The Research in the Relation of Tax Avoidance and Corporate Social Responsibility

The research in the relation of tax avoidance and corporate social responsibility (CSR)

With an increasing number of companies, the phenomenon of tax avoidances has become more and more universal. Researchers found that 99% European listed corporations choose to operate their business in tax havens where the companies have lower taxes imposed and they can avoid taxes in other jurisdictions (Sikka,2010). There are several consequences due to corporate tax avoidance, such as reduction of national revenues. According to US Treasury(2009), tax avoidance caused more than $345 billion to be lost in annual national revenues. Therefore, a discussion about if there is a conflict between corporate tax avoidance and CSR appears. Actually, more scholars support that tax avoidance has violated CSR, particularly in national revenues. This essay aims to point out motivations of corporate tax avoidance and discuss if tax avoidance and CSR are in conflict. Initially, the definition of tax avoidance will be given and distinguished with tax evasion. Then it will shed light on subjective and objective motivations about why corporations choose to avoid tax. Finally, the conflict between tax avoidance and CSR will be analysed.

Tax avoidance is a legal approach to reducing tax payments of corporations, which is usually confused with tax evasion. Generally, tax evasion refers to illegally reducing tax payments by deceitful and fraudulent methods, while tax avoidance refers to legally reducing tax payments (Fisher,2014). The main difference between these two definitions if is legal or not. In general, tax evasion is an absolutely illegal practice, but tax avoidance is a reasonable and legal behaviour. Concerning why firms choose to avoid tax, motivations contain not only objective factors but also subjective factors.

For objective elements, corporations aim at gaining profits, and tax avoidance can help them gain higher profits. Also, the profits refer to executives’ profits, shareholders’ profits, and firms’ profits. Initially, executives are able to adjust firm’ financial strategies to gain higher profits and status. Generally, tax avoidance is a part of firm’s financial strategies. Dumitru(2012) stated that corporate executives can gain higher profits, remuneration, status and media accolades through tax avoidance. In other words, tax avoidance can make senior leaders gain higher incomes and improve their reputation. In addition, improving shareholders’ profits is one of the corporate responsibilities. If corporations adopt tax avoidance practices, there will be more benefits for shareholders. Evertsson(2016) illustrated that shareholders are main pushers about tax avoidance practices. Therefore shareholders take significant roles in corporate tax avoidance. Finally, it is significant that tax avoidance is an efficient way to assist corporations in realising maximum profits. Desai and Dharmapala(2009) noted that profits of corporations will be able to increase by tax avoidance, especially for poorly governed companies. Meanwhile, for high-quality governed companies, tax avoidance can also increase corporations’ values by using an external source of variation. Consequently, tax avoidance is an effective and legal method to help corporations gain more interests.