The Effect of Corporate Social Responsibility and Audit Quality on Corporate Tax Aggressiveness

Abstract

This study investigates the effect of corporate social responsibility (CSR) and audit quality on corporate tax aggressiveness and ascertains how favourably audit quality may moderate the relationship between CSR and corporate tax aggressiveness using economic deterrence and legitimacy theories. The study employed 27 listed firms on the Ghana Stock Exchange from 2011 to 2020, and the hypothesised relationships of the study were tested using the fixed effect model. Results from the fixed effect model reveal that although entities engage in CSR activities to improve the welfare of the society, some of them have ulterior motives to use these CSR activities to engage in corporate tax aggressiveness thereby reducing the amount of tax payable to the state. This confirms that some of these entities trade off tax payments for CSR, proving that, on average, CSR and tax payment act as substitutes rather than as complements. The findings demonstrate that the extent to which entities use CSR to reduce the amount of tax payable to the tax authorities depends on management’s perception of the quality of the audit carried out on the financial affairs of the corporate entities. The results of this study make important contributions to the corporate tax aggressiveness discourse. Academically, the study provides some new insights into the tax aggressiveness discourse by investigating the moderating role of audit quality on the relationship between CSR and corporate tax aggressiveness. The results of the study are beneficial to tax authorities since it creates awareness about the role of audit quality in reducing the effect of CSR activities on corporate tax aggressiveness. This suggests that the tax authorities must design quality tax audits to report on the over-claiming of donations and other contributions made to society by taxpayers. This will demotivate the management of these taxpayers from engaging in tax aggressiveness in the future. Lastly, to improve the nation’s revenue, policymakers need to formulate and implement appropriate tax laws to curb the usage of CSR as a tax aggressiveness strategy to reduce the amount of tax payable to the state.