Allocation of Corporate Social Responsibility and Tax Planning
Norhidayah Mohd Salleh1*
1 Commerce Department, Politeknik Kota Bharu, 16450 Kok Lanas, Kelantan, Malaysia
*Corresponding Author: [email protected]
Accepted: 1 November 2020 | Published: 15 November 2020
________________________________________________________________________________________
Abstract: This study aims to find empirical evidence of the relationship between corporate social responsibility (CSR) allocation and tax planning. Past studies that assess the relationship between the allocation of CSR and tax planning mostly focused on developed countries. However, there was a poor implementation of assessment in developing countries such as ASEAN countries, especially in Malaysia. Therefore, this study is important to be implemented because it links the allocation of CSR and tax planning in a study based on the institutional background in Malaysia. In Malaysia, CSR information is reported voluntarily.
From a tax standpoint, CSR is one of the tax expenses that can reduce a firm’s tax. The study sample was 278 public firms listed on the Main Market and ACE market on Bursa Malaysia from various business sectors in 2015-2016. This study uses quantitative methods of correlation study. The allocation of CSR variables is measured using the Allocation of CSR index revealed in the firm’s annual report during the study period. Tax planning variables are measured using tax effective rates and tax book differences. Tax planning methods using tax effective rates and tax-book differences show the actual relationship between firm earnings before tax and current tax expenses in the current year based on both methods. In the regression model of the study, there are several control variables that affect corporate tax planning namely, size, profitability, leverage, and capital intensity.
Keywords: corporate social responsibility, CSR, tax planning, tax
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1. Introduction
Recently, many firms have engaged in various social activities referred to as corporate social responsibility (thus referred to as CSR) (Mirfazli 2008) and reported their CSR activities (Collier 2013). A study conducted by KPMG (2013) found that 93% of 250 Fortune Global firms had reported investment information in CSR in their respective annual financial reports or separate CSR reports (standalone reports).
Starting from this, Bursa Malaysia plays an important role in encouraging Malaysian listed firms to perform CSR activities (Bidin 2008; Shirley et al. 2009; Rosli et al. 2015), and report this information voluntarily based on the CSR Framework issued in September 2006 and effective in 2007 (Shirley et al. 2009; Sharma 2013). The four main areas of focus for CSR are environment, workplace, society and market (Sharma 2013).
The issue of CSR is increasingly important to focus on (Moir 2001; Shirley et al. 2009) as it is one of the major issues in business and society (Mirfazli 2008; Shirley et al. 2009). The coverage of CSR issues is constantly increasing in line with the growth in the business world (Mirfazli 2008). This is because CSR involves several other related issues such as ethics,
corporate governance, social responsibility, environmental sustainability (Shirley et al. 2009), and the well-being of society (Shirley et al. 2009; May Yee 2014; Tuhin 2014).
Firms are interested in spending large sums of money on CSR activities even if it is voluntary (Shirley et al. 2009). This starts with simple activities, for example, donation activities up to relatively expensive scientific studies. In CSR reports, firms report activities related to their responsibility to show the firm is not only concerned with business profitability but also social aspects (Shirley et al. 2009).
Apart from CSR, rapid development in the economic environment requires reforms in the income tax policy of the Inland Revenue Board (IRB) Malaysia (Takril & Sanusi 2014) implemented in accordance with the specifications of the Malaysian Income Tax Act 1967 which was revised in 1971. This aims to supervise and guide businesses and taxpayers to file tax returns tailored to current economic changes (Takril & Sanusi 2014). In the 2016 Malaysia Budget, the firm's income tax rate was reduced by 1% from 2015 to 2016. Among the factors that reduced the tax rate were to attract investors, capital mobility and the assumption that low tax rates encouraged more honest tax payments (Harari et al. 2013).
Based on the legal perspective, if a business plans to reduce the tax burden paid (Avi-Yonah 2008; Avi-Yonah 2009; Avi-Yonah 2014a; Avi-Yonah 2014b; Landry et al. 2013), one of the legitimate tax plans is through CSR. This is because CSR is a tax incentive (Wood 2013) given by the government to firms to encourage some desired behavior. Tax incentives are the amount of gross profit less tax (Yusoff et al. 2016) or tax deduction given by deducting the cost of expenses from the gross income of taxpayers (Wood 2013).
1.2 Problem Statement
The issue of CSR is inevitable with tax issues because spending on CSR is effective against tax reduction and can be used in tax planning activities (Huseynov & Klamm 2012; Ylönen
& Laine 2015). Firm managers can plan to reduce tax payments from business profits by performing CSR activities (Cheng & Lin 2014; Dowling 2014). This was agreed by Wood (2013) who stated that due to tax deductions for CSR expenses, most firms showed an increase in the percentage of implementing CSR voluntarily.
The study of the relationship between the allocation of CSR and tax planning is somewhat neglected (Hanlon & Heitzman 2010) although CSR information reporting has raised the debate on whether it should be seen as a corporate tax planning issue (Ylönen & Laine 2015;
Dowling 2014). According to Wood (2013), the corporate tax deduction for CSR expenditure needs to be emphasized because if the deduction is not monitored, it will reduce the country's revenue.
To the best of the researcher’s knowledge, previous studies have focused on developed countries and are very poorly implemented in developing countries such as Asian countries, especially in Malaysia to assess the relationship between total allocation of CSR and its impact on tax planning. Yet the extent to which their study results can be linked in other countries has not been explored.
1.3 Research Question and Objective
The study question raised, does the total allocation of CSR affect tax planning? Thus, this study aims to evaluate the relationship between total of allocation of CSR and its impact on
2. Literature Review
Various terms have been used to refer to CSR activities such as CSR reports, sustainability reports, or ‘a triple bottom line report’ (Rosli et al. 2015). Guthrie & Mathews (1985) define the allocation of CSR as the provision of financial and non-financial information related to organizations that interact socially and environmentally. In Malaysia, Allocation of CSR is reported voluntarily (Shirley et al. 2009). However, in India, CSR is reported to be mandatory, i.e. 2% of the profit in each financial year of business must be contributed to CSR expenses (Mukherjee & Chaturvedi 2013).
Information on CSR activities performed has been studied in Malaysia (for example, May Yee 2014; Shirley et al. 2009; Hamid & Atan 2011; Anas et al. 2015). In Malaysia, most empirical studies use firms listed on Bursa Malaysia as a sample of studies (for example, Shirley et al. 2009; May Yee 2014; Hamid & Atan 2011; Anas et al. 2015). Most firms disclose CSR in their annual reports in the Chairman's statement section (55%) (Ahmad et al.
2003), operational evaluation (44%) (Ahmad et al. 2003), and specific sections on CSR statements (Ahmad et al. 2003); Anas et al. 2015).
Most of the information related to CSR dimensions revealed by firms in Malaysia, the majority of firms are focused on development exposure and community-service involvement (Shirley et al. 2009; May Yee 2014; Hamid & Atan 2011; Anas et al. 2015), and the environment (Anas et al. 2015; May Yee 2014). The CSR information is disclosed either in financial or non-financial activities proving that the firm is responsible for not only reporting accountability in financial performance but also social performance in society, market, workplace, and environment that can strengthen ethical and social involvement in balancing socio-economic aspects of the firm.
In addition to CSR, in recent decades, tax planning has become increasingly common in the business world (Ylönen & Laine 2015). This is because from an accounting perspective, taxes are considered as one of the business costs that need to be minimized to increase profits as well as maximize shareholder wealth (Groen 2014; Vintilă et al. 2012; Landry et al. 2013).
There are two categories of tax planning; 1) legal action or; 2) an illegal action (Takril &
Sanusi 2014; Wang 2016). McBarnet (2004) suggests firms can choose in terms of (a) voluntary tax compliance, referring to the willingness of taxpayers to pay taxes without complaining; (b) compulsory compliance with taxes, depicting taxpayers who are willing to pay taxes but not voluntarily, and (c) reduce taxes by taking full advantage of the relaxation of legal provisions consisting of activities that can reduce legally valid taxes- invite. Besides, they can also choose to disobey, which is to describe non-compliant taxpayers to pay taxes (McBarnet 2004).
In a previous study, studies related to tax planning focused on multinational firms in developed countries (e.g., the US and Australia). Large-scale multinational firms operating in various countries, are actively involved in tax planning (Brooks et al. 2015; Dowling 2014;
Thomson Reuters 2016) to reduce their tax liabilities carried out either legally or illegally in tax law.
Instead, this study will focus on how allocation of CSR affects tax planning. This is because CSR is one of the activities encouraged by the government as well as tax incentives. This tax
incentive can be used as a strategy to reduce taxes because it is a tax deduction given by deducting the cost of expenses from the gross income of taxpayers (Wood 2013).
In previous studies that evaluated the relationship between allocation of CSR and corporate tax planning, the study focused on tax-free areas (e.g., Preuss, 2010); specific countries such as the US and Australia (for example, Huseynov & Klamm 2012; Hoi et al. 2013; Lanis &
Richardson 2012, 2015); or specific firms such as multinational firms (Ylönen & Laine 2015).
In general, there are various study findings on the relationship between allocation of CSR and tax planning. Studies linking positive relationships found: (1) firms that do less CSR (Huseynov & Klamm 2012); (2) socially irresponsible firms (Hoi et al. 2013); (3) aggressive tax planning firms (Lanis & Richardson 2012b); and (4), firms operating in tax protection areas (Preuss 2012) higher tax planning. This proves less responsible firms are more involved in tax planning. Because of the lower the firm’s CSR, the higher the tax planning firm.
On the other hand, there are studies highlighting the negative and significant relationship between allocation of CSR and tax planning. First, listed public firms that have charitable foundations (Wang 2016). This proves that firms are less responsible for tax planning. This is because the higher the firm’s CSR performance, the lower the tax planning firm (Lanis &
Richardson 2012a; 2015).
However, there are also studies featuring different relationships; positive or negative and significant between allocation of CSR and tax planning based on the category of socially responsible firms. First, there are positive relationships (e.g., van Renselaar 2016; Landry et al. 2013), and second, there are negative relationships (Lanis & Richardson 2015). This proves that socially responsible firms are involved or not involved in tax planning.
Meanwhile, there are some studies showing no relationship between variables. Among them, the results of the study of Vintilă et al. (2012) found no relationship between CSR and fiscal planning.
Based on a study focused on specific CSR dimensions, Lanis & Richardson (2012a) showed that there is a negative and significant relationship between allocation of CSR and tax planning. Laguir et al. (2015) proved (1) there is a negative relationship between the level of social dimensions of CSR and aggressive tax planning actions; and (2) there is a positive relationship between the level of CSR economic dimensions and aggressive tax planning actions. This indicates that the higher / lower the CSR performance of the firm, the lower / higher the tax planning firm.
3. Research Methodology
This study uses secondary data in collecting information related to the total allocation of CSR and corporate tax payment of each firm. This study focuses on the annual reports of public listed firms from the Main Market of Bursa Malaysia for tax payments for 2015 and 2016 for tax planning representing dependent variables and evaluating the total allocation of CSR representing independent variables. The justification for the 2015 and 2016 elections is because it is the latest data owned by public firms listed on Bursa Malaysia during the data collection process. In addition, the study's consideration of the study period is based on the corporate income tax rate which was reduced to 24% in 2015 from 25% in 2014 and
remained the same throughout the study period (2015-2016). Stability in this corporate income tax rate actually helps to obtain better results as a result of the study findings.
Specifically, descriptive information on tax planning is taken from financial information taken from the Statement of Financial Position and the Cash Flow Statement. This study also focuses on the chairman's statement and corporate activities division (Ahmad et al. 2003) as well as operational evaluation to evaluate allocation of CSR (Ahmad et al. 2003; Anas et al.
2015); the board member profile section (top executive organization chart and biodata) and the Shareholder Analysis section to assess family firm ownership in annual reports throughout the review period.
3.1 Sampling Methods
Based on the questions and objectives of the study, the selection of firms for this study is a public listed firm from the Main Market of Bursa Malaysia which is a market platform for large funded firms in Malaysia (Sherman 2015). In total, the population of listed public firms was 734 firms from various business sectors on Bursa Malaysia in 2015 and 2016.
A total of 202 sample firms were taken from the population of public firms listed on Bursa Malaysia for a period of two years (2015-2016) based on the information in the table introduced by Cohen et al. (2008). Cohen et al. (2008) took into account sampling errors, significant levels and confidence levels in the correlation coefficient table for sample determination.
The firm's annual report is downloaded from Bursa Malaysia to obtain data on financial figures and total allocation of CSRs. Data on the total allocation of CSR is taken from the chairman's statement section and corporate activities (Ahmad et al. 2003) as well as operational evaluations (Ahmad et al. 2003; Anas et al. 2015) involving financial figures allocated for firm CSR.
3.2 Variable Measurement
3.2.1 Dependent Variable
Tax planning is used as a dependent variable that is measured using two (2) measurement methods, namely the effective rate of tax and the difference between tax books. The basic assumption underlying the effective measurement of tax rates and differences in these tax books is to detect cross-sectional differences in income planning (De Simone et al. 2015) and with the assumption that managers are driven by tax planning to reduce taxable income (Lee et al. 2015).
The first method of tax planning which is Tax effective rate is the most widely used method by academics in tax planning study (Kvas & Mumel; 2017). This method is widely used in studies related to the relationship between the allocation of CSR and tax planning (e.g., Huseynov & Klamm 2012).
Generally, tax planning firms have lowered tax effective rates, and at the same time, firms will maintain pre-tax income annually (Lanis & Richardson 2012b; Laguir et al. 2015).
According to previous studies (e.g., De Simone et al. 2015), this study excludes firms that have total negative tax expenses and negative pre-tax income. This aims to get the best results in tracking tax planning for the firms selected in this study.
The second method of measuring tax planning is Tax-book differences. There are several studies using tax-book differences as a measure of tax planning (e.g., Liao & Fu 2015; Hoi et al. 2013; Steijvers & Niskanen 2011; Martinez & Ramalho 2014).
Like the Tax effective rate, the measurement of Tax-book differences can show positive or negative values and can exceed one. Total tax-book differences are used as tax planning proxies, assuming that firm managers will report lower taxable income and higher pre-tax income (Hanlon & Heitzman 2010; Lee et al. 2015).
Tax planning studies are important in the business context in Malaysia given the nature of family firm ownership which is less likely to report income, and at the same time, manipulate taxable income (Salihu et al. 2015). Hanlon & Heitzman (2010) argue that tax planning methods use Tax effective rate and Tax-book differences that can both show the real relationship between firm earnings before tax and tax expenses in the current year. Based on previous studies, firms that do tax planning will report lower tax effective rates and higher Tax-book differences than other firms.
3.2.2 Independent Variable
The independent variable in this study was Allocation of CSRs. For the allocation of CSR, the study applied the CSR framework of Bursa Malaysia (Bursa Malaysia, 2006) (e.g., Ahmad et al. 2003; Sumiani et al. 2007; Shirley et al. 2009; Anas et al. 2015; Rosli et al.
2016).
To evaluate the relationship between the allocation of CSR that affects tax planning, this study examines all annual reports that report total allocation of CSRs. This is based on quantitative information (QUAN) only in the CSR Item Category and Score in the Bursa Malaysia CSR framework. To identify the allocation of CSR in this study, the total allocation of CSR is disclosed in financial form in the analysis of the firm's annual report content.
3.2.3 Control Variables
In the regression model of this study as well, there are several control variables that influence firm tax planning. There are four control variables namely size, profit, leverage and capital intensity.
Based on the above explanation, the following is a summary of the measurement for the variables used in this study:
Table 1: Summary of Variables Measurement
Variable Measurement
Dependent variable
Tax effective rate Tax effective rate 1:
Total current tax expenses ÷ Net income before current tax Tax effective rate 2:
Total current tax expenses ÷ Total Operating Cash Flow Expenditure
Tax-book differences Gross profit - (Firm tax expense ÷ Nominal income tax rate)
Independent Variable
Allocation of CSR CSR index based on quantitative (financial) information Control Variables
Firm size The natural log value of property, plant and equipment (plant, property and equipment-PPE) ÷ total assets
Profit Return on assets ÷ total assets
Leverage Long-term liability ÷ total assets
Capital Intensity Total fixed assets ÷ total assets
4. Discussion and Conclusion
4.1 Overall analysis for year 2015 and 2016
Based on Table 4.1 below, it shows the overall sample of Tax effective rate and Tax- book differences. The ANOVA test showed that the overall Tax effective rate and Tax- book differences showed significant on allocation of CSR for the years 2015 and 2016 [F (5,194) = 13.912 p <0.05]. For multiple regression tests, the profit and leverage show a significant relationship with the Tax effective rate and Tax-book differences.
Profit and leverage explain 51.4% of the Tax effective rate and Tax-book differences.
The value of R2 = 0.264 indicates that a 26.4% change in Tax effective rate and Tax- book differences is due to changes in profit and leverage. This means that the factors that influence profit and leverage are the main factors that contribute to the Tax effective rate and Tax-book differences. The results also show that standardized beta value 5.214 shows very significant profit and greatly affects the Tax effective rate and Tax-book differences and followed by leverage shows standardized beta is -5.085.
Table 5.1: Overall Analysis For Year 2015 and 2016
TER1 i + TER2 i + BTD i = β 0 + β1 CSRit + β2 firm size it + β3 profit it + β4 leverage it + β5 capital it + εit
Unstandardized
Coefficients
Standardized
Coefficients
B SE B T Sig
Constant 0.534 0.544 0.98 0.328
CSR 0.308 0.512 0.04 0.601 0.548
Firm size 0.02 0.034 0.04 0.58 0.562
Profit 0.708 0.122 1.992 5.785 0
Leverage -0.301 0.053 -1.966 -5.718 0
Capital intensity 0.124 0.074 0.116 1.662 0.098
R=0.396, R2=0.157, Adjusted R2=0.135 F-statistic=7.203 p-value=0.000
4.2 Comparison Analysis Between Year 2015 and 2016
Based on Table 4.2 below, it shows the overall sample of comparison of Tax effective rate and Tax-book differences. The ANOVA test showed that the overall Tax effective rate and Tax-book differences showed significant on allocation of CSR between the years 2015 and 2016 [F (5,194) = 5.804 p <0.05]. For multiple regression tests, the profit and leverage show a significant relationship with the Tax effective rate and Tax-book differences. Profit and leverage explain 36.1% of the Tax effective rate and Tax-book differences. The value of R2 = 0.130 indicates that the 13% change in Tax effective rate and Tax-book differences is due to changes in profit and leverage. This means that the factors that influence profit and leverage are the main factors that contribute to the Tax effective rate and Tax-book differences. The results also show that standardized beta 2.626 shows very significant profit and greatly affects the Tax effective rate and Tax-book differences and followed by leverage shows standardized beta is -3.690.
Table 4.2: Comparison Analysis Between Year 2015 and 2016
TER1 i + TER2 i + BTD i = β 0 + β1 CSRit + β2 firm size it + β3 profit it + β4 leverage it + β5 capital it + εit
Unstandardized
Coefficients
Standardized
Coefficients
B SE B T Sig
Constant -0.092 0.026 -3.543 0
CSR -0.190 0.719 -0.018 -0.264 0.792
Firm size 0.103 0.06 0.121 1.722 0.087
Profit 0.514 0.126 2.626 4.082 0.000
Leverage -0.211 0.057 -3.690 -3.690 0.000
Capital intensity -0.246 0.334 -0.050 -0.738 0.461
R=0.361, R2=0.130, Adjusted R2=0.108 F-statistic=5.804 p-value=0.000
Same as previous study, this study proved that there are; 1) socially responsible firms allocating CSR is more tax planning (Sikka 2010; Landry et al. 2013; van Renselaar 2016); 2) socially irresponsible firms allocating CSR are more tax planning (Hoi et al. 2013) and; 3) tax planning firms aggressively allocate firms CSRs than firms less aggressive tax planning firms (Lanis & Richardson 2012b). The above evidence explains firms allocating CSR to plan how much tax, i.e. the firm calculates how much minimum income needs to be reported to the tax authorities, taking into account the firm’s income level and tax rate (Noguera et al. 2014). At the same time, socially responsible firms allocate more CSR (Lanis & Richardson 2012a;
2015) and more tax planning (Sikka 2010; Preuss 2012). Therefore, based on the findings of the study, the discussion on allocation of CSR and its impact on tax planning meets the stated objective which allocation of CSR has a positive relationship with tax planning.
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