What is the empirical evidence on the relation between CSR and tax?
Research has suggested mixed results when testing the relation between CSR and Corporate Tax. Hoi et al. (2013) find that firms with lower CSR ratings have lower ETRs. Lanis and Richardson (2012) found that Australian firms with high levels of CSR disclosure have higher ETRs. They also found that self-reported tax disputes were higher for firms with low CSR ratings. Relation between CSR and taxes for U.S. firms depends on firm or lobbying activities.
The results of the research carried out by Davis et al. differs from the study by Hoi et al. in two main ways. Firstly, Hoi et al. focus on CSR activities that negatively affect a firm’s stakeholders, indicating poor CSR. In contrast, Davis et al. take a more comprehensive approach, looking at both positive and negative CSR together. By netting off the two (strengths minus concerns), this prevents the miss-classification that arises when looking at them independently. For example, concerns may both equal 5. However, one firm has zero strengths and the other eight, therefore when netted off, one has positive (score of 3) and the other negative (score of -5). Secondly, Hoi et al. focus on ‘extremely aggressive tax avoidance,’ which may be considered illegal. Instead, Davis et al. focus on cash ETRs as these measures capture a broader range of tax avoidance activities.