Corporate Social Responsibility and Profit Shifting

48 Pages Posted: 31 Jan 2019 Last revised: 20 Sep 2021

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Panagiotis Karavitis

University of Glasgow - Adam Smith Business School

Pantelis Kazakis

University of Glasgow - Adam Smith Business School

Woon Sau Leung

The University of Edinburgh Business School, The University of Edinburgh

Date Written: September 17, 2021

Abstract

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

Hasan, Iftekhar and Karavitis, Panagiotis and Kazakis, Pantelis and Leung, Woon Sau, Corporate Social Responsibility and Profit Shifting (September 17, 2021). Available at SSRN: https://ssrn.com/abstract=3318861 or http://dx.doi.org/10.2139/ssrn.3318861

Iftekhar Hasan (Contact Author)

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Panagiotis Karavitis

University of Glasgow - Adam Smith Business School ( email )

University Avenue
Glasgow
Glasgow, West End G12 8QQ
United Kingdom

HOME PAGE: http://https://www.gla.ac.uk/schools/business/staff/panagiotiskaravitis/

Pantelis Kazakis

University of Glasgow - Adam Smith Business School ( email )

Adam Smith Business School
Gilbert Scott Building
Glasgow, Scotland G12 8QQ
United Kingdom

HOME PAGE: http://sites.google.com/site/panteliskazakis/home

Woon Sau Leung

The University of Edinburgh Business School, The University of Edinburgh ( email )

29 Buccleuch Pl
Edinburgh, Scotland EH8 9JS
United Kingdom

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