Corporate Social Responsibility and tax haven use: Evidence from the Central and Eastern Europe

• Thesis title in Czech: Společenská odpovědnost firem a využívání daňových rájů: Země střední a východní Evropy.
• Thesis title in English: Corporate Social Responsibility and tax haven use: Evidence from the Central and Eastern Europe
• Key words: SOF, daňové ráje
• English key words: CSR, tax havens
• Academic year of topic announcement: 2020/2021
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: prof. doc. PhDr. Mgr. Ing. Antonie Doležalová, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 24.05.2021
• Date of assignment: 24.05.2021
• Date and time of defence: 14.09.2022 09:00
• Venue of defence: Opletalova - Opletalova 26, O206, Opletalova - místn. č. 206
• Date of electronic submission: 27.07.2022
• Date of proceeded defence: 14.09.2022
• Opponents: doc. Petr Janský, M.Sc., Ph.D.

Guidelines

Although the importance of the influence of offshore finance on the global economy is ever-growing, the academic research on the link between the tax haven usage and Corporate Social Responsibility of firms is only limited. The main objective of the study is to address this link for Czech firms.
There are two principal theories to explain the linkage between firm´s CSR engagement and their use of tax haven services. The first theory, so called “corporate culture theory” suggests that if the firm pursues socially responsible actions, then they should not engage in tax avoiding operations as these are widely considered to be ethically dubious. That is to say, if the firm believes it is morally right to contribute to their employees, customers and the communities in which they operate, engaging in tax avoidance actions is in direct contrast with this view as the government tax revenue, which is in turn used to finance the community, will be diminished. (Hermalin 2001; Hoi et al., 2013). Thus, following this theory, one could expect a negative relationship between CSR and the tax havens use.
The second theory, “risk management theory”, argues that the firm might want to improve its reputation by increasing their CSR ratings as using tax haven services is generally viewed as immoral (Godfrey 2005; Kang, Kim, & Lee, 2017). As in the past many multinational firms such as Apple, Google, Starbucks, Amazon have experienced negative media coverage for using the services of the offshore industry, the increased engagement in CSR actions might reduce the reputational risk and mitigate the customer backlash. (Col, Patel 2019). According to this reasoning, the relationship between CSR and tax havens use should be positive.
Existing studies in this area (such as Alsaadi 2020; Carroll and Joulfaian 2005; Col and Patel 2019; Davis et al. 2016; Fallan and Fallan (2019); Huseynov and Klamm 2012; Lanis and Richardson 2012; Lee, D. 2020; Hoi et al. 2013;
Watson 2015;) vary in results and thus there is a lack of consensus among scholars on which of these theories holds.
Moreover, it is questionable whether CSR can be even viewed as factor for Czech firms, given the fact that this concept arrived to our region with substantial delay compared to US.
In the thesis, I will examine the relation between CSR and tax havens use in Czech firms and analyse the firms´ incentives to engage in CSR activities in the Czech Republic.
Hypotheses:
Hypothesis #1: In the Czech Republic, there is no significant
relationship between firm´s CSR engagement and the location of its
headquarters in a tax haven

Hypothesis #2: A firm increases its CSR engagement in the Czech Republic
after its move to a tax haven.

Hypothesis #3: Czech firms with CSR activities do not move their
headquarters to a tax haven.
Hypothesis #2: A firm increases its CSR engagement in the Czech Republic
after its move to a tax haven.

Hypothesis #3: Czech firms with CSR activities do not move their
headquarters to a tax haven.
Hypothesis #3: Czech firms with CSR activities do not move their
headquarters to a tax haven.
Methodology
The thesis largely follows the methodology proposed in a recent study by Lee, D. (2020)
. In order to test the hypotheses, I will work with a probit model in which the response variable “CSR↑“ equals to one if the firms CSR engagement increased from year t to year t+1 or zero otherwise. The main independent variable in this model will be a dummy variable „HAVEN_HQ“, which equals to one if the firm has relocated their headquarter to a tax haven jurisdiction in year t or zero otherwise. The rest of the independent variables will control for factors commonly associated with the level of CSR engagement, such as the firm´s size, cash holdings, leverage, market-to-book ratio and return on assets.
I will construct an original dataset using two important databases: MSCI ESG KLD STATS, which will provide us on the firm´s CSR index.
The second database that I will use is the Orbis database created by Bureau van Dijk. This database will provide important information on firms and will cover the rest of variables I will use in the empirical models including the addresses of the firms´ headquarters.
Expected Contribution:
Given that the existing research is largely focused on U.S. firms (Lee, D. (2020); Col, B. and Patel, S., (2019); Watson (2015)), our contribution lies mainly in its application to the Czech environment. Although there are certain studies that focus on the link between aggressive tax avoidance in countries outside of the U.S. – such as Su, W. and Tan, D. (2018), which covers Taiwanese business groups or Lanis and Richardson (2012), who examine the Australian-listed corporations, the majority of research studies the situation in the U.S.. To best of my knowledge, this is the first time such study is focused on Czech firms.
The link between tax avoidance and Corporate Social Responsibility scores is generally an under-researched area and a number of scholars (Christensen, Murphy (2004); Carroll, Joulfaian (2005); Hanlon, Heitzman (2010)) emphasizes the importance of exploring this relationship. My main objective will be to verify whether the conclusions obtained in the existing studies correspond with the Czech situation. This will help us understand whether the incentives for firms´ CSR engagement differ across regions. Moreover, the empirical results from the thesis might provide useful information for the Czech tax authorities.

References

CHAVAGNEUX, Christian; PALAN, Ronen; MURPHY, Richard. Tax havens: How globalization really works.
London: Cornell University Press, 2010.

DAINOFF, Charles A. Outlaw Heaven: Why States Become Tax Havens. 2018.

MAFTEI, Loredana, et al. An overview of the European tax havens. CES Working Papers, 2013, 5.1: 41-50.

OGLE, Vanessa. Archipelago capitalism: Tax havens, offshore money, and the state, 1950s–1970s. The American Historical Review, 2017, 122.5: 1431-1458.

PALAN, Ronen. The history of tax havens. History & Policy, 2009.

RAPOSO, Ana Margarida; MOURÃO, Paulo Reis. Tax havens or tax hells? A discussion of the historical roots and present consequences of tax havens. Financial theory and practice, 2013, 37.3: 311-360.

ROSENZWEIG, Adam H. Why are there tax havens. Wm. & Mary L. Rev., 2010, 52: 923.

SHAXSON, Nicholas. Treasure islands: Tax havens and the men who stole the world. Random House, 2011.

ZUCMAN, Gabriel. The hidden wealth of nations. University of Chicago Press, 2021.

Lee, D., 2020. Corporate social responsibility of US‐listed firms headquartered in tax havens. Strategic Management Journal, 41(9), pp.1547-1571.

Preuss, L., 2012. Responsibility in paradise? The adoption of CSR tools by companies domiciled in tax havens. Journal of business ethics, 110(1), pp.1-14.

Fisher, J.M., 2014. Fairer shores: Tax havens, tax avoidance, and corporate social responsibility. BUL Rev., 94, p.337.

Christensen, J. and Murphy, R., 2004. The social irresponsibility of corporate tax avoidance: Taking CSR to the bottom line. Development, 47(3), pp.37-44.

Col, B. and Patel, S., 2019. Going to haven? Corporate social responsibility and tax avoidance. Journal of Business Ethics, 154(4), pp.1033-1050.

Lenssen, G., Bevan, D., Fontrodona, J. and Preuss, L., 2010. Tax avoidance and corporate social responsibility: you can't do both, or can you?. Corporate Governance: The international journal of business in society.

Su, W. and Tan, D., 2018. Business groups and tax havens. Journal of Business Ethics, 153(4), pp.1067-1081.

Jenkins, R. and Newell, P., 2013. CSR, tax and development. Third World Quarterly, 34(3), pp.378-396.

Preliminary scope of work

Content
Introduction
Literature review
Data
Methodology
Empirical models
Regression results
Conclusion