ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

ESG, Business Strategy, and Tax Avoidance

  • Yong－Ki Kim Department of Accounting and Taxation, College of Business Administration, Kyung Hee University
  • Sung Ook Park Kyung Hee University

Asian Tax Journal Vol. 23 No. 5 (2022), pp. 53-78

Abstract

Recently, the concept of ESG management has gradually established its place in consideration of the environment, social, and governance. In addition, for the sustainable management of a company, how managers set and promote business strategies is very important. Therefore, this study examines the effect of ESG ratings and business strategies on tax avoidance based on the ESG grade provided by the Corporate Governance Service and business strategies by Miles and Snow(1978, 2003) from 2015 to 2020. The results of this study are as follows. When examining the effect of the ESG grade on tax avoidance, we find that the comprehensive ESG grade and the social responsibility variable grade have a negative effect on tax avoidance. Since companies that actively perform ESG management operate in consideration of the environment, social, and governance, we discover that tax avoidance behavior is suppressed in consideration of reputation；as a result of analyzing subcategories, it was confirmed that the tax avoidance tendency is mainly related to the social responsibility index. Second, we find that the prospector business strategy has a positive effect on tax avoidance, and the defender business strategy has a negative effect on tax avoidance. As a result of additional analysis of companies with high level of additional financing, it was confirmed that prospector business strategies have a positive effect on tax avoidance. Third, looking at the effect of business strategy and ESG rating on tax avoidance, the interaction effect was not significant. When dividing ESG grades into high and low groups for analysis, companies of high ESG grades have a stronger tendency to avoid tax when they adopt prospector business strategies than those that do not. This implies that even though companies incorporate ESG management, the acceptance of the prospector business strategy tends to increase the level of tax avoidance. In contrast to prior research, this study finds a different relation between ESG rating and tax avoidance. In addition, through the categorization of level of additional financing, we analyze the effect of business strategy on tax avoidance. Using this finding, the government and regulatory agencies can estimate the tendency of tax avoidance. This also provides useful information for investors and interested parties in making decisions.

Keywords

  • ESG
  • business strategy
  • prospector
  • defender
  • tax avoidance

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