Corporate Tax Avoidance & Social Responsibility: A Study of German DAX 30 Companies - Essay Sample

Introduction

Background of the Study

In the past few decades, the importance of CSR policies for firms has tremendously increased. In the modern business world, large and medium-sized companies document how their CSR policies are formulated, pursued, and achieved. There is, however, little consensus as to what CSR entails, and several definitions have been formulated. For instance, the European Commission defines CSR as "the responsibility of enterprises for their impacts on society.... To fully meet their corporate social responsibility, enterprises should have in place a process to integrate social, environmental, ethical, human rights, and consumer concerns ..." (European Commission, 2011, p. 6). The World Business Council for Sustainable Development (2010, p.8) defines CSR as "the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large." These definitions of CSR, among many others, assume firms pursue their objectives in addition to profits. Some components of CSR are directly beneficial for enterprises as profit maximization is dependent on the firm's engagement in CSR activities (Goerke, 2018). For instance, the level of the firm's market power and its CSR policy helps the firm to commit to a certain level of output, which in turn increases profits for the firm (Goerke, 2018).

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Also, the production of high-quality goods can simultaneously put the firm and its customers in a better relationship as customers will be more attracted to the organization. However, pursuing the CSR objectives is sometimes detrimental to profitability, and the conformity in business CSR and profit maximization does not always arise. Some of the objectives of CSR include improving the working conditions, which may benefit employees but increase the cost of production and raise the firms' cost over revenues. Another pertinent is increasing production to address consumer concerns and firms having market power and producing a quantity which may be less than the welfare-maximizing level, lowering profits.

CSR policies of most organizations are usually associated with a multitude of aspects that the firms need to address. However, payment of taxes is usually not associated with CSR policies of most firms (Goerke, 2018). The credibility of this claim is exemplified by the European Commission and the World Business Council for Sustainable Development, from which the definitions of CSR are quoted. The organizations do not deal with taxation, and hence it is not a mandatory part of CSR. Recent research has revealed the loophole in failing to address the issue of payment of taxes in CSR policies. Several suggestions have also been formulated to compel the incorporation payment of taxes into CSR policies according to goodwill and not as a result of an order from the letter of the law (Sikka 2010; Narotzki 2016; Col & Patel, 2018).

Legitimacy is another central theme of debates about CSR. The emphasis on organizational legitimacy as the foundation of the firm in society has made the companies themselves, the global civil society and public authorities to come up with new frameworks to manage the environmental and social externalities of economic activity (Preuss, (2010). The pressure on organizations to honor their CSR policies and ensure they achieve their objectives has made some organizations to find alternative ways of achieving their CSR objectives while maximizing their profits. Tax evasion has been at the center stage as a means that firms use to maintain their profitability while pursuing their CSR objectives (Preuss, (2010). Tax evasion is a circumstance where firms can successfully insulate themselves against societal expectations. In so doing, most businesses sustain their CSR policies, which may be costly, by evading the payment of taxes.

One of the ways through which firms evade pay paying taxes is locating their headquarters and subsidiaries in settings where the pressure from civil society is low (Preuss, (2010). Such areas include tax heavens and Offshore Finance Centres. Offshore Finance Centres attract bank deposits and report business activities through nominal or zero tax rates. In such territories, substantial corporate activities are not required, and there is usually no significant local civil society to make follow-ups on organizations for their social responsibilities. In tax havens and OFCs, the firms are insulated from pressure from the international civil society and "sell secrecy to attract clients to their shores" (Preuss, (2010). The situation in Germany is similar to the one described, and the German DAX 30 companies have been discovered to locate their businesses in tax havens and OFCs to insulate against the pressures of the international civil society. The present study, therefore, aims at analyzing the tax evasion among German DAX 30 companies by the location of their headquarters and subsidiaries in tax havens and OFCs in relation to their CSR policies.

The Need for the Study

The basis of this paper is that maintaining CSR activities is costly, and firms react by making adjustments to balance the decline in profits. Some of the responses include pricing strategies, input policies, and limiting the extent to which the profits generated profits during a financial year are reported (Bagnoli & Watts 2017). The firms may also involve other aggressive behaviors such as non-compliance to rules and regulations. A common phenomenon which considered a widespread behavioral adjustment is tax evasion, and according to Goerke (2014), evidence exists that firms try to legally avoid paying taxes exploiting loopholes in the tax law and locating their businesses in tax heavens or Offshore Finance Centers. This research focused on answering the question of whether tax avoidance by locating businesses in tax havens and OFCs and CSR policies of firms are complements or substitutes. The research also sought to reveal if policy relevance between CSR and tax avoidance is obvious, and if CSR firms would be tax compliant than firms pursuing no CSR objectives or the reverse.

Research Purpose

The research aimed at establishing the relationship between CSR and corporate tax avoidance as well as identifying how the German DAX 30 companies reduce their tax burden by locating affiliates in tax havens. The research also aimed at determining whether tax avoidance is ironical of the corporate social responsibility and if firms are not supposed to be praised for being socially responsible when they are engaging in corporate tax avoidance

Objectives

The study focuses on finding out if the location of businesses in tax heavens or OFCs is complementary to the CSR obligations of firms. The study will also try to achieve the following objectives;

To find out the relationship between CSR and corporate tax avoi...