Tax Evasion, Corporate Social Responsibility and National Governance: A Country-Level Study

Abstract

This study uses a sample of 25 OECD countries to examine the association between CSR, national governance and tax evasion at the country level. The interaction between country-level governance and CSR relative to tax avoidance is also explored. The findings suggest that neither the ESG dimensions nor the overall CSR measure are significant determinants of tax evasion at the country level. In contrast, national governance quality is significantly and negatively related to tax evasion. Significant support is also found for the mediating effect of national governance on the association between CSR and tax evasion: in countries with weak national governance, CSR and country-level governance are substitutes; in countries with strong national governance, CSR reporting (in particular, environmental disclosures) seems to be used as a cosmetic and compensatory tool for firms to mitigate the reputational risk and public concern arising from tax evasion activities. The findings are theoretically and practically relevant as they underscore not only the importance of national governance in mitigating tax evasion but also the relevance of the mediating effect of national governance on the relationship between CSR and tax evasion. The evidence highlights the need for policymakers in countries with strong national governance to design new/strong anti-tax avoidance regulations.

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