SUSTAINABLE TAX PLANNING : Investigating the relationship between ESG and tax aggressiveness

Abstract: The footprint firms leave behind on this planet is widely discussed, and the topic of corporate social responsibility is constantly receiving additional attention. The gravity of working towards a more sustainable way of conducting business is illustrated by the incentivized tax system in various countries, where CSR can render tax deductions. It is widely debated if CSR and tax aggressiveness can live in symbiosis, and what relationship the two areas have. However, the literature investigating thisrelationship is scarce, which has left a research gap for the authors of this study to fill.This study does through a quantitative method investigate the relationship between CSR and tax aggressiveness of 3899 firms from 68 different countries, measuredat the end of 2018. By equivalating the level of social responsibility of a firm with the widely accepted ESG-score and the level of tax aggressiveness of a firm with the ETR-index created by the authors, the statistical testing of the relationship was enabled. Further, the control variables country, industry, leverage, beta, and size were included to account for variance in tax aggressiveness which is not captured by the ESG-score.To guide the authors through the establishment of hypothesis and statistical testing,a theoretical framework was established, concluding theories speaking for the implementation of tax aggressiveness, against it, and theories which reconciles the two contradicting views. The data was thereafter processed to investigate which statistical model to utilize. The robust OLS was found to be the best suited model, which was used to test the relationship between the aggregated ESG-score, as well as its components, relationship to the ETR-index.The statistical results in this study did not exhibit a significant relationship between the aggregated ESG-score, nor for the two components S and G, and the ETR-index. There is however a significant positive relationship between the E-score and the ETR-index, showing that environmentally friendly firms are less tax aggressive in general. This relationship could be explained by the stakeholder theory, which indicates that a firm's objective should be to maximize the value creation for all its stakeholders, as well as by the legitimacy theory, stating that firms seek to conduct proper business within socially constructed norms. Furthermore, the results show that tax aggressiveness depends on the country of headcounter, the industry, and the beta of a firm.