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Socially Responsible Firms Tend to Pay Less Taxes

Jan 25th 2016
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Do you think companies with higher corporate social responsibility (CSR) would also pay more taxes – or at least their fair share? If you cynics figured the do-gooders pay less in taxes, you're right, according to a study published in the January/February issue of the American Accounting Association journal, The Accounting Review.

CSR includes things like community commitment, diversity, employee relations, environment, and product safety and quality.

The study finds that a higher CSR corresponds to lower taxes paid. In a sample of US companies with an effective tax rate averaging 26 percent, the do-gooders ranking in the top fifth of CSR paid an average of 1.7 percentage points below other companies – and, ultimately, about 6 percent less when factoring in other differences in tax rates.

And the high-CSR companies lobby more, too, with about a 158 percent greater probability of lobbying for taxes than other companies do, according to the study.

All of which is particularly pertinent with increased attention to corporate tax inversions, such as drugmaker Pfizer Inc.'s recent $160 billion deal to acquire Allergan PLC and move its corporate headquarters to Ireland.

According to the MSCI Index, a widely referenced rating of companies' citizenship, Pfizer scores high in CSR, which is often thought to be at odds with aggressive corporate tax avoidance. Yet, the pharmaceutical giant plans to move its longstanding base in the United States across the ocean for that very reason.

“Our findings are inconsistent with the notion that the US corporate sector generally views paying the minimum in taxes as compromising integrity or good ethics,” said study co-author David Guenther of the University of Oregon. Guenther's colleagues in the study were Angela Davis and Linda Krull of the University of Oregon, and Brian Williams of Indiana University.

“With countries competing in lowering corporate tax rates (the global average fell by almost 15 percent from 2006 to 2014), it would be imprudent to view Pfizer's move to a low-tax country as an anomaly,” Guenther continued. “Perhaps some awareness of this explains the relatively mild response of US policymakers to this strategy – why they have tended to call for international tax reform as distinct from harsh or restrictive measures.”

But corporations have a variety of perspectives, the study notes.

International organizations, like the Global Reporting Initiative (GRI), issue guidelines for corporate sustainability reports that seek to influence CSR activities, the study states. Those guidelines recommend that companies provide details on tax payments because users of the sustainability reports want “the organization's contribution to the sustainability of a larger economic system,” suggesting that the GRI considers corporate tax payments as a positive contribution to social welfare.

On the other hand, some corporations argue in their sustainability reports that innovation, production, job creation, and economic development are harmed by taxes – a negative influence on social welfare. And some corporations say they lobby to lower corporate taxes because lower taxes will increase economic development.

It's worth noting that the researchers did not draw any conclusions about their findings.

One possibility: “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.” Researchers cite economic studies that indicate corporate taxes tend to decrease investment or that corporations are more efficient at resource allocation than governments.

And for the cynics: Another possibility is that companies “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,” according to the study.

Related article:

Pfizer and Allergan Announce Tax-Busting Mega-Merger

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