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Companies that rank high in social responsibility prove
more inclined than other firms to avoid taxes, study finds
To many students of corporate social responsibility, or CSR, the recent decision of Pfizer to move its headquarters abroad through a merger with a foreign-based firm may have been perplexing. According to the MSCI Index, a widely referenced rating of companies' citizenship, Pfizer scores high in CSR, a status commonly thought to be at odds with aggressive tax avoidance; yet, now it plans to move its longstanding base in the U.S. across the ocean for that very purpose.
Is Pfizer, then, an exceptional case? Or is it fairly typical in regarding CSR and tax-paying less as complements to one another than substitutes for each other?
Some new research suggests the latter to be the case. In the words of a study in the January issue of the American Accounting Association journal The Accounting Review, companies' CSR ratings are "negatively related to five-year cash effective tax rates, and these results are driven by firms with high CSR."
In other words, a higher rating in corporate social responsibility – which takes in such matters as community commitment, diversity, employee relations, environment, and product safety and quality – is associated with lower taxes paid. More specifically, in a large sample of U.S. firms in which the effective tax rate averaged 26%, those ranked in the top fifth in CSR paid an average of 1.7 percentage points below what the remainder paid. In short, about six percent less after controlling for other differences that have been found to affect tax rates.
In addition, high-CSR firms were considerably more likely than others to engage in tax lobbying. According to the study, "firms in the highest quintile of CSR Index have approximately a 158% higher probability of lobbying for taxes than other firms."
Comments David Guenther of the University of Oregon, a co-author of the paper: "Our findings are inconsistent with the notion that the U.S. corporate sector generally views paying the minimum in taxes as compromising integrity or good ethics.” Collaborating with Prof. Guenther on the research were two University of Oregon colleagues, Angela K. Davis and Linda K. Krull, and Brian M. Williams of Indiana University.
Prof. Guenther adds: “With countries competing in lowering corporate tax rates (the global average fell by almost 15% from 2006 to 2014), it would be imprudent to view Pfizer's move to a low-tax country as an anomaly. Perhaps some awareness of this explains the relatively mild response of U.S. policy-makers to this strategy – why they have tended to call for international tax reform as distinct from harsh or restrictive measures."
At the same time, the study takes note of an episodenot long ago in the U.K.wherea prominent member of parliament chastised multinationals for, in her words, “using the letter of tax laws…to immorally minimize their tax obligations,” following which Starbucks promised to pay 10 million pounds or thereabouts in each of the following two years regardless of whether the company was profitable. This leads the new study's authors to wonder whether "public pressure may mitigate the impact of tax rules on corporate investment decisions, at least for a subset of firms."
The researchers draw no conclusion as to exactly what motivates the negative CSR-taxpaying relationship they uncover. One possibility is simply that "socially responsible firms may not consider the payment of corporate taxes to be the best means by which to accomplish their social-responsibility goals" and even believe that "paying taxes detracts from social welfare." In this regard, the authors cite economic research which has "demonstrated that corporate taxes tend to decrease investment" or whichargues that "for-profit corporations are more efficient than governments in allocating resources." They note that "negative statements about corporate taxes in firms' sustainability reports generally argue that high tax rates discourage innovation and investment and harm job creation, which limit firms' ability to contribute to social welfare."
A more cynical interpretation of the research's findings, the authors acknowledge, is that firms "engage in CSR to create 'moral capital' to reduce the consequences of their involvement in negative events or publicity." In other words, "firms strategically engage in CSR to create a more favorable reputation among various stakeholders and reduce the possibility of negative attention or regulatory action directed at aggressive tax practices."
Whatever motives account for the lower taxes associated with higher CSR, the relationship emerges quite clearly from the professors' analysis of information from large corporate databases over the 10-year period 2002 through 2011. For each company in the sample, the professors analyzed the relationship between their citizenship rating in the MSCI index in a given year and their average effective tax rate (total of cash taxes paid divided by total of pre-tax income less special items) for that year and the previous four years. For example, a company's CSR rating in 2006 is compared with its effective tax rate from 2002 through 2006; its rating in 2007 is compared with its taxes from 2003 through 2007; and so on through 2011. In total, the analysis comprises 5,588 such observations.
As indicated, the professors find a significant negative relationship between firms' CSR ratings and taxes paid, with the relationship driven by companies with high ratings. Firms in the lowest CSR quintile, in contrast, neither significantly exceed or lag the rest of the sample in their tax rates.
Employing a similar methodology and drawing on data from the Center for Responsive Politics, the researchers also analyze the relationship between companies' effective tax rates over five-year spans and whether or not they engaged in tax lobbying. They find that "those firms that are more socially responsible are more likely to engage in tax lobbying. These results are economically significant because an increase from the 25th to 75th percentile of the CSR Index is associated with a 16.5% increase in the probability of tax lobbying, and firms in the highest quintile of the CSR index have approximately a 158% higher probability of lobbying for taxes than other firms."
The new study, entitled “Do Socially Responsible Firms Pay More Taxes?” is in the January/February issue of The Accounting Review, published every two months by the American Accounting Association, a worldwide organization devoted to excellence in accounting education, research, and practice. Other journals published by the AAA and its specialty sections include Auditing: A Journal of Practice and Theory, Accounting Horizons, Issues in Accounting Education, Behavioral Research in Accounting, Journal of Management Accounting Research, Journal of Information Systems, and The Journal of the American Taxation Association.