Corporate Social Responsibility and Profit Shifting
48 Pages Posted: 31 Jan 2019 Last revised: 20 Sep 2021
Date Written: September 17, 2021
This paper studies the relationship between corporate social responsibility (CSR) and profit shifting. Using a profit-shifting measure derived from worldwide data for parent firms and their foreign subsidiaries, we find that corporate social responsibility is positively and significantly associated with profit shifting, consistent with the legitimacy theory. Our findings are robust to a battery of sensitivity and endogeneity tests. In turn, we show that this positive relationship between MNEs’ profit shifting and CSR is exacerbated when MNEs are headquartered in countries where consumer activism and the freedom of media are higher, and thus the need for “social capital” is higher, too. Finally, we find that when MNEs are headquartered in countries with worse rule of law and government effectiveness this positive relationship between MNEs’ profit shifting and CSR is also exacerbated. Taken together, these findings highlight the importance of the multi-country setting in studying the relationship between CSR and tax aggressiveness. Overall, our evidence suggests that multinational firms with higher CSR scores shift larger amounts of profits to their low-tax foreign subsidiaries, potentially indicating strategic planning in the choice of CSR investments by multinational enterprises.
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
Suggested Citation: Suggested Citation