Tax avoidance, value creation and CSR – a European perspective

• Published in: Corporate governance (Bradford) 2017-01, Vol.17 (5), p.803-821
• Main Authors: Kiesewetter, Dirk, Manthey, Johannes
• Format: Article
• Language: English
• Subjects: Abnormal returns; Corporate governance; Corporate taxes; Costs; International business; Legislation; Market economies; Research design; Social responsibility; Stockholders; Studies; Tax avoidance; Tax rates; Taxation; Value creation
• ISSN: 1472-0701; 1758-6054
• DOI: 10.1108/CG-08-2016-0166

Purpose This paper aims to answer how corporate governance and corporate social responsibility (“CSR”) affect the relationship between value creation and tax avoidance. This study further analyses the impact of the institutional environment, i.e. whether a country is rather a liberal or a coordinated market economy, on the relationship between CSR and tax avoidance. Design/methodology/approach The empirical analysis comprises a panel data set of 7,924 observations for the years from 2005 to 2014 for European companies. The relationship between value creation and tax avoidance is tested by grouping the sample in high and low CSR performers. Similarly, the impact of the type of market economy is analysed for the firms. Findings The research design does not find evidence that tax avoidance is creating value. The empirical findings reveal that there is a positive relationship between value creation and the effective tax rate for firms with low social and environmental characteristics. Further, this analysis could show that stronger corporate governance is associated with a lower effective tax rate in both coordinated and liberal market economies. The analysis identifies social strengths being associated with a higher effective tax rate for coordinated market economies. Practical implications It is proposed to encourage CSR disclosure. The creation of incentives for social strengths could increase tax revenue. Firms should reconsider whether the engagement in tax avoidance is worth it and pursue social responsibility to achieve higher value creation for their stakeholders. Originality/value The paper challenges the intuitive expectation that tax avoidance creates value. It is suggested that the governance and CSR culture, as well as the tax legislation in Europe, is different to the USA. Conclusively, tax avoidance is not generating value for the European sample.