Corporate Social Responsibility and Profit Shifting

Abstract

This paper examines the relation between corporate social responsibility (CSR) performance and tax motivated income shifting. Using a profit shifting measure estimated from multinational enterprises (MNEs) data, we find that parent firms with higher CSR scores shift significantly more profits to their low-tax foreign subsidiaries. The relation is more pronounced for parent firms in countries where the strategic incentives and benefits to accrue ‘moral capital’ are greater, as captured by weaker legal and government institutions, higher consumer activism, and greater press freedom. Overall, our evidence suggests that MNEs engaging in CSR activities acquire legitimacy and moral capital that temper negative responses by stakeholders and thus have greater scope and chance to engage in unethical profit-shifting activities, consistent with the legitimacy theory.

Keywords: Corporate Social Responsibility; Legitimacy Theory; Risk Management; Profit Shifting; Corporate Tax Systems; Agency Problems

JEL Classification: F23, G30, G32, H25, H26, L10, L21, M14