Arguments favouring Tax Deductions against Corporate Social Responsibility expenditure incurred by Multinational Enterprises

Abstract:

Why are the local taxation laws prevalent in the Host Country viewed as not being
harmoniously constructed in support of the Corporate Social Responsibility (CSR) policies by
the Managers of Multinational Enterprises (MNES)? Could it postulated that the Governments
functioning the host country by allowing deductions against CSR expenditures could invoke
an impetus towards the strategic alignment towards International Taxation Laws by
Multinational Enterprises (MNES) while demonstrating a heightened degree of transparency
which would qualify as industry best practices in declaring the CSR expenditures incurred as
a function of the tax avoidance endeavour by the MNE. This kind of amalgamation of
transparent practices in the realm of seeking tax deductions for an MNE’s CSR expenditure
could also help minimise conflicts of perception before the proponents who interchangeably
refer to Tax Evasion. Therefore, it could be estimated that global CSR laws could be
harmoniously constructed vis-à-vis local taxation laws in their interpretation by MNEs if
encouraged by the governments of the host country.

Keywords: Corporate Taxation; Tax Deductions; Comparative Taxation Laws; Multinational Enterprises
(MNEs).

Introduction:

Bender and Broekhuijsen (2015) opine that tax burdens of MNEs may be minimised within the
limits that have been set by the law. Payment of taxes have long been considered a business
expense eligible for reducing, just like other business expenses (taxation as ‘taking from’).

More recently, however, MNEs have come to realise that paying taxes may also be
seen as an element of being a socially responsible participant in society
(“taxation as contributing to”), and that this may mean that just paying all
legally obliged taxes is not enough.

Non-Governmental Organisations (NGOs) have helped to highlight and scrutinise
the tax strategies employed by MNEs on the political and social agenda.

Tax avoidance is increasingly believed to be detrimental to society because it
signals a reduction of revenues generated for governments, resulting in a
shifting of the tax burden to individuals and enterprises operating domestically.

Moreover, in many countries the government’s contribution to the widespread
existence of tax evasion by MNEs has been included in debates involving the
OECD and the European Union.

The rest of this paper has been organised to discuss the justification for the
study, literature review, research questions, and future directions.

Justification

The contextual factors that support the main objective of studying literature
in relation to existing laws and managerial accounting practices regarding CSR
expenditure and Tax Deductions are accurately identified in the research
conducted by Knuutinen (2014).

Literature Review

Scarpa and Signori (2023) in their literature review have enunciated that thinking of tax as an
area of corporate discretion would challenges the assumption that governments were the only
actors responsible for achieving a fair tax system and extends this responsibility to companies
(Scarpa & Signori, 2023).

Scarpa and Signori (2023) found that an interaction pertaining to expenditure towards CSR
activities and corporate taxation has been receiving increased attention. Accordingly, 63.25%
articles were published in the period 2017–2020. This growth was probably attributed to the
increased attention to corporate tax strategies and their effects on society from the media,
NGOs, public opinion and national and international institutions (Scarpa & Signori, 2023).

Scarpa and Signori (2023) concluded that contradictory results emerged confirming that
corporations perceived the duty to pay tax differently and these varying perceptions shape
different moral obligations and, consequently, different behaviours (Scarpa & Signori, 2023).

Avi-Yonah (2009) argues that although some managers see CSR expenditure as an unfair
burden on shareholders, the government can nevertheless ethically promote CSR by offering
tax incentives to firms (Avi-Yonah, 2009).

Avi-Yonhah (2009) posited that certain corporate CSR initiatives are more effectively carried
out by the private sector rather than the government. In light of this, it is seen as acceptable for
the government to forgo collecting specific tax amounts as a means to encourage private sector
involvement in these activities. This is equally valid to the government imposing taxes and to
make use of its purchasing power (funded by taxes) to incentivize firms to participate in
corporate social responsibility, a practice that many governments have adopted in recent times.
(Avi-Yonah, 2009).

According to Avi-Yonhah (2009), differentiating between the CSR functions that can directly
contribute to increased shareholder profits and the CSR activities that the state can encourage
corporations to engage in. (Avi-Yonah, 2009).

From this aggregate perspective, it becomes clear that the state’s utilization of tax as a
regulatory tool aims to align its interests with those of the shareholders. This alignment is
achieved by offering increased profits to shareholders through lower taxes for corporations that
engage in CSR activities. (Avi-Yonah, 2009).

According to the study conducted by Song et al. (2024), their mediation analysis has suggested
that a reduction in profitability influenced the firms’ decision to disclose CSR. Moreover, Song
et al. (2024) detected a reduction of economic benefits for corruption-related firms due to the
loss of political connections.

The results from the study conducted by Song et al. (2024) would imply that non State Owned
Enterprises (nonSOEs) voluntarily chose to declare in their CSR reports in lieu of building
political legitimacy (Song et al., 2024).

According to Muller and Kolk (2012), MNEs in developing countries use their multinational
status to evade taxes owed to host governments. (Muller & Kolk, 2012).

In their study, Muller and Kolk (2012) found that in India MNEs paid higher effective tax rates
compared to local firms. Additionally, MNE subsidiaries that were recognized for their CSR
initiatives paid more taxes than those that were less known for CSR. (Muller & Kolk, 2012).

According to Muller and Kolk (2012), a significant concern for MNEs which function in the
countries which are developing remains in the effect they have on the local economy.

Surprisingly, Song et al. (2024) had observed that despite substantial research on the
motivations for establishing political connections and the consequences of losing them, little
attention has been paid to how a firm reacted after losing its political connections to mitigate
adverse impacts.

To fill this gap in the literature, Song et al. (2024) in their study examined whether the CSR
disclosure was a strategic action that could serve a firms’ political agenda.

Specifically, basing upon the previous literature Song et al. (2024) were expecting to detect
that firms would strategically disclose CSR reports after losing connections with government
officials in order to build political legitimacy.

Hence, it was proposed by Song et al. (2024) that if firms were intent upon building political
legitimacy, that by merely disclosing in their reports which was a far less costly endeavour and
it proved to be more than efficient.

Considering the significant influence that multinational corporations have over taxation in
developing countries, especially in places with limited enforcement, it becomes evident that
this issue is closely tied to corporate social responsibility. This is because taxes play a crucial role in enabling governments of developing countries to offer essential public services and
resources. (Muller & Kolk, 2012, p. 3).

Interestingly, Song et al. (2024, p. 3) in their study instead of examining an alternative strategy
for maintaining market competitiveness by increasing investments, chose to focus on the efforts
of firms towards the building of political legitimacy by strategically responding to government
signals. Secondly, the study by Song et al. (2024, p. 4) has contributed towards the growing
research being conducted on corporate political strategies.

According to Muller and Kolk (2012), the existence of varying norms and regulations in
different countries has created a dearth of clarity regarding which laws ought to be applicable
under specific circumstances.

In their analysis, Muller and Kolk (2012) posed two important questions: Firstly, did
multinational enterprise (MNE) subsidiaries in India possess a considerable enhancement in
their Effective Tax Rate (ETR) as compared to local firms? If that is the case, it is possible that
they are not utilising their multinational status as a means to avoid paying taxes.

Comparatively, Song et al. (2024, p. 16) explored the channels through which the loss of
connections of a political nature affected CSR disclosure decisions.

Do multinational enterprises (MNEs) with a reputation for CSR have higher effective tax rates
in India compared to MNEs with a lesser-known CSR record? If this is the case, multinational
enterprises (MNEs) may view taxation as an expansion of their comprehensive CSR strategy.
The reference for this information is Muller and Kolk (2012), page 4.

In their study, Muller and Kolk (2012) found that there was variation in the implementation
and enforcement of legal frameworks. Developing economies faced larger challenges
compared to developed countries due to weaker institutional structures and administrative
capabilities. Therefore, the mere presence of laws did not guarantee their enforcement or
adherence. (Muller & Kolk, 2012, p. 7).

Recently, the study by Song et al. (2024, p. 16) showed that firms were inclined to comply with
the governmental signals and build political legitimacy to continually enjoy their preferred
treatment and associated resources.

In their analysis of the limitations and potential areas for future research, Muller and Kolk
(2012) acknowledged that India, despite its significance, may not fit the mould of a typical developing country. Factors such as its size, institutional development, and relative skill levels
set it apart. (Muller & Kolk, 2012).

Furthermore, it was deemed essential to conduct more comprehensive analyses at both the
subsidiary and sector levels in order to delve deeper into the effects being examined and to
explore alternative explanations for the observed results. (Muller & Kolk, 2012).

Jenkins and Newell (2013) found that there was a notable lack of focus on tax evasion as a
corporate social responsibility issue for transnational corporations operating in the South,
despite the budding recognition of taxation’s significance in helping to fund the state and to
address poverty. This is surprising, especially considering that some of these companies
consider themselves leaders in CSR. (Jenkins & Newell, 2013).
In their research, Jenkins and Newell (2013) found that the increase in CSR was driven by a
compulsion to address concerns about the potential exploitation by multinational corporations
in developing countries. This led to a rise in the number of codes of corporate conduct and CSR
reports (Jenkins & Newell, 2013).

The paper by Jenkins and Newell (2013) examines an aspect that has received little attention
in the CSR agenda: the tax payments and tax avoidance practices of companies. This is in spite
of a series of recent scandals that have affected prominent corporations that position themselves
as champions of CSR matters. (Jenkins & Newell, 2013).

Jenkins and Newell (2013), when examining past practices and contrasting it to the present
decade, they noted that the challenges of obtaining tax revenues have increased due to
globalization. (Jenkins & Newell, 2013).

The enhanced mobility of capital and expansion of global operations of major companies has
created fresh opportunities for tax avoidance as well as evasion. (Jenkins & Newell, 2013).
In their study, Jenkins and Newell (2013) highlighted the challenge of generating sufficient tax
revenues. They pointed out that the informal sector influences this issue, which is inherently
difficult to tax, as well as the deliberate tax evasion and avoidance practices employed by
corporations and wealthy individuals who can manipulate profits and maintain assets abroad.
(Jenkins & Newell, 2013).

In their study, Jenkins and Newell (2013) emphasised taxation as a crucial component between
citizens and the state’s interrelationship. They highlighted the obligation of citizens to contribute to the functioning of society through taxes. Claiming ‘corporate citizenship’ implies
a responsibility to fulfil tax obligations in the jurisdiction where the company operates. (Jenkins
& Newell, 2013, p. 387).

Jenkins and Newell (2013), have often argued by those who support tax avoidance (as opposed
to illegal tax evasion) that companies and individuals are not obligated to pay more than the
minimum tax required by law. They believe that it is a legitimate business practice to organise
financial matters in a way that minimises tax payments within legal boundaries. It is true that
a corporation may be seen as acting irresponsibly if it pays more tax than legally required,
considering its obligations to shareholders. (Jenkins & Newell, 2013).

Accordingly Jenkins and Newell (2013), in developing countries with weak laws and low
standards, simply complying with regulations is not enough to demonstrate a firm commitment
towards CSR. (Jenkins & Newell, 2013).

In their study, Jenkins and Newell (2013) delve into the question of what constitutes a
responsible tax strategy. Concluded that “the utilisation of transfer pricing has been a
significant method for multinational corporations to decrease their tax expenses.” (Jenkins &
Newell, 2013).

As stated by Jenkins and Newell (2013), it is important to adopt arm’s length pricing to govern
all transactions amongst related parties, as advised by the OECD Guidelines on Multinational
Enterprises. (Jenkins & Newell, 2013).

Jenkins and Newell (2013) noted that determining arm’s length prices for all transactions may
be challenging, but the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and
Tax Administrations would periodically provide updated guidelines to guide this process.
(Jenkins & Newell, 2013).

In a study conducted by Jenkins and Newell (2013), they highlighted the existence of a method
that allows companies to circumvent taxes. This method involves the establishment of intricate
corporate structures and the strategic allocation of assets within these structures. (Jenkins &
Newell, 2013).

Jenkins and Newell (2013) believed that it is crucial to refrain from creating artificial structures
that have no connection to actual business transactions and are primarily designed to minimize
the corporation’s tax obligations. (Jenkins & Newell, 2013)

Therefore, Jenkins and Newell (2013) concluded that refraining from utilizing tax havens in
their operations would demonstrate a responsible tax policy. (Jenkins & Newell, 2013).
In their insightful analysis, Jenkins and Newell (2013) emphasised the importance of a
responsible tax strategy. They highlighted the need for companies to not only avoid tax
avoidance but also prioritise transparency (Jenkins & Newell, 2013).

Jenkins and Newell (2013) observed that companies which emphasised social responsibility
should take the initiative in implementing country-by-country reporting, eliminating transfer
price manipulation, and avoiding the use of tax havens. They argue that waiting for
governments and international organisations to act is not enough. (Jenkins & Newell, 2013).
Quite recently, Xu et al. (2022) have postulated that paying taxes to support the societies in
which they operate was both a legal and ethical responsibility of business.

The results obtained from the study conducted by Xu et al. (2022) are consistent with the notion
that CSR reporting represents an attempt to overcome legitimacy concerns arising from tax
avoidance.

Their findings indicated that tax avoidance and CSR reporting were alternative means of
establishing legitimacy, rather than complementary reflections of an organisational culture that
valued (or devalued) CSR (Xu et al., 2022).

Xu et al. (2022) felt that an alternative perspective (‘corporate culture’) could suggest that
companies committed to CSR might pay their fair share of taxes and present transparent CSR
reporting owing to their commitment to CSR (Xu et al., 2022).

Hence, Xu et al. (2022) were prone to believe that the legitimacy gap perspective was consistent
with the use of CSR to close a legitimacy gap that may have arisen when a company was
perceived as not paying its fair share of taxes, thus suggesting a positive relationship between
corporate tax avoidance and transparency of CSR reporting (Xu et al., 2022).

The key takeaways from the study by Xu et al. (2022) and the consequent results had indicated
that companies engaged in tax avoidance might be inclined to view tax avoidance more through
an economic lens, as they appeared to be aware of the potential effects of tax avoidance on
public perceptions. Therefore, if CSR reporting were more common and standardised, the
opportunity to distract stakeholders would be lessened, and companies might be more likely to pay their fair share of taxes as the opportunity to otherwise overcome legitimacy concerns
would become reduced (Xu et al., 2022).

In Narotzki’s (2016) thought-provoking analysis, a vivid depiction is presented of a
hypothetical scenario in which a company like Microsoft fulfills its tax obligations. This
imaginative exploration highlights the significant consequences such a responsible action
would have on the state’s capacity to allocate more resources towards education, healthcare,
and public transportation. In a comparison made by Narotzki (2016), an alternative reality is
explored where Microsoft achieves great success and subsequently fills the gap through
corporate social responsibility activities. As a result, not only does Microsoft thrive, but the
State also has more funds to invest in its residents and infrastructure.

In examining potential methods of “Creating the Standard,” Narotzki’s (2016) paper proposed
that addressing the matter and building upon the organic progression required the establishment
of a fresh standard. To achieve this goal, corporations would be required to obtain certifications
at various levels of CSR activity, with a strong emphasis on taxation as the primary, if not the
sole, focus.

In a forward-looking perspective, Narotzki (2016) has expressed the view that in the global
economy, companies are engaged in constant competition to maximize returns for their
shareholders and achieve success. In a paper by Narotzki (2016), a suggestion was made to
establish a new standard of CSR that includes responsible tax practices, in response to an
emergent trend within CSR.

In a forward-looking perspective, Narotzki (2016) has expressed the view that in the global
economy, companies are engaged in constant competition to maximize returns for their
shareholders and achieve success. In a paper by Narotzki (2016), a suggestion was made to
establish a new standard of CSR that includes responsible tax practices, in response to an
emergent trend within CSR.

By combining the CSR principles with efforts to minimise harmful tax competition, we can
establish a new global business standard. The individual would experience a reduction in
taxation, while corporations’ wealth would be redistributed to support local economies.
(Narotzki, 2016)

In close pursuit, the findings by Gillette and Stinson (2022) observed that while tax
minimization activities were important to financial performance of a firm, they were inherently
secondary towards the firm’s core competencies. As such, Gillette and Stinson (2022) proposed
that by encompassing the primary operations of the firm and its established track record of
behaviour, evaluated from a high-level, societal perspective (Gillette & Stinson, 2022).

nature of a company’s activities would alter how their tax behavior was interpreted.
Additionally, the findings by Gillette and Stinson (2022) offered psychological evidence as to
why companies should act in anticipation of investor reactions (Gillette & Stinson, 2022).

In recent times, Skibetto (2023) has highlighted the dual benefits of CSR. While the main
objective is to impact society and the environment positively, companies can also take
advantage of significant tax benefits. (Skibetto. 2023).

In a Case Study, Skibetto (2023) highlighted the concept by examining an Indian conglomerate,
which effectively utilises CSR to both achieve tax savings and make a substantial societal
impact.” (Skibetto. 2023).

According to Skibetto (2023), the CSR initiatives of the Indian conglomerate encompasses a
wide range of projects, such as healthcare, education, and sanitation. The company qualifies
for tax deductions and benefits under Section 80G due to its significant contributions to
charitable organisations. Through strategic allocation of their CSR initiatives, companies shall
be able to meet their social responsibility criteria while also benefiting from tax savings.
(Skibetto. 2023).

According to Skibetto (2023), CSR activities provide a mutually beneficial situation for
enterprises that want to make a constructive contribution to society and also receive tax
advantages. (Skibetto. 2023).

Skibetto (2023) suggests that firms can maximise their tax savings and have a significant global
impact by matching their CSR programs within the regulations prevailing locally. The Tata
Group story exemplifies that deliberate and planned CSR investments can result in significant
financial advantages, thereby bolstering the idea that CSR would not just be a moral obligation
but also a shrewd economic choice. (Skibetto. 2023).

Research Questions:

From the focused literature review carried out in the previous section, the following questions
arise upon which the theme of research would invariably need to be directed towards:

Q1. Whether International Taxation Laws should recognize and allow deductions and tax
rebates to Multinational Enterprises (MNEs) against their expenditures on CSR contributions?

Q2. Whether global (CSR) Laws can be harmoniously constructed vis-à-vis local taxation laws
in their interpretation by Managers of MNEs?

Discussion:

From the context of Indian Taxation Laws, Singh (2019) has expressed that:

“The provisions of Section 135 of the Companies Act, 2013 mandates that: Every company
having net worth of rupees five hundred crores or more or turnover of rupees one thousand
crores or more or a net profit of five crore or more during any financial year shall ensure that
the Company spends, in every financial year, at least two percent of the average net profits of
the company made during the three immediately preceding financial years.” Singh (2019)

According to Singh (2019), it is commonly understood that corporate expenditures on CSR
efforts cannot be deducted from a company’s profits. The allocation of funds towards CSR was
to be regarded as the appropriation of profits as per Singh’s study in 2019

In his 2019 publication, Singh clearly states that the Central Government has added an
Explanation 2 to Section 37(1) of the Income Tax Act, 1961. This explanation declares that
any expenses incurred by a taxpayer on activities related to corporate social responsibility, as
defined in Section 135 of the Companies Act, 2013, will not be considered as business or
professional expenses.

Singh (2019) found that according to the Budget Memorandum, CSR expenditure is not
considered to be solely and imperatively towards the aim of conducting business. Allowing
these expenses to be tax deductible would result in the government subsidising approximately
one third of these expenses through tax expenditure.

Estimation to the Research Questions posited:

Scarpa and Signori (2023) in their literature review, which dealing with the aspect of
“Interconnections between the instrumental dimension and the components of corporate tax
responsibility (CTR), have commented that while a growing number of managers are
concerned about the reputational consequences of their firms’ tax behaviour, it seemed that tax
practices deemed irresponsible by companies did not pose any reputational threats. Hence, a
deeper analysis was still required. For example, scholars could explore under what conditions
media, NGOs and other stakeholders’ coverage and criticism over firms’ tax practices
negatively influence their reputation, as well as whether and how being a socially responsible
taxpayer (e.g. being transparent about tax) could enhance a firm’s reputation (Scarpa & Signori,
2023).

According to Scarpa and Signori (2023), corporate tax payments were not always conceived as
a relevant component of companies’ evaluation, or that evaluators exhibited different tax
preferences, or that they lacked access to enough information to judge firms’ tax affairs (Scarpa
& Signori, 2023).

In leading up the charge to garnering legitimacy signals, five of the leading MNEs have made
the following declarations in their respective Annual Reports which clearly express the need to
reinforce their legitimacy signals in light of the newly implemented model rules on global
minimum taxation (Pillar Two) published by the OECD. The relevant excerpts from the Annual
Reports have been reproduced verbatim for the sake of brevity and transparency.

According to the Volkswagen Financial Services AG (2023), the MNE in their Annual Report
have declared the following:

“The model rules on global minimum taxation (Pillar Two) published by the OECD have been
enacted or substantively enacted in certain countries where Volkswagen Financial Services AG
operates. In Germany, the legislation enters into force for the fiscal year of Volkswagen
Financial Services AG beginning on January 1, 2024. Volkswagen Financial Services AG falls
within the scope of the legislation that has been enacted or substantively enacted and has begun
to assess the potential risk to which Volkswagen Financial Services AG is exposed in relation
to the global minimum tax rate. The assessment of the potential risk from the minimum tax rate
is based on the latest available country-by-country reporting and annual financial statements
for the business entities of Volkswagen Financial Services AG. Based on the assessment, the
effective Pillar Two tax rates are higher than 15% in most of the countries in which Volkswagen Financial Services AG operates. There is, however, a small number of countries where the
transitional safe harbor exemption does not apply and the effective Pillar Two tax rate is below
15%. Volkswagen Financial Services AG does not expect any material Pillar Two income tax
risk in these countries.” (Volkswagen Financial Services AG, 2023)

According to the United States Securities And Exchange Commission (2023), the MNE
Alphabet Inc. in their Annual Report have declared the following:

“The OECD is coordinating negotiations among more than 140 countries with the goal of
achieving consensus around substantial changes to international tax policies, including the
implementation of a minimum global effective tax rate of 15%. While various countries have
implemented the legislation as of January 1, 2024, we do not expect a resulting material change
to our income tax provision for the 2024 fiscal year. As additional jurisdictions enact such
legislation, we expect our effective tax rate and cash tax payments could increase in future
years.” (United States Securities And Exchange Commission, 2023)

According to Källenius (2024), the MNE Mercedes-Benz Group in their Annual Report have
declared the following:

“In December 2021, the OECD published guidelines for a new global minimum tax framework
aimed at curbing base erosion and profit shifting (BEPS) by multinational corporations. EU
member states unanimously agreed in December 2022 to implement these rules in the form of
a directive (BEPS Pillar 2 regulations). As at the balance sheet date, this directive was
transposed into German law with the Act to Ensure Global Minimum Taxation for Groups of
Companies (Minimum Tax Act – MinStG) and is applicable to the Mercedes-Benz Group from
1 January 2024. As part of an analysis of possible effects on the Group, no countries were
identified as at the reporting date from which significant effects are to be expected with regard
to the possible payment of a minimum tax.” Källenius (2024)

According to Ricard (2023), the MNE Pernod Ricard in their Annual Report have declared the
following:

“OECD Pillar Two rules providing for a 15% minimum tax per jurisdiction for multinational
corporations have been adopted by the EU and should therefore apply as from 1 January 2024;
the European directive has been transposed into the French law in December 2023. Pernod
Ricard has applied the exception under IAS 12 amendment in relation to the accounting and
disclosure of deferred taxes related to Pillar Two, no deferred tax was booked in the interim consolidated financial statements at 31 December 2023 with respect to additional future income
tax.” (Ricard, 2023)

According to BMW Finance N.V. (2024), the MNE BMW Finance N.V. in their Annual Report
have declared the following:

“In May 2023, the IASB published International Tax Reform – Pillar Two Model Rules
(Amendments to IAS 12) which sets out a mandatory exemption to the accounting for deferred
taxes in conjunction with the global minimum taxation (Pillar Two). The amendments provide
for a temporary exemption from recognising deferred taxes resulting from the implementation
of the Pillar Two rules. The amendments also include disclosures in the notes to explain the
impact of the introduction of minimum taxation on affected entities. The exemption has
accordingly been applied by the Company. The introduction of the Pillar Two regulations is
not expected to have any significant impact on the Company.” (BMW Finance N.V, 2024).

Hence, the Research Question 1 can be answered in the affirmative with respect to the Indian
scenario in light of Indian legislation and thereby how the MNEs are treated in India.

However, with regards to Research Question 2, a harmonious construction of local Taxation
Laws in consonance with the signals of Legitimacy that would be imposed by industry best
practices prevalent among CSR leaders can be efficiently achieved by negotiating with the
proponents of tax authority functioning in the host state of the MNE.

Points of Contention:

In furtherance to the above referred estimation, the following grounds of contention therefore
need to be raised at a level that could transcend mere academic discourse and would thereby
placate the debate towards an authoritative discussion aimed at implementing positive change
in the field of Tax Deductions of qualifying CSR expenditure:

• Deductions allowed against the CSR expenditures at present are not strategically
  aligned towards International Taxation Laws by Multinational Enterprises (MNES);
• Whether Multinational Enterprises (MNEs) should benefit from the deductions and tax
  rebates available to them in off-setting their expenditures on CSR? ;
• Why are the local taxation laws prevalent in the Host Country viewed as not being
  harmoniously constructed in support of the CSR policies by the Managers of
  Multinational Enterprises (MNES)?

Conclusion:

The arguments presented in this paper align with the reasoning put forth by Gribnau (2015)
that corporate social responsibility (CSR) companies should go beyond a limited and rigid
interpretation of (tax) law. Instead, they should embrace a broader perspective that recognizes
tax as a set of rules based on principles that form the inherent moral framework of the legal
system. Hence, it is imperative for them to treat these principles with utmost seriousness. By
acknowledging ethical responsibilities that traverse further than the requirements of the law,
they should unquestionably acknowledge ethical responsibilities that are inherent in the law,
which should not be perceived merely as a set of regulations. Not paying significant business
taxes directly contradicts these principles. The question at hand is whether the legal system has
explicit standards for ethical behaviour that extend beyond the literal interpretation of the law
(Gribnau, 2015).

Future Research Lines:

Therefore, after having evaluated the Annual Reports of the leading Multinational Enterprises
(MNEs) wherein they have expressed that the recent implementation of the OECD model rules
on global minimum taxation (Pillar Two) could not be estimated in their most recent annual
reports.

While the leading MNES have clearly made statements which demonstrate that their firms
perceive a negative exposure to the newly implemented OECD model rules on global minimum
taxation which need to be read together with the Accounting Standards, the main criteria for
detecting the exposure remains the effective Pillar Two tax rates which are higher than 15% in
most of the countries in which these MNEs operate and while there could exist a small number
of countries where the transitional safe harbour exemption does not apply and the effective Pillar Two tax rate would be below 15%, this observation would clearly present as a prospective
line of future research wherein it could be explored as to how the signals of legitimacy are
being perceived in the practices of these MNEs while paying taxes.

Consequently, the CSR expenditure and its eventual disclosure by these MNEs would garner
the approval of the stakeholders in favour of building firm legitimacy signals and hence another
line of future research could involve exploring the impact of CSR expenditure by MNEs that
would enable better participation in policy building and the subsequent interpretation of tax
regulations that could favour leveraging CSR expenditure as deductions upon the applicable
corporate tax rate in countries where the rate of corporate taxes exceeded the newly
implemented global minimum tax rate of 15% without having to jeopardise any legitimacy
signals even though the respective MNE may be aggressively engaged in strategies of tax
planning.

Resultantly, the new data which would be presented in the upcoming Annual Reports and the
Sustainability Reports of the MNEs would in fact stand to demonstrate the desirability of
permitting CSR expenditure as a deductible upon the tax payable by the MNEs in order to
harmonise the global minimum taxation standards of 15% without losing any reputation that
could harm firm legitimacy signals.

References

Avi-Yonah, R. S. (2009). Taxation, corporate social responsibility and the business
enterprise. Social Science Research Network.

https://doi.org/10.2139/ssrn.1440884

Bender, T., & Broekhuijsen, D. (2015b). The Relationship between Corporate Social
Responsibility and International Tax Avoidance.
Social Science Research Network.

https://doi.org/10.2139/ssrn.2873611

Muller, A., & Kolk, A. (2012). Responsible tax as corporate social responsibility.
Business & Society, 54(4), 435–463.

https://doi.org/10.1177/0007650312449989

Song, S., Jun, A., Luo, T., & Ma, S. (2024). Political legitimacy and CSR reporting:
Evidence from non-SOEs in China.
Global Finance Journal, 100942.

https://doi.org/10.1016/j.gfj.2024.100942

Volkswagen Financial Services AG. (2023). Annual Report.

https://www.vwfs.com

United States Securities and Exchange Commission. (2023). FORM 10-K.

https://abc.xyz/assets