What is the connection between corporate taxes and sustainability reporting?
Davis et al. examine how managers discuss taxes in sustainability reports as one way to understand the relation between CSR and taxes. Managers can make decisions on the extent they engage in lobbying and tax planning, to reduce the amount of taxes paid. Davis et al. find inconsistencies in how corporate tax payments are treated in sustainability reports, despite GRI reporting guidelines on the importance of tax disclosure. Davis et al. examined 40 sustainability reports selected randomly in the MSCI ESG annual data set from 2009 to 2011 that are of high-quality. Davis et al. find a lack of uniform treatment of taxes. Some firms which regard CSR as important, report no tax information at all (47.5%) but instead lobbying activity. Intel and 3M company show disconcert for corporate tax as it detracts from innovation and investment. 3M company underscores the importance placed on lobbying for lower corporate tax, ranking it a greater concern than the environment.
Studies by Kim et al. see a positive relation, finding evidence that “managers engage in CSR activities to meet ethical expectations as opposed to a response to opportunistic incentives.” Carroll supports this view and identifies Economic, Ethical, legal and discretionary responsibilities as four key activities in CSR. This concludes the theory that firms need to consider the interest of all stakeholders and engage in activities that are not profit-maximizing. Furthermore, public pressure targeted at Apple for understating profits represents a growing trend that could mitigate the impact of tax policy on corporate investment.
There is expected to be no relation between CSR and corporate tax payments If engaging in each independently increases firm value. Conversely, if corporate tax is viewed as detracting from investment, the relation is expected to be negative. Hines argued that “international investment, and international tax avoidance, are strongly influenced by tax policies’. Djankov et al. support this view finding a ‘consistent and large adverse effect of corporate taxes on investment.’ The negative relation is also supported due to firms being more efficient in the allocation of resources in comparison to the government. Malani and Posner give the example of Google starting its own for-profit charity to ‘develop new technology and improve water supplies in Kenya’. Although an extreme example, it supports the theory that firms believe they are able to distribute social welfare better than the Government.