Corporate social responsibility (CSR) is one of the issues that have dominated management and corporate strategy debates for the last few decades. In many cases, companies engaging in CSR activities are spending money that would otherwise have been channeled towards shareholders as part of the dividend payments. Additionally, these companies also pay taxes, which can be considered to be an additional deduction from the dividends. According to Benois and Roc’h (2021), taxation and CSR seem to be distant and antimonic fields. However, the two have come together over the last few years to form what can be considered two sides of a coin. CSR activities are facilitated through such elements as tax incentives, which means that more tax deductions allow companies to make more contributions toward social wellbeing.
Academia and the business world have started to debate whether taxes should be considered social responsibility. There seems not to be an agreement about how much taxes should a company pay due to conflict between CSR and tax payments (Timbate, 2021, p. 1). The focus of this paper is to use both shareholder and stakeholder theories to answer this question and support the position that more tax incentives should be offered to companies with greater CSR initiatives. The rationale is that shareholder value declines with both CSR and taxation despite all other stakeholders experiencing maximum benefit. Balancing between shareholder value and stakeholder interests should help reach a workable compromise.
Shareholder and Stakeholder Perspectives of Corporate Tax
Shareholder and stakeholder theories offer different views on the practice of CSR and, in this case, tax payment. The rationale is that shareholders represent a single stakeholder group whose interests are often prioritized by businesses through their wealth maximization objectives. On the other hand, stakeholder theory takes into account all other groups who have a stake or affect or are affected by the decisions made by the company. In other words, these theories offer a contrasting view to the issues of CSR and tax payment depending on what the interests are. From a shareholder theory view, the purpose of the business is to make as much money as possible, which means maximizing shareholder value (Issah and Rodrigues, 2021, p. 2). On the contrary, stakeholders may include employees, customers, the public, the government, and suppliers. In many cases, these stakeholders would prefer more focus on the social benefits or wellbeing, especially in an era where the society faces major problems that require the support of corporations. CSR could become a priority for the rest of the stakeholders, which undermines the interests of shareholders.
Tax payment could be the mechanism used to pursue a balance between the two views and interests of the two stakeholder groups. However, the question of how much tax corporations should pay can be explored from each theory independently before attempting to bridge this gap. Additionally, the relationship between CSR and tax payment has been extensively studied, which offers an insight into how companies attempt to strike a balance that benefits stakeholders. From a shareholder perspective, many scholars have found that companies with greater tax incentives often engage in more CSR activities. Tax avoidance is often a controversial issue considering that even though it is legal, many stakeholders do not consider it moral. The extent to which companies engage in tax avoidance depends on the tax incentives they receive or are extended to their shareholders. For example, when tax credits are extended to shareholders, the companies score better in terms of tax avoidance measured in terms of the effective tax rate (McClure et al., 2018, p. 492). Therefore, companies are keen on ensuring maximum shareholder value in terms of reducing costs that reflect on shareholders’ dividends.
Tax avoidance is associated with CSR since both of them play a critical role in determining how much taxes companies are willing to pay. In essence, it can be argued that businesses opposed to CSR could also be opposed to paying more taxes. In other words, businesses with fewer CSR initiatives are also associated with more aggressive tax avoidance practices. Even though the results are often mixed in this regard, both CSR and taxes diminish shareholder value. Where companies view taxes as a decrease in social welfare and shareholder value, the relationship between CSR and tax avoidance is negative (Chouaibi, Rossi, and Abdessamed, 2021, p. 10). In other cases, companies prefer to view taxes and CSR as substitutes, which means that more taxes should be met with reduced CSR initiatives. In such a situation, businesses engaging in more CSR activities would expect to pay fewer taxes, which could result in more aggressive tax avoidance practices. In essence, it can be argued that the philosophical differences in corporate governance are the cause of these mixed results. Overall, the shareholder theory will always be in support of value maximization.
From a shareholder theory perspective, it can be assumed that the businesses will engage in practices that seek to benefit the shareholders more than anyone else. Indeed, it is a moral responsibility of the business to pursue this goal, especially since many governments bestow fiduciary duty on the directors to act in the best interests of the shareholders. According to Hager and Baines (2020, p. 285), companies are facing ever-growing demands for shareholders, which has resulted in businesses seeking more payouts and investing less in areas with greater social benefits, including job creation and CSR. In such a case, it can be argued that the interests of this group counter those of others, including the government and the taxes demanded. In many countries, the taxes are often paid as a percentage of the gross profit, the remainder of which can be paid as dividends. Rational shareholders will claim to believe in the maxims of the free markets with as little as possible government involvement. Besides opposition to CSR initiatives, even the taxes paid to pose an inconvenience to the shareholders, who would prefer to pay less.
Even though the shareholder theory seems to support the pursuit of the interests of the shareholders at the expense of other stakeholder groups, it is important to acknowledge its importance in management. According to Posner (2019), this theory proposed by Milton Friedman was popular since it absolved companies of difficult moral choices and protected them from public criticism as long they made profits. The argument made by Friedman is that managers or chief executive officers (CEOs) were employees of the shareholders, which means that they had to act in the shareholder’s interests. Such reasoning means that all the funds that the CEOs dedicate to CSR have to come from the customers through higher profits or workers through lower wages. Alternatively, the funds had to be derived from shareholders by offering them lower returns. In so doing, the CEO would be taxing other people for a social cause in which he or she is not an expert (Posner, 2019). Therefore, it would be better to leave the social causes for the experts and for the CEO to balance between the three stakeholders whose funds are taxed for CSR.
The above argument has been used by some experts and critics to prove that Friedman was wrong in his proposition of the shareholder theory. This is because Friedman argued that a firm’s sole social responsibility was to maximize profits (Schechter, 2017). This position has, for the right reasons, faced criticism considering that other stakeholders have interests that have to be addressed. Even though no response has been given to the critics, the argument provided earlier of taxing employees, customers, and shareholders seem sound since all funds used in CSR have to be taken from elsewhere. If CSR is considered to be operational costs, then the customers would be charged higher prices to sustain a desirable profit margin. Employees would also be paid lower wages to offset the costs or take part of the profits owed to shareholders to fund the CSR projects. In this case, it can be argued that the government is responsible for addressing social problems affecting a country. Therefore, companies assisting in this regard would be justifiable in asking for tax incentives or seeking tax avoidance pathways.
If the shareholder theory has been found to have weaknesses, the stakeholder theory presents itself as the better alternative and one to fill the gaps left by Friedman’s propositions. According to Hillenbrand et al. (2019, p. 404), the stakeholders of a business are often discernible and include society or the general public and the government, which is in charge of laws and policies. Others include special interest groups, non-governmental organizations, customers, shareholders, and employees. In the context of corporate tax, the government is the main stakeholder group, which seeks to obtain the most from all economic activities to help address the social problems facing the country. Even in liberal markets, governments are often responsible for the provision of essential amenities alongside such responsibilities as defense and security. Therefore, corporate taxes are critical sources of funds for a stakeholder not involved in other income-generating activities. To the government, the stakeholder theory calls for a balance between the interests of the company’s shareholders and the government, which means optimizing CSR, taxes, and dividends.
The stakeholder theory has both moral and strategic implications for a company and its tax payment practices and CSR activities. Today, socially responsible companies are preferred by customers, workers, society, and other stakeholders (Fernández-Guadaño and Sarria-Pedroza, 2018, p. 2). In this case, CSR is a means of seeking acceptance by all stakeholders by positioning the firm as a moral entity. However, a business that is keen to please all stakeholders has to strike a balance between their interests. In this case, accomplishing both CSR and tax obligations is a strategic move intended to bring everyone on board. However, CSR and tax payments are all costs to a business, which means that the shareholders may be left to suffer due to lower dividends. Therefore, it is apparent that even the stakeholder theory fails to offer a vivid idea regarding what a business should do when faced with certain strategic dilemmas. As such, it can be argued that shareholders of a business cannot be left to shoulder the entire burden of a company’s efforts to comply with both taxation and CSR.
Therefore, tax incentives should be used to encourage businesses to engage in more CSR activities. Alternatively, governments that expect businesses to pay the maximum taxes should absolve them of the social responsibility and use the taxes paid to address any social concerns and pressing needs. The argument by Fernández-Guadaño and Sarria-Pedroza (2018, p. 2) is that paying taxes is indeed contributing to the country’s social development. In other words, it would be immoral to expect a company pays a large percentage of taxes and spends large sums of money on CSR. Such an expectation denies shareholders their deserved returns from their company and such a phenomenon could discourage people from investing. Furthermore, it can be argued that taxes are a percentage of the gross profit, which can have two major implications. Firstly, CSR costs should be deductible from the taxable income to offer companies incentives to invest in social wellbeing. Secondly, the calculation of the gross profit should include a deduction of the CSR expenditure as part of the company’s operational costs.
The two options for determining tax payments seem to allow a business to achieve a balance between shareholders and the rest of the stakeholder groups. In this case, most of the stakeholders have not invested their funds, time, and efforts in a company, which means that the benefits they receive are simply gifts from a well-wishing company and the generosity of the shareholders. The stakeholder theory can be criticized for taking shareholders to be a separate group of stakeholders whose interests should come last. such a position also explains why the CSR and tax avoidance debate has emerged. In other words, competing stakeholder interests leave companies with limited choices as explained by Issah and Rodrigues (2021, p. 4). Where firms have been forced to spend massive amounts of money on CSR, the only alternative they have to maximize the shareholder value is by finding legal means of reducing other expenditures, and tax avoidance become a go-to choice for many. From a stakeholder perspective, it can be argued that there is still a need to balance the interests of all stakeholders.
Considering the two theories, it is recommended that corporations should pay around 30% of their gross profits. This percentage is lower than the current rates since it is assumed that companies will continue to invest heavily in CSR. However, these tax incentives should be given only to those businesses with massive CSR projects. Alternatively, 45% of taxes can be paid where companies are absolved of all CSR activities.
Shareholder and stakeholder theories offer different pictures of companies’ tax obligations, especially when factoring in CSR initiatives. The shareholder theory suggests profit maximization, which calls for lower taxes and CSR spending. On the contrary, the stakeholder theory prioritizes other stakeholder groups than the shareholders, which also raises concerns. Therefore, the question of how much taxes companies should pay is answered by taking into account the extent of CSR involvement. Rates of 30% for socially responsible businesses and 45% where businesses are not expected to be socially responsible have been proposed. The philosophical stance of this proposition is that social wellbeing is the responsibility of the government, which should not demand more taxes from companies that are helping in this regard.
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