& Zhang, 2013). Greater disclosure indicates corporate willingness to explain and justify social

commitments, but can also be a sinister cover for negative stakeholder reactions to tax

aggressiveness (Lanis & Richardson, 2013). To justify corporate legitimacy, firms must adhere

to the underlying spirit of the tax law (Christensen & Murphy, 2004; Lanis & Richardson, 2013).

Findings on the CSR-tax avoidance link are equivocal. A more recent study of U.S.

public companies found a distinctly different result in conflict with the Lanis and Richardson
 10

(2012; 2013) and the Hoi, Wu and Zhang (2013) studies (Davis et al., 2013). The results

indicate that CSR is negatively correlated with five year effective tax rates and positively related

to the amount spent on tax lobbying. Contrary to previous empirical studies consistent with the

negative correlation of tax avoidance and CSR (Lanis & Richardson, 2012; 2013; Hoi, Wu &

Zhang, 2013), the study suggests that socially responsible firms do not consider taxes as a

socially responsible construct, and that firms that value CSR in fact pay lower taxes. Using data

derived from the same KLD and Compustat sources as Hoi, Wu and Zhang (2013), Davis et al.

(2013) arrive at contrary conclusions based partially on higher tax lobbying expenditures aimed

at lowering tax liabilities. The cause of the disagreement deserves further empirical research.

In an international context, an analysis of MNCs in India concluded that subsidiaries with

a reputation for CSR pay higher tax rate relative to subsidiaries without a reputation for CSR

(Muller & Kolk, 2015).

In a review of sustainability reports, Davis et al. (2013) noted some firms commented

positively about the importance of tax on social welfare, whereas others issued negative

statements reflecting the belief that high taxes discourage innovation and harm job creation.

Some firms prefer to act philanthropically out of a desire to obtain a tax deduction and make

their own decisions about social welfare instead of paying taxes and leaving the decision to the

government of what to fund.

One stakeholder often left out of the assessment of tax and CSR is the customer. A study

out of Germany addresses the consumers’ role by linking tax avoidance, marketing and CSR

(Hardeck & Hertl, 2014). In a lab experiment, the authors discovered that consumers are not

willing to pay a premium for responsible tax companies, yet will punish a tax aggressive

company through restricted purchase intent and the negative effect on reputation.
 11

In summary, tax aggressiveness can be considered a legal matter or a CSR issue. If taxes are

viewed as a business cost, minimizing taxes is understandable (Avi-Yonah, 2008). Yet, through

their contribution to the provision of public goods, tax payments have broad social implications

and tax minimization is hard to justify (Lanis & Richardson, 2013; Sikka, 2010). The decision

for managers who want to do “the right thing” may turn on the ethics of the circumstances, a

subject discussed in the following section.

ETHICAL PROBLEMS OF TAX AVOIDANCE

Ethics is one of the foundational principles of CSR. Ethical CSR incorporates not only the

notion of what is the right thing to do but also what philanthropic responsibilities the firm has to

the society in which it operates (Carroll, 2006). Ethics and its relation to tax are becoming a

comparative international benchmark based on the CSR scores generated by KLD and DJSI after

several studies zeroed in on the unethical practices of MNCs in the developing world (Otusanya,

2011; Sikka, 2010; Jenkins & Newall, 2013; Christensen & Murphy, 2004).

Studies linking ethics and tax avoidance have coalesced around three distinct themes: (1) the

theoretical lenses used to judge the ethics of tax avoidance; (2) the self-interest of managers; (3)

and the role of the accounting profession in crafting tax avoidance measures.

Theories

Utilitarianism, deontology, virtue ethics, justice and beneficence have all been used as theoretical

lenses to evaluate the ethics of tax avoidance. Preuss (2013) reviewed tax inversion to Bermuda

and Cayman Islands from the multiple perspectives of utilitarianism, deontology and virtue

ethics. He concluded that under all theories, tax avoidance must be judged as unethical.

However, other analyses provide a more nuanced perspective.

 12

From a narrower utilitarian perspective in which all of the consequences of an action are

considered in a cost benefit analysis, the benefits accrue to a small number of professional

advisors, managers and shareholders, whereas a large number of citizens in the affected country

suffer from their government’s inability to collect and spend taxes on social welfare and

infrastructure. In contrast, an earlier study examining the ethics of inversion, suggested that,

from a utilitarian stakeholder standpoint, the conclusion of whether tax avoidance is ethical

depends on the circumstances (Godar, O’Connor & Taylor, 2005). That study considered only

five groups of stakeholders impacted by the inversion – employees, customers, investors, current

home government and prospective home government, without consideration of the impact to the

broader society. Some stakeholders are positively affected, others negatively, economically and

psychologically. The optimum decision will be based on an analysis to determine the net effect

of the decision taking into account all stakeholders and all possible outcomes. Godar et al. (2005)

raise the question of what it means to be a “citizen” of a country and the rights and duties that

come with citizenship. Corporate freeloaders with an itinerant behavior for the simple purpose

of reducing taxes undermine what it means to be a citizen.

The deontological perspective posits that humans must be treated as an end, never a means.

This “golden rule” is violated when taxes are diminished through “predatory” practices (Sikka,

2008:290) leaving corporations and governments unable to address working conditions or other

social welfare interests (Prior, Surroca & Tribo, 2008; Scheffer, 2013; Sikka, 2008).

Virtue principles recommend avoiding extremes of action and building moral character

(Velasquez, 2012). Shifting the tax burden from corporations to individuals violates this

principle. Touting corporate CSR performance while aggressively avoiding taxes creates an

environment in which “certain habits and practices become normalized and tax avoidance
 13

becomes just another part of the daily organizational life” (Sikka, 2010:157). Virtue ethics

suggests that this corporate culture is not conducive to character development and is, therefore,

unacceptable.

What does this means to managers with a fiduciary responsibility to shareholders? Their

moral duty must extend over a broader range of stakeholders including the government and

society. The ethical principles examined so far suggest that it is difficult to justify tax avoidance

on ethical grounds. Therefore, reducing taxes as a duty to the shareholders and to the detriment

of other stakeholders cannot be morally justified (Preuss, 2013).

Theories of justice (Slemrod, 2004) and beneficence (Dowling, 2014) advocate the same.

The fairness argument views tax avoidance as a financial transfer from society to shareholders.

Beneficence theory resembles utilitarianism with the added proviso of “do no harm.” In the

context of taxes, it questions if tax avoidance is legalized theft by a government or if the

government has the right to impose taxes to run itself (Dowling, 2014). Some consider tax

payments as the right thing to do, some as amoral and others as immoral. Opponents of tax

avoidance see it as a moral issue; paying tax is a primary social responsibility of the corporation

(Christensen & Murphy, 2004). Tax professionals and MNCs’ leaders believe it is amoral, even

if the tax actions contradict corporate codes (Slemrod, 2004). For example, General Electric

frames tax avoidance as amoral “cross-border trade and investment”, just another business cost

(Dowling, 2014:179). Some companies describe tax avoidance as immoral only if it is illegal.

Overall, from an ethical perspective, a broad view of stakeholder theory must be adopted to

account for the responsibility the firm has to the general public and the government as a first

level stakeholder (Dowling, 2014). However, as a counter point, under these circumstances, tax
 14

avoidance may be ethically justifiable as a form of civil disobedience or anti-democratic

behavior to reinforce disagreement with government policies (Dowling, 2014).

Self-Interest of Managers

Some studies suggest that tax avoidance emanates from managerial greed (Desai &

Dharmapala, 2006, 2009a; Dowling, 2014; Kim, Park & Weir, 2012; Prior et al., 2008; Sikka,

2010; Scheffer, 2013; Slemrod, 2004). The rise in incentive compensation through bonuses and

share options has led to aggressive earnings management to increase compensation while

improving shareholder wealth (Desai & Dharmapala, 2006; 2009a; Slemrod, 2004; Scheffer,

2013). Managers who avoid taxes shield their actions and motivations from concerned

shareholders and other stakeholders (Desai & Dharmapala, 2009a; Dowling, 2013; Kim, Park &

Weir, 2012; Prior et al., 2008). Executives with incentives to manage earnings proactively build

their public exposure through CSR activities to project a socially-friendly image while pursuing

their self-interest in the form of compensation, job security or reputation (Prior et al., 2008).

Role of the Accounting Profession

In the tax avoidance research a lot of attention is directed at accounting professionals who

design and implement tax avoidance schemes (Hansen, Crosser & Laufer, 1992). In their role of

corporate financial officers, they can establish inter-company pricing arrangements, royalty

payments and interest on inter-company loans, all recognized tax avoidance strategies. While

firms, particularly in the US and UK are free to arrange their tax affairs to alleviate tax burden,

“accounting professionals should be more concerned with what is right than with technical

compliance with the law” (Hansen et al. 1992:685).

Accounting firms have been compared to entrepreneurial opportunists in pursuit of

profits at the expense of ethical behavior (Sikka, 2008; Sikka & Wilmott, 2013). They have been
 15

known to set up profit centers with an inventory of 500 active tax products they actively market

to existing and prospective clients. The largest accounting corporations, of which there are only

four, know better than anyone the boundary conditions of CSR and ethics, and how to stretch the

interpretation of government taxation law. During the time when the firms could link audit and

consulting services, they had easy access to senior management to sell their inventory of tax

avoidance schemes. Many firms were eagerly and aggressively looking to increase profits

through tax avoidance and willingly bought into the tax avoidance advice of the accountants.

Codes of ethics provided the firms a smokescreen and their unconstrained and unethical use of

the tax code to boost profits was not exposed by the professional associations, but by

whistleblowers (Sikka, 2008).

A survey of corporate and advisory tax professionals in Hong Kong that examined attitudes

toward corporate ethics, social responsibility and Machiavellianism found that deceitful and

manipulative behavior was weighed against willingness to participate in aggressive tax

avoidance schemes (Shafer & Simmons, 2008). Tax professionals scoring high on the

Machiavellianism endorsed the shareholder view of the firm and were likely to engage in tax

avoidance; ethics and professionalism were abandoned in favor of “commercialism and client

advocacy” (Shafer & Simmons, 2008:696).

A review of MNCs in Nigeria describes the natural resource industries as notorious tax

avoiders in a country with endemic corruption problems (Otusanya, 2011). These companies

operate in conjunction with “local facilitators” (Otusanya, 2011:328), including accountants, to

create tax avoidance schemes with bribes to tax officials for favorable treatment. In one case in

Nigeria, Halliburton, the oil field servicing giant adopted tax avoidance schemes with the advice

of KPMG, the company’s tax advisor in Nigeria. Halliburton was accused of failing to
 16

accurately report profits and paying the required income taxes (Otusanya, 2011). KPMG

defended Halliburton before the Nigerian Attorney General, and in the process Halliburton

admitted to paying bribes to tax officials for favorable tax treatment.

This case illustrates that accountants and tax experts have made crucial contributions in the

creation of tax-evasion structures for personal financial gain (Otusanya, 2011). With some

exceptions (e.g., Muller & Kulk, 2015), tax avoidance has proven especially harmful in the

developing world where governments rely heavily on corporate income tax, but their capacity to

supervise is weak (Jenkins & Newell, 2013). Some have argued that “the higher ethical

perspective demands that corporations rise above minimal compliance standards on taxation,

whatever their merit, and requires us to define corporate responsibility as directly tied to the true

wealth (in terms of wages, health, education, human rights, infrastructure, the environment, and

the rule of law) of a society” (Scheffer, 2013:361).

GOVERNANCE, CSR AND TAX AVOIDANCE

Corporate governance is “the process in which the conduct of enterprises is controlled and

supervised and the factual and legal framework that influences or governs this process” (Friese,

Link & Mayer, 2008:360). Directors who sit on audit committees oversee the tax activities of

the company and assess financial statements and book-tax gaps. They protect shareholder

interests and can often approve dubious and risky tax maneuvers (Christensen & Murphy, 2004).

Boards can suggest and initiate tax avoidance activities (Brown & Drake, 2014). To build

corporate legitimacy, boards of socially responsible organizations balance conflicting interests in

the area of taxation (Christensen & Murphy, 2004; Lanis & Richardson, 2011).

In democratic societies, directors are shareholder advocates who have no legal or moral

obligation to approve the payment of the maximum amount of tax (Hasseldine & Morris, 2012).
 17

On the contrary, “there are no laws which require directors to specifically increase profits by

avoiding taxes” (Sikka, 2010:155).

Several studies examine the board’s impact on tax avoidance. A longitudinal investigation of

16 tax-aggressive and 16 non-tax-aggressive Australian corporations found that boards with

many outside members were less likely to engage in tax aggressive actions, because outside

directors provide impartial oversight and eschew a broad definition of shareholder agency (Lanis

& Richardson, 2011). Boards dominated by executive directors are likely to expropriate

shareholder wealth (Lanis & Richardson, 2011).

A follow-up study of 203 public Australian companies assessed the impact of director

oversight characteristics on tax aggressiveness (Richardson, Taylor & Lanis, 2013). Effective

risk management systems, internal controls, use of Big-4 auditors, audits favoring audit activity

over tax services, and an independent audit committee all contribute to less tax avoidance.

Effective risk management and internal control systems can help catch incorrect financial

statements and prevent complex, opaque tax avoidance activities (Desai & Dharmapala, 2009b).

Decoupling the audit- from tax-consulting services further improved monitoring by independent

large auditors (Richardson et al., 2013).

Payment of tax consulting fees lowers a firm’s ETR when a firm has strong community ties

and strong governance (Huseynov & Klamm, 2012). Lower ETRs free up cash for CSR

investment in community, philanthropy and diversity (Huseynov & Klamm, 2012), but they

drain money away from government’s ability to provide social services to constituents

(Christensen & Murphy, 2004; Preuss, 2010; Sikka, 2010). To examine the relationship between

CSR, governance and tax consulting fees, Huseynov and Klamm (2012) investigated the CSR
 18

practices of S&P 500 firms from 2000 to 2008. Contrary to Lanis and Richardson (2012), they

found that more socially responsible firms are more likely to be tax aggressive.

Board interlocks also affect the level of tax avoidance (Brown & Drake, 2014). Firms

share tax avoidance strategies through social network connections like social clubs, college

alumni, industry association memberships, joint ventures, shared auditors or charity board

connections. A diffusion of business practices takes place within the board interlocks as

members spread information based on their personal experience. Thus, board members coming

from low ETR firms tend to oversee other low ETR firms. Executive director interlocks have a

stronger influence because those individuals are more closely connected to specific tax strategies

and their costs, benefits and efficacy.

The low-tax interlocking board ties are asymmetric; that is, a lower ETR is associated

with its board members coming from low tax firms, not those from high-tax network ties,

supporting their assumption that the network ties act as a conduit for tax avoidance schemes.

Sikka (2010) advocates inviting members of social groups to sit on boards as a mitigating

countermeasure.

Tax avoidance was influenced by executive incentive plans in a study of 943 firms in the

period 1993-2002 (Desai & Dharmapala, 2004). Since earnings management and tax

aggressiveness are complementary, the managerial costs of diversion are lower when avoidance

is higher. However, a shareholder cost is imposed forcing directors to walk a fine line between a

motivated CEO and disgruntled shareholders (Desai & Dharmapala, 2004; 2009a; 2009b).

Although tax returns are confidential, activists, the media, governments and academics have

called for firms to deliver more transparency of the company’s activities (Desai, 2012; Windsor,

2009). Greater alignment of the financial and tax statements increases transparency on
 19

profitability, deferred earnings, and tax incentives and provides detailed information on where

the profits were generated (Christensen & Murphy, 2004; Desai, 2012; Jenkins & Newell, 2013).

Firms that disclose more CSR information are less likely to avoid taxes (Lanis & Richardson,

2012). Transparent reporting signals CSR activities “motivated by managers’ incentives to be

honest, trustworthy and ethical” (Kim, Park & Weir 2012:790). The prevailing view is that good

governance builds trust with all stakeholders and is linked to a high level of transparency of tax

and CSR data.

DISCUSSION AND FUTURE RESEARCH

This paper reviews the literature on tax avoidance and CSR. Although placing tax avoidance

within the domain of CSR is not universally accepted, the preponderance of research on the topic

suggests that tax avoidance is increasingly understood as a CSR issue. The debate is about

whether the firm is a profit maximizer or a socially-responsible citizen. Shareholder theory

suggests that the purpose of the firm is to maximize shareholder value and minimizing the tax

burden is desirable. Stakeholder theory recognizes that a variety of stakeholders, including

governments, employees, investors and society depend on firms to meet their tax obligation, as

the government will otherwise fail to provide the social services and effectively fulfill its other

responsibilities (Sikka, 2010; Huseynov & Klamm, 2012). Emerging theories and research into

shared value (Porter & Kramer, 2006, 2011) and collective value (Donaldson & Walsh, 2015)

provide a bridge between the two competing shareholder and stakeholder theories, but with a

bias toward consideration of all stakeholders dependent on the performance of the firm.

Our understanding of the link between tax avoidance and CSR is nascent but the collective

examination of CSR and tax is important, because firms need to identify the right balance

between minimizing the tax burden and fulfilling their responsibilities to stakeholders.
 20

Reputation is a key attribute of corporate success and commitment to tax payment can enhance it

(Vonwil & Wreschniok, 2009).

Most research in the area of tax avoidance and CSR comes from the accountants and finance

specialists. Management and strategy experts have only recently become engaged; however,

greater attention is needed to raise awareness of the strategic implications of tax as a CSR issue.

One of the limitations researchers contend with is the lack of reliable tax data (Sikka, 2010;

Lanis & Richardson, 2012). Several calls have been made for firms to align their financial and

tax statements for clarity and openness (Desai, 2012). Researchers rely on assumptions about the

effective tax rates to determine if tax avoidance occurs, but there is little other information

regarding the type of transaction involved, when it took place or where it happened.

Confidentiality limits the release of valuable data that can be used to extend the research into

small and medium private enterprises.

The quality of CSR disclosure documents is also questionable (Moser & Martin, 2012) as

they can be intentionally obscured to cover up tax avoidance activities (Sikka, 2010). Given the

voluntary nature of these reports, it is difficult to ascertain their reliability (Moser & Martin,

2012). Europeans are addressing this problem with government oversight and the requirement

that CSR reports be transparent and auditable. Reports coming from other regions will need to be

interpreted for clarity, completeness and political spin.

CSR is often examined as an aggregation of various initiatives, but individual CSR activities

have not been qualified and ranked in terms of their effect on corporate results (Orlitzky,

Schmidt & Rynes, 2003). Future research is needed to determine which CSR activities are

associated with a firm’s likelihood to avoid taxes, and why those activities are chosen in place of

others (Lanis & Richardson, 2012). Also, tax avoidance decreases the ETR thereby increasing
 21

profitability. Increasing CSR expenditures could reduce that effect raising concerns about the

financial implications of firms’ avoidance practices. Also, tax avoidance can have a corrosive

effect on executives’ decisions (Sikka, 2010), but the link between tax avoidance activities and

corporate culture and decision making have not been thoroughly explored (Hoi, Wu & Zhang,

2013).

Research so far has been limited geographically. Some focuses on tax havens (Palan et al.,

2010; Preuss, 2010; 2012; Citizens for Tax Justice, 2014a; 2014b), or a specific country such as

Australia (Lanis & Richardson, 2011; 2012; 2013), Nigeria (Otusanya, 2011) and India (Muller

& Kulk, 2015). Others have taken a broad look at the U.S. and global firms without detailing

with regional or local variations (Prior et al., 2008; Hoi et al., 2013). The US and the UK, for

example, are averse to regulation of markets and corporations whereas other countries like

France, Germany and Japan accept a larger government role in the markets. The research must

consider institutional discrepancies that can affect a firm’s stakeholder position and tax behavior.

The OECD (2014) has made numerous tax policy recommendations in its base erosion and profit

shifting project, but whether the liberal market economies will align with the coordinated market

economies across the G20 to universally accept the recommendations is unclear.

Poor countries suffer the hardest from tax avoidance (Christensen & Murphy, 2004; Sikka,

2010), but little research exists on CSR and tax issues in countries where tax collection is

problematic. Getting tax data from poor countries is challenging. Language, corruption,

misrepresentation or the limited amount of tax related data are among the problems researchers

face (Christian Aid, 2011, 2013). Where national regulations have been implemented, empirical

studies examining the impact of tax avoidance and the role of CSR before and after the changes

can be conducted.
 22

Some have concluded that business ethics are an all or nothing affair; managers cannot be

implementing an ethical CSR program while avoiding taxes (Christensen & Murphy, 2004).

While theorists argued that tax avoidance is unethical, empirical tests are needed to confirm this

(Preuss, 2012; 2013; Godar et al., 2005; Dowling, 2014). From a utilitarian perspective, a cost-

benefit analysis can be conducted to assess if particular actions result in the maximum level of

welfare for the most people. Tax avoidance in one jurisdiction may result in investments and

improved conditions in another, but ethical relativism can also be problematic. Ethics are a

reflection of local social morals, so variations exist, especially between advanced and

underdeveloped nations. How these local interpretations influence what constitutes aggressive

tax decisions will produce a more nuanced understanding of the impact of tax at the local level.

Governments, NGOs, watchdogs and investors must remain vigilant for unethical corporate

activity that is costly to stakeholders. Analysis of the executive motivation for tax avoidance can

identify recommendations that policy makers can use to mitigate this issue.

CONCLUSIONS

Responsible tax behavior is the “litmus test” of corporate CSR claims (Sikka, 2010:154), a

“boundary condition for CSR” (Dowling, 2014:173), and “a new frontier in CSR” (Jenkins &

Newall, 2013:378). This literature review examines 37 papers addressing the role of tax as a

CSR subject. Three themes were identified in the literature: past efforts to relate tax avoidance

and CSR, ethical aspects of tax avoidance, and the role of governance in tax avoidance decisions.

Each of these themes leaves gaps in the research deserving further examination. Many

researchers see tax avoidance as a part of CSR, although there is not unanimity on the matter.

This conclusion relies on adopting a stakeholder view of the firm and the impact of tax
 23

avoidance on a broad range of citizens and investors. The shareholder view of the firm provides

counter arguments, disconnecting any relationship between CSR and tax.

More research is warranted in this important subject to eliminate the destructive and

insidious impact of the race to the bottom. The end result puts governments in a precarious

position to fulfill their commitments, and places companies in a risky posture that may

irrevocably impact their long term viability.

 24

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TABLE: TAX AVOIDANCE AND CSR LINKAGES

Author Year Journal T/E 1 Subject Themes 2

Hansen,
Crosser & Journal of Business
Laufer 1992 Ethics T Tax minimization, professional conduct, moral ethics, transfer pricing in MNCs 2

Slemrod 2004 National Tax Journal T Tax avoidance, tax as a profit center, public policy 2

Advocates linking tax to CSR, accounting transparency. Estimates size of 'global

Christensen & shadow economy', state competition. Counter actions include GAAR, international
Murphy 2004 Development T accounting standards, profit in each country & tax strategies 2,3

Journal of Business Analysis of content of business codes (corporate code of ethics) of 200 of the largest
Kaptein 2004 Ethics E MNCs. Tax mentioned only by 1% of companies 1

Godar,
O'Connor & Journal of Business
Taylor 2005 Ethics T Ethical analysis of business decisions 2

Study of 943 firms 1993-2002 using Compustat and Execucomp databases. Increases in
Desai & Journal of Financial incentive compensation tend to reduce the level of tax sheltering - the relationship is a
Dharmapala 2006 Economics E function of the firm's corporate governance. 2,3

Accounting, Auditing
& Accountability
Sikka 2008 Journal T Role of accounting firms in developing and assisting with tax avoidance 2

Should corporations pay tax or engage in tax minimization? Three views of the
In Schoen: Tax and corporation: artificial entity, real entity, aggregate or nexus of contracts. Impact of each
Corporate on legitimacy of CSR. States perspective on tax for revenue only or use to steer
Avi-Yonah 2008 Governance T corporate behavior in socially beneficial directions? 1

1
T represents a theoretical reference and E an empirical analysis.
2
Themes: 1= Connecting tax and CSR; 2= Ethics; 3=Governance
 32

In Schoen: Tax and

Corporate Friedman-like objection to Avi-Yonah's conclusion tax avoidance is inconsistent with
Timonen 2008 Governance T any of the 3 views of the corporation. Taxes are a cost & not connected to CSR 1

Not directly connected to tax avoidance, but addresses impact of unethical decision
making by managers who manipulate earnings statements for personal gain and
manipulate CSR activities to cover up. Used archival data of 593 firms from 26
Prior, Surroca Corporate countries between 2002 - 2004 using data from the Sustainable Investment Research Intl
& Tribo 2008 Governance E Co. (SiRi). 2

Accounting, Auditing
Shafer & & Accountability
Simmons 2008 Journal E Survey of 175 tax professionals in Hong Kong. 2

Analyzes link between earnings management and corporate tax avoidance. Tax
avoidance requires obfuscatory actions that can be bundled with diversionary activities
Desai & like earnings manipulation to advance interests of managers rather than shareholders.
Dharmapala 2009 National Tax Journal T Advocates alignment of financial and tax reports. 2

Longitudinal study of 862 firms over 1993-2001 using Compustat data to evaluate role
of governance in tax avoidance and the resulting firm value. Tax avoidance does not
The Review of clearly represent a transfer of value form the state to shareholders. Agency perspective
Desai & Economics and on tax avoidance illuminates mediating role of governance. Higher quality firm
Dharmapala 2009 Statistics E governance leads to a larger effect of tax avoidance on firm value. 3

Exposes contradiction between corporate actions and tax avoidance. Discusses

governance, stakeholders, social justice, legitimacy, transparency, role of accounting
firms. Provides case studies of Enron, WorldCom, UBS Deutche Bank, WalMart, Anglo
Sikka 2010 Accounting Forum T Gold Ashanti, and Barrick Gold. Payment of tax is the litmus test for CSR 1,3

Study of codes of conduct of 27 MNCs headquartered in Bermuda and Cayman Is.

Corporate Found they make claims of socially responsible behavior (hypocrisy) and paid less
Preuss 2010 Governance E attention to the needs and requirements of their customers. 1

Critical Perspectives
Otusanya 2011 on Accounting T Three case studies of tax avoidance / evasion by MNCs in Nigeria. 2
 33

Journal of Examined 32 Australian corporations, 16 tax-aggressive and 16 non-tax-aggressive.

Lanis & Accounting & Public Conclude the higher the proportion of outside directors, the lower the likelihood of tax-
Richardson 2011 Policy E aggressiveness 3

Hasseldine & Tax avoidance vs. tax evasion vs. tax-related behavior. Letter of the law vs. spirit of the
Morris 2012 Accounting Forum T law. Relationship with CSR, tax gap, policy responses (OECD) 1,3

Three principles of a new corporate tax code: reduction in corporate tax rate, new policy
toward innovation, end to taxes on active foreign income. Recommends aligning
Harvard Business definition of taxable income with EBIT reported to financial markets. Premise - tax is a
Desai 2012 Review T CSR activity. Advocates for transparency in tax payments 1

Reviews two papers based on shareholder view of corp. One (Dhaliwal 2012) focuses
on whether CSR disclosure provides useful information to investors. The second (Kim
2012) examines whether managers who engage in more CSR activities also engage in
less earnings management. Suggest more research by accounting researchers into CSR
Moser & The Accounting motivated by both shareholders and stakeholders raising new questions needing to be
Martin 2012 Review T researched. 1

Journal of Business Analysis of codes of conduct, CSR standards, social & environmental reports of 26 large
Preuss 2012 Ethics E firms headquartered in Bermuda and the Cayman Islands from Global 2000 Index. 1,2

Study of 408 public companies in Australia for 2008/2009.Regression analysis show that
the higher the level of CSR disclosure the lower the level of tax aggressiveness. Shows
Lanis & Journal of Accounting also social investment s and CSR strategies have a negative impact on tax
Richardson 2012 & Public Policy E aggressiveness. 1

S&P 500 firms, Compustat financial data 2000 - 2008. Interaction of community
concerns with tax management fees positively affects ETR; interaction of governance
Huseynov & Journal of Corporate strengths and diversity concerns with tax management fees negatively affects ETR.
Klamm 2012 Finance E Higher fees, lower ETR. 3

Kim, Park & The Accounting Socially responsible firms are less likely to (1) manage earnings through discretionary
Weir 2012 Review E accruals, (2) manipulate real operating activities, (3) be the subject of SEC investigations 2

Sikka 2013 Accounting Forum T Restatement of earlier Sikka paper on Smoke and Mirrors role of government 1
 34

Ethics & International Ethics as the bridge between tax and CSR. OECD BEPS, UN Global Compact.
Sheffer 2013 Affairs T Recommends adding 11th principle called "Fair Taxation" 2

Social contract between corporation and state. CSR in developing countries, tax
Jenkins & Third World avoidance techniques - transfer pricing, locating to tax havens. Recommendations for a
Newall 2013 Quarterly T responsible tax strategy. 1,3

In Corporate Social
Responsibility: A
Preuss 2013 research handbook T Ethical analysis of tax avoidance 2

Davis, Conclusion: Socially responsible firms do not act as if the payment of corporate taxes is
Guenther, Krull a socially responsible activity. Studied 40 US public companies using MSCI ESG
& Williams 2013 SSRN E (former KLD) data. 1

Firms with excessive irresponsible CSR activities (4 or more) have a higher likelihood of
engaging in tax-sheltering activities and greater discretionary/permanent book-tax
differences. Used sample of 2620 US firms 2003-2009 and Compustat for financial data
Hoi, Wu & The Accounting and KLD analytics for CSR activities. Thomson Reuters Ownership Database use for
Zhang 2013 Review E institutional ownership. 1

Accounting, Auditing Study of 20 tax aggressive companies and 20 non-tax aggressive companies in Australia.
Lanis & & Accountability Tax aggressive corporations have greater CSR disclosures to alleviate potential public
Richardson 2013 Journal E concerns arising from the negative impact of their tax aggressiveness on the community. 1

Examined 203 publically traded Australian companies 2006-2009. If a firm has

established an effective risk management system and internal controls, engages a big-4
Richardson, J. Accounting & auditor performing less non-audit services than audit, and the more independent is it
Taylor & Lanis 2013 Public Policy E internal audit committee, it is less likely to be tax aggressive. 3

Boston University Overview of tax havens, tax as a CSR issue, harms of tax avoidance, and solutions -
Fisher 2014 Law Review T consumer activism, investor influence, corporate leadership 1

Journal of Business Tax avoidance, Spirit of the law vs. letter of the law, ethics of tax avoidance, case for
Dowling 2014 Ethics T and against tax avoidance, tax principles and relationship to CSR 2
 35

Hardeck & Journal of Business Corporate success = corporate reputation, consumer purchase intention, willingness to
Hertl 2014 Ethics E pay. Empirical analysis showing CTS can influence corporate success with customers 1

The Accounting Firms with greater low-tax network ties (board interlocks) exhibit greater tax avoidance.
Brown & Drake 2014 Review E Used Compustat for US firms during 1996 - 2009. 3

MNEs pay higher tax rate than local Indian firms. Subsidiaries of MNEs known for CSR
Muller & Kolk 2015 Business & Society E pay higher tax rate than subsidiaries without CSR reputation. 1, 2