{"id":875,"date":"2019-02-26T14:02:52","date_gmt":"2019-02-26T14:02:52","guid":{"rendered":"http:\/\/blogs.cardiff.ac.uk\/business-school\/?p=875"},"modified":"2019-02-26T14:07:01","modified_gmt":"2019-02-26T14:07:01","slug":"does-corporate-social-responsibility-reduce-profit-shifting","status":"publish","type":"post","link":"https:\/\/blogs.cardiff.ac.uk\/business-school\/does-corporate-social-responsibility-reduce-profit-shifting\/","title":{"rendered":"Does Corporate Social Responsibility reduce profit shifting?"},"content":{"rendered":"\n
\"\"
The question of why some firms choose to pursue CSR while others do not remains unanswered<\/figcaption><\/figure>\n\n\n\n

In our latest post, Dr Woon Sau Leung outlines the findings of his latest research on the economic motivations for corporate social responsibility campaigns.<\/h3>\n\n\n\n

In recent decades, economies have become bound together through globalisation, a phenomenon that integrates societies and creates business opportunities but also challenges tax policies.<\/p>\n\n\n\n

The\namount of taxes corporations pay is a heatedly debated topic among policy\nmakers, academics, and the media. <\/p>\n\n\n\n

An\narticle in the Financial\nTimes<\/a>, for example, argues that\nmultinational enterprises (MNEs) are paying significantly lower taxes now than\nthey did prior the financial crisis. An important way MNEs reduce their taxes\nis to move profits from the countries where they\u2019re based to countries where\ntax rates are lower, a practice commonly referred to as \u201cprofit shifting.\u201d <\/p>\n\n\n\n

\u201cAlthough such strategies are not illegal, they deny host countries tax revenues and put social welfare and equality at risk.\u201d <\/p><\/blockquote>\n\n\n\n

The\nextent of profit shifting, however, remains unclear and has yet to be fully\nunderstood.<\/p>\n\n\n\n

Parallel\nto the growing importance of tax planning, CSR has become increasingly popular\namong businesses around the globe. Driven by corporate strategy or shareholder\npressure, companies increasingly participate in socially responsible\nactivities, such as investing in employees and the quality of workplaces,\nreducing pollution, and improving governance. <\/p>\n\n\n\n

From\nan economic perspective, the fundamental reason to engage in CSR is less clear.\nAccording to Friedman (1970), firms should only pursue activities that maximise\nshareholder value. He argues that socially responsible activities do not qualify.\nDespite a growing body of research on CSR (e.g., Ferrell et al., 2016; Lins et\nal., 2017), the question of why some firms choose to pursue CSR while others do\nnot remains unanswered and warrants more research efforts. Our results provide\na potential explanation.<\/p>\n\n\n\n

A legitimacy theoretical perspective<\/h3>\n\n\n\n

In our study, we extend prior research (e.g., Hoi et al., 2013; Davis et al., 2016) on the link between CSR and tax avoidance and analyse firms\u2019 profit-shifting activities from an international perspective. <\/p>\n\n\n\n

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Is the relationship between CSR and profit shifting a positive or negative one?<\/figcaption><\/figure>\n\n\n\n

On the one hand, socially responsible firms are expected to pay their fair share of taxes, thus maximising stakeholder value. In our context, this would indicate a negative relationship between CSR and profit shifting. <\/p>\n\n\n\n

On\nthe other hand, according to legitimacy theory, the association between CSR and\nprofit shifting could be positive. This is the case when firms have incentives\nto invest in CSR. <\/p>\n\n\n\n

\u201cOne such incentive may be to gain legitimacy, build \u201cmoral capital,\u201d and avoid severe punishment if they act in ethically questionable ways.\u201d<\/p><\/blockquote>\n\n\n\n

To\nshed more light on this relationship, we use MNEs data from 2009 to 2016, which\nconsist of over 500 parent companies from 20 countries and over 6,000 of their\nsubsidiaries in 63 countries. <\/p>\n\n\n\n

Our\nanalysis proceeds in two stages. First, we adopt the method proposed by\nDharmapala and Riedel (2013) and estimate a measure of profit shifting. Second,\nwe examine the relationship between CSR and profit shifting and find it\npositive and statistically significant, thus being consistent with the\nlegitimacy-theory view. To further corroborate our findings, we try a number of\nalternative tests and reach the same conclusion.<\/p>\n\n\n\n

This graph shows average values of CSR and profit shifting by country for the period 2009-2016.<\/p>\n\n\n\n
\n Figure: Corporate social\n responsibility and profit shifting<\/strong>\n <\/td><\/tr><\/tbody><\/table>\n\n\n\n
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Source<\/em>: Authors\u2019 calculations. <\/figcaption><\/figure>\n\n\n\n

Territorial tax system<\/h3>\n\n\n\n

Our next set of\ntests investigates whether the link between CSR and profit shifting varies\nacross different types of tax systems. <\/p>\n\n\n\n

Recent debate has\nfocused on the potential drawbacks of the different types of tax systems.\nAcademic research has shown that multinationals under the territorial tax\nsystem shift more income than do those under the worldwide tax system (e.g.,\nScholes et al, 2015; Kohlhase and Pierk, 2016; Markle, 2016). <\/p>\n\n\n\n

\"\"
In a fast-paced globalised world, our study provides some empirical justification as to why some MNEs may choose to invest in CSR <\/figcaption><\/figure>\n\n\n\n

If the positive\nrelationship between CSR and profit shifting holds, one would have expected\nthis relationship to be more pronounced for firms headquartered in countries\nunder the territorial tax system. This is because firms under the territorial\ntax system are able to repatriate income without the need to pay additional\ntaxes and thus have greater incentives to engage in profit shifting. <\/p>\n\n\n\n

Indeed, our\nanalysis shows that CSR has a more pronounced effect on profit shifting for\nfirms under a territorial tax system.<\/p>\n\n\n\n

Our\nresults suggest that multinational firms with higher CSR scores shift larger\namounts of profits to their low-tax foreign subsidiaries, potentially\nindicating strategic planning in the choice of CSR investments by multinational\nenterprises. <\/p>\n\n\n\n

In\na fast-paced globalised world, our study provides some empirical justification\nas to why some MNEs may choose to invest in CSR, and offers potentially useful\ninsights for policy makers and academic researchers.<\/p>\n\n\n\n

This post was\noriginally published on <\/em>Columbia\nLaw School\u2019s Blue Sky Blog<\/a><\/em> and was<\/em> <\/strong>prepared\nin collaboration with <\/em>Professor\nIftekhar Hasan<\/a><\/em> at Fordham University\u2019s Gabelli School of Business\nand <\/em>Dr\nPanagiotis Karavitis<\/a><\/em> and <\/em>Dr\nPantelis Kazakis<\/a><\/em> at the University of Glasgow\u2019s Adam Smith Business\nSchool.<\/em><\/p>\n\n\n\n

It is based on a recent\nworking paper, entitled: <\/em>‘Corporate\nSocial Responsibility and Profit Shifting’<\/a><\/em>.<\/em><\/p>\n\n\n\n

Dr\nWoon Sau Leung<\/a><\/strong> is a\nLecturer in Finance at Cardiff Business School.<\/strong><\/p>\n\n\n\n

References<\/h4>\n\n\n\n
  • Davis,\nA. K., Guenther, D. A., Krull, L. K., & Williams, B. M. (2016). Do socially\nresponsible firms pay more taxes?. Accounting Review, 91(1), 47-68.<\/li>
  • Dharmapala,\nD., & Riedel, N. (2013). Earnings shocks and tax-motivated income-shifting:\nEvidence from European multinationals. Journal of Public Economics, 97, 95-107.<\/li>
  • Ferrell,\nA., Liang, H., & Renneboog, L. (2016). Socially responsible firms. Journal\nof Financial Economics, 122(3), 585-606.<\/li>
  • Friedman,\nM. (1970), The social responsibility of business is to increase its profits,\nNew York Times Magazine, September 13, 1970.<\/li>
  • Hoi, C. K., Wu, Q., &\nZhang, H. (2013). Is\ncorporate social responsibility (CSR) associated with tax avoidance? Evidence\nfrom irresponsible CSR activities. Accounting Review, 88(6), 2025-2059.<\/li>
  • Kohlhase,\nS. and Pierk, J. (2016) Why are U.S.-owned foreign subsidiaries not tax\naggressive? WU International Taxation Research Paper Series, 2016-06. WU Vienna\nUniversity of Economics and Business, Universit\u00e4t Wien, Vienna.<\/li>
  • Lins, K. V., Servaes, H.,\n& Tamayo, A. (2017). Social\ncapital, trust, and firm performance: The value of corporate social responsibility\nduring the financial crisis. Journal of Finance, 72(4), 1785- 1824.<\/li>
  • Markle,\nK. (2016). A comparison of the tax\u2010motivated\nincome shifting of multinationals in territorial and worldwide countries.\nContemporary Accounting Research, 33(1), 7-43.<\/li>
  • Scholes,\nM., Wolfson, M. A., Erickson, M. M., Hanlon, M. L., Maydew, E. M., Shelvin,\n2015. Taxes and Business Strategy, 5th Edition, Prentice Hall.<\/li><\/ul>\n","protected":false},"excerpt":{"rendered":"The question of why some firms choose to pursue CSR while others do not remains unanswered In our latest post, Dr Woon Sau Leung outlines the findings of his latest […]","protected":false},"author":1665,"featured_media":919,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[432],"tags":[102,450,9,436,449,28,100,253,433,115,152,442,439,451,376,255,438,441,440,95,98,447,434,435,16,446,245,437,448,444,443,445,186],"class_list":["post-875","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-corporate-social-responsibility","tag-academia","tag-adam-smith-business-school","tag-business","tag-campaigns","tag-capital","tag-cardiff-business-school","tag-cardiff-university","tag-corporate-social-responsibility","tag-csr","tag-economy","tag-equality","tag-financial-crisis","tag-financial-times","tag-gabelli-school-of-business","tag-globalisation","tag-governance","tag-media","tag-mnes","tag-multinational-enterprises","tag-policy","tag-policymakers","tag-pollution","tag-profit","tag-profit-sharing","tag-research","tag-social-welfare","tag-society","tag-tax","tag-tax-avoidance","tag-tax-policies","tag-tax-rates","tag-tax-revenues","tag-workplace"],"jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/paOfaS-e7","meta_box":[],"jetpack_featured_media_url":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-content\/uploads\/sites\/620\/2019\/02\/Question.png","_links":{"self":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts\/875","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/users\/1665"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/comments?post=875"}],"version-history":[{"count":8,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts\/875\/revisions"}],"predecessor-version":[{"id":925,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/posts\/875\/revisions\/925"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/media\/919"}],"wp:attachment":[{"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/media?parent=875"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/categories?post=875"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.cardiff.ac.uk\/business-school\/wp-json\/wp\/v2\/tags?post=875"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}