Does CSR affect tax avoidance? Moderating role of political connections in Bangladesh banking sector

Abstract

Purpose This study aims to investigate whether socially responsible businesses with corporate social expenditure are less prone to engaging in tax avoidance. The study also examines whether political connections moderate the association between corporate social responsibility (CSR) and tax avoidance. Design/methodology/approach The study uses ordinary least squares to analyse the panel data of all 30 listed banks on the Dhaka Stock Exchange covering 2012 to 2020. The study uses a set of alternative variables to check the robustness of the findings. Findings Confirming the corporate culture theory, the study findings indicate that the higher the firms’ CSR expenditure, the lower the tax avoidance. Contrarily, the moderating effect of political connection weakens the role of CSR in tax avoidance, implying that political relation makes the firms socially irresponsible. Besides, the findings document that firms with strong political connections are more likely to be tax aggressive by weakening the role of CSR. The findings imply that firms with weaker political connections are more socially responsible than firms with strong political ties. Research limitations/implications The study provides the bank management and regulatory bodies valuable insights to take necessary actions so that they can easily monitor whether the banks follow their instructions regarding CSR and tax payments. As the politicians make the firm socially irresponsible, the regulatory bodies and bank management should not keep them or their relatives on the board. Originality/value The study contributes to the CSR and tax avoidance literature considering the moderating role of political connections in Bangladesh banking sector.

Tax avoidance and tax evasion: current insights and future research directions from an emerging economy

“…Rashid et al. (2023) found that higher CSR expenditure can reduce corporate tax avoidance, but political ties reduce the contribution of CSR to tax evasion.…”

“…Sound governance incentivises taxpayers to correctly declare their taxable income (Murshed and Saadat, 2018) and leads to lower tax evasion in developing countries (Rashid et al. , 2023).…”

“…In contrast, interaction between audit committee meetings and audit committee independence positively affects corporate tax avoidance. Rashid et al (2023) found that higher CSR expenditure can reduce corporate tax avoidance, but political ties reduce the contribution of CSR to tax evasion. Businesses with political relations are more likely to be tax aggressive by downplaying CSR.…”

“…Citations Findings Demographic factors Education (Tishar and Hasanuzzaman, 2019) Tax education significantly influences tax non-compliance behaviour Education (Kazi Abdul and Khandaker Mursheda, 2023) Individual tax compliance amongst taxpayers whose primary sources of income are businesses, salaries and other sources is directly and significantly impacted by their educational background Administrative and policy factors Complexity and a Tax System, Corruption Rashid, 2020;Sarkar, 2022) The higher level of corruption and complexity in a tax system will result in lower fairness, audit probability and tax knowledge, leading to greater tax evasion Process of Assessment Rahman et al, 2018) Main cause of tax avoidance and tax evasion is dissatisfaction with the complex payment system, tax assessment system, lack of tax information and lack of counselling campaigns Tax Rate Kabir, 2020) Higher tax rate decreases wealth disclosure in the tax return and hence causes low tax collection, implying high tax avoidance and tax evasion National Board of Revenue (NBR) and Government Jewel et al (2020) Poor services of public administrators including NBR, corrupt government officials, lack of audit and transparency have worsened the situation Psychological factor Subjective Norm (Hasan et al, 2017) Subjective norm has a significant influence on tax compliance behaviour Morale (Kemme et al, 2020) Individuals in countries with low tax morale engage in tax evasion Ethics (Kazi Abdul and Khandaker Mursheda, 2023) Individual tax compliance amongst taxpayers whose primary sources of income are businesses, salaries and other sources is directly and significantly impacted by their ethical standards Negative Perceptions Negative perceptions of taxpayers to get service in return for paying tax can influence individuals to evade tax Government factor Government Initiatives for Improving Tax Collection Service (Abdul et al, 2021) The absence of a participatory policymaking process, lack of research into and reform of the tax system, short-term oriented and politically motivated tax policies, loopholes, anomalies and complexities of tax laws and policies are responsible for creating scope for tax evasion Quality Service (Jewel et al, 2020;Rana and Maskujjaman, 2017) Inefficient tax return system, lack of transparency in the tax collection system, harassment by the tax officer can influence the tax evasion and tax Source(s): Authors' own creation (Rashid et al, 2023) Higher CSR expenditure reduces tax avoidance, but political connection weakens its role in tax avoidance. Firms with strong political connections are more tax aggressive, whilst weaker connections are more socially responsible Audit Committee (AC) Attributes Islam and Hashim (2023) AC size has a negative insignificant association with cor...…”

“…In the 2021–2022 fiscal year, 68% of Bangladeshis do not pay income tax (Moazzem et al ., 2023). According to the State of Tax Justice 2020 report, Bangladesh loses more than $703m a year due to individual taxpayers and multinational firms evading taxes (Rashid et al ., 2023). Earlier studies claim that Bangladesh is facing the problem of losing tax revenue, mainly due to tax avoidance by firms, including multinational corporations (Ahmed, 2019; Islam and Hashim, 2020; Shakila, 2019).…”