10 1016@j Jcorpfin 2012 06 005

Journal of Corporate Finance 18 (2012) 804–827
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Journal of Corporate Finance

journal homepage: www.elsevier.com/locate/jcorpfin
Tax avoidance, tax management and corporate social responsibility

Fariz Huseynov, Bonnie K. Klamm ⁎
North Dakota State University, Department of Accounting, Finance and Information Systems, Fargo, ND 58108-6050, United States
a r t i c l e i n f o a b s t r a c t
Article history: This study examines the effect of three measures of corporate social responsibility (CSR) —
Received 7 April 2011 corporate governance, community and diversity on tax avoidance in firms that use auditor‐
Received in revised form 5 June 2012 provided tax services. This is one of the first studies, to our knowledge, to empirically relate tax
Accepted 7 June 2012
avoidance, tax management and CSR literature. By separating the strengths and concerns for
Available online 17 June 2012
each CSR measure, we are able to analyze the effects of a firm's negative and positive social
actions on tax avoidance. We find that the interaction of community concerns with tax
JEL classification: management fees positively affects both GAAP and Cash ETR, while the interaction of
G3
corporate governance strengths and diversity concerns with tax management fees negatively
H2
affects Cash ETR. Our results are similar when we use Excess ETR that is not explained by firm
specifics. We find additional evidence that CSR affects tax avoidance when we divide firms into
portfolios based on CSR levels. Our findings suggest that future studies on tax avoidance and
Keywords:
tax management should incorporate CSR.
Tax
Corporate governance
© 2012 Elsevier B.V. All rights reserved.
Corporate social responsibility
Tax management
Tax fees
1. Introduction
This study examines the effect of corporate social responsibility (CSR) on tax avoidance for firms that use auditor-provided tax
services. Literature on CSR (e.g. Carroll, 1991; Kiernan, 2005; Llewellyn, 2005; Wood, 1991) relates economic goals of businesses to
their social responsibilities, which includes acting ethically, contributing to economic development and improving the quality of life of
stakeholders (Holme and Watts, 2006). There is an overlap between CSR and corporate governance (Jamali et al., 2008) because firms
are held responsible not only to internal stakeholders, but also to external stakeholders and society in general, and there may be
conflicts between the stakeholders. One potential area of conflict among the stakeholders relates to taxation. A firm's strategy to
reduce or avoid its taxes may benefit shareholders, but at the expense of society (Sikka, 2010) given that taxes are used, in part, for
governmental infrastructure and social programs. Despite research in the separate areas of tax avoidance and CSR, a link between
these two areas is missing (Carroll and Joulfaian, 2005; Hanlon and Heitzman, 2010). Our study provides this link.
Research related to corporate tax avoidance is a matter of concern to tax authorities, shareholders, and the general public. Tax
authorities, concerned with tax revenues, are interested in evidence about firms that engage in tax aggressiveness, tax shelters, and
tax evasion. Shareholders, interested in whether the firm's management is fulfilling its responsibility of increasing shareholder
wealth, may, on the one hand, view management that “cheats the government” as a management that may also “cheat” its
shareholders. On the other hand, shareholders expect management to control expenses. The general public has an interest in knowing
whether a corporation is a good citizen and “paying its fair share” of taxes.1
⁎ Corresponding author. Tel.: + 1 701 231 8813; fax: + 1 701 231 6545.
E-mail addresses: fariz.huseynov@ndsu.edu (F. Huseynov), bonnie.klamm@ndsu.edu (B.K. Klamm).
1
For example, Citizens for Tax Justice, a public interest research and advocacy organization focusing on tax policies reported that 280 most profitable U.S.
corporations shelter half their profits from taxes (McIntyre et al., 2011).
0929-1199/$ – see front matter © 2012 Elsevier B.V. All rights reserved.
doi:10.1016/j.jcorpfin.2012.06.005
F. Huseynov, B.K. Klamm / Journal of Corporate Finance 18 (2012) 804–827 805
Research proposes that tax avoidance may be a tax-saving vehicle that reduces costs and increases shareholders' wealth (e.g., Graham
and Tucker, 2006; Hanlon and Heitzman, 2010; Hanlon and Slemrod, 2009; Robinson et al., 2010). Other studies suggest that firms that
use tax shelters are socially irresponsible (Erle, 2008; Schön, 2008). Under any of the above conditions, tax decisions are indicative of firm
characteristics or management behavior. Studies find associations between tax avoidance and executive compensation, ownership
structure and corporate governance (Desai and Dharmapala, 2006, 2009; Desai et al., 2007; Minnick and Noga, 2010), individual
executives (Armstrong et al., 2011) and tax planning, including the use of external tax services to optimize a firm's tax strategy
(Armstrong et al., 2011; Killgore et al., 2010). To capture tax avoidance, the commonly used measures are effective tax rates based on
income, GAAP ETR or cash payments, Cash ETR (Hanlon and Heitzman, 2010). GAAP ETR affects financial accounting earnings; Cash ETR
captures taxes paid and is affected by tax deferrals not by accruals. Dyreng et al. (2008) suggest that long-term Cash ETR is a preferred
measure of tax avoidance because of the possible fluctuation in annual rates.
Using predictions of theoretical studies (Crocker and Slemrod, 2005; Slemrod, 2004) and linking corporate governance to tax
avoidance, empirical studies test the relationship between compensation for executives and tax avoidance. Desai and Dharmapala
(2006) find negative relation between incentive compensation and tax sheltering, and Minnick and Noga (2010) find that executive
high pay-performance sensitivity is related to lower taxes, but other measures of compensation are not related. Tax director
compensation results in lower GAAP ETR, but does not affect Cash ETR (Armstrong et al., 2011). Compensation is only one proxy for
governance. Using other governance measures, e.g., the number of board members, the percentage of independent directors, and
corporate governance indexes, Minnick and Noga (2010) find that only staggered board membership is associated with higher effective
tax rates, which is contrary to the effect of other selected compensation measures. But, it is evident that the parties referenced above do
affect tax strategy.
The use of external tax services is another strategy that affects tax decisions. Studies show that the fees spent for tax services result
in a lower effective tax rate (Armstrong et al., 2011; Mills et al., 1998; Omer et al., 2006). If these tax services are provided by a firm's
auditor, the audit committee must approve the engagement (Sarbanes–Oxley Act, 2002). The audit committee approval was the
outcome of legislation; there was consideration of eliminating auditor-provided tax services due to the possibility of impairment of
auditor independence. But because tax services provide a benefit to the taxpayer by lowering costs, the legislation allows the use of
audit firms as tax service providers — unless the tax advice has no business purpose (i.e., tax shelters) (Purcell and Lifson, 2003).
Auditor-provided tax services possibly provide another benefit, knowledge spillover, which can lead to enhanced audit oversight and
quality (Lassila et al., 2010). Evidence indicates that the auditor-provided tax services are of benefit to the firm, i.e., there is not an
impairment of independence, and tax expense is more accurately stated (Gleason and Mills, 2011). We focus on firms that use
auditor-provided tax services and analyze the impact of tax management fees and CSR, including corporate governance, on effective
tax rates.
The tax avoidance literature uses various corporate governance proxies, but neglects CSR (Hancock, 2005; Hanlon and Heitzman,
2010). Given evidence of a relationship between corporate governance and CSR (Hancock, 2005; Ho, 2005; Jamali et al., 2008) and the
implications of CSR on firm decisions (Windsor, 2009) and firm performance (Adams and Ferreira, 2009), CSR may have an impact on
tax reducing activities. Some studies suggest that CSR, such as community involvement and corporate giving and diversity may be
related to tax avoidance. On one hand, Watson (2011) and Lanis and Richardson (2012) find that more socially responsible firms are
likely to be less tax aggressive, but on the other hand, Carroll and Joulfaian (2005), Preuss (2010) and Sikka (2010) argue that some
firms that claim to be socially responsible are also engaged in tax avoidance.
Given the sparse research on the effect of CSR on tax avoidance, along with the implication that governance, and possibly other
CSR variables, affect a firm's use of auditor-provided tax services, we examine the role of CSR and tax management fees on
effective tax rates. Specifically, our study addresses the following question: Do tax management fees and different levels of corporate
social responsibility affect tax avoidance of firms that use auditor‐provided tax services? We use the term tax avoidance to represent
reductions in a firm's taxes relative to pretax accounting income (Dyreng et al., 2008, 2010) and measure tax avoidance in two
ways: GAAP tax expense to pretax accounting income (GAAP ETR) and taxes paid to pretax accounting income (Cash ETR). We use
three aspects of CSR — corporate governance, community, and diversity. We investigate the interactive impact of CSR on tax
avoidance by conducting multivariate regression analysis where we control for corporate governance, community and diversity,
and their interaction with tax management fees. We also divide our sample into portfolios with different levels of CSR and analyze
tax avoidance behavior in each portfolio.
Our results indicate that the relationship between fees paid for auditor-provided tax services and tax avoidance is affected by levels
of CSR. We find that tax fees are associated with lower GAAP ETR regardless of a firm's strengths or concerns for corporate governance or
diversity, but are associated with lower Cash ETR when a firm has corporate governance strengths or diversity concerns. However, tax
fees are associated with higher GAAP ETR in a firm with a high number of community concerns and with higher Cash ETR in a firm with
any community concerns. Our results remain similar when we examine the effect of tax fees and CSR on excess ETR that is not explained
by firm specifics.
We find additional evidence that the impact of tax fees on effective tax rates depends, in part, upon the level of CSR and
whether the firm is in a strong or poor category. Firms with governance strengths such as limited compensation, effective social
reporting and public policy leadership use tax fees to decrease tax payments. However, strong governance firms with diversity
strengths use tax services to obtain financial reporting benefits and potentially forgo cash tax savings. The poor governance (i.e., high
compensation, accounting or public policy issues) and community (i.e., tax disputes) portfolios indicate that firms without women
representation use tax fees to decrease both the expense and the cash payments. In contrast, the presence of diversity strengths
results in higher tax expense and payments for poor community firms. We also find that the role of community strengths and
concerns varies among the portfolios. Support to community is associated with lower income tax expense for strong governance and
806 F. Huseynov, B.K. Klamm / Journal of Corporate Finance 18 (2012) 804–827
strong diversity firms. Community concerns are associated with lower cash tax payments for strong governance firms. Depending
upon the level of support to community and community concerns, tax fees result in an increase in expense for poor governance firms.
Our study contributes to the literature in several ways. First, we extend the tax avoidance literature by studying the role of CSR in
the relationship between tax fees paid to external auditors and effective tax rates. There is extensive research on tax avoidance and
CSR, separately, but these two areas are yet to be examined together (Carroll and Joulfaian, 2005; Hanlon and Heitzman, 2010). To our
best knowledge, this study is the first to link tax avoidance and CSR literature. Second, we analyze the interaction between levels of
CSR and tax management fees. Most tax avoidance studies examine the impact of tax fees paid for auditor-provided tax services; we
study how a firm's CSR level affects the effectiveness of tax services. Third, we separately examine the effects of strengths and
concerns of three categories of CSR. This allows us to separate out the effects of a firm's positive and negative social actions (Mattingly
and Berman, 2006).
We organize the remainder of the paper as follows: Section 2 presents the literature leading to our research questions. Section 3
describes the data and methodology, followed by the results in Section 4. Section 5 provides a summary and conclusion.
2. Background
Corporate social responsibility (CSR) should be viewed in a managerial context (Davis, 1960) given that it is businesses'
commitment to act ethically, contribute to economic development, and improve the quality of life of workers, local communities, and
society at large (Holme and Watts, 2006). CSR models include Carroll's (1991) pyramid whereby total CSR constitutes economical, legal,
ethical and philanthropic responsibilities, which Carroll interprets as: “the CSR firm should strive to make a profit, obey the law, be
ethical, and be a good corporate citizen” (page 43). Wood (1991) categorizes three principles of CSR as: institutional, organizational,
and individual,2 and states that outcomes of corporate behavior include the impact on social programs and social policies. The ideal
situation is that good motives lead to good outcomes, but Wood (1991) posits that there can be good outcomes from bad motives and
bad outcomes from good motives. For example, decreasing tax rate to increase shareholder value may be a good motive, but if viewed as
socially irresponsible, it would be a bad outcome.
Other models define corporate responsibility by economics and environmental and social aspects (Llewellyn, 2005) and as drivers
of future value creation (Kiernan, 2005). Two of Kiernan's (2005) drivers are stakeholder capital and strategic governance.3 Thus,
corporate governance, defined as compliance with laws, regulations, and codes of ethic (Cadbury, 2000) is closely linked to CSR.
A review of CSR and corporate governance literature provides the basis for three models that explicitly incorporate CSR and
corporate governance (Jamali et al., 2008). The first model defines corporate governance as a foundation for CSR. Thus, good corporate
governance is necessary for sustaining CSR. The second model views CSR as a dimension of corporate governance, i.e., a firm is
responsible to all stakeholders (internal and external to the firm) and this responsibility is embedded within the firm's corporate
governance structure. The third model describes corporate governance and CSR as two main parts of a continuum for improving
corporate performance, whereby along the continuum, compliance with laws and regulations varies and may be difficult to measure.
The overlap of corporate governance and CSR in each of the models is due in part to firms being held responsible not only to internal
stakeholders, but also to external stakeholders and society in general, i.e., firms are held to laws that are explicit and to norms that are
expected. The degree to which laws and norms are followed may result in different outcomes, especially in the area of taxation, where
the stakeholders have differing concerns.
The public's concern is whether or not a firm pays its share of taxes; the shareholders' concern is whether a firm is reducing taxes to
increase shareholder value. Thus, there is a conflict: reduction of taxes may be of benefit to shareholders, but the avoidance of taxes may
be at the expense of society as a whole (Sikka, 2010). If a firm avoids taxes, it increases profitability, but the reduction in taxes may affect
support for governmental infrastructure and/or social programs, hence the firm may be categorized as socially irresponsible. But, the
same firm may be socially responsible given other measures of CSR. The complexity increases given the definitions and measurements
of tax avoidance.
Hanlon and Heitzman (2010) define tax avoidance as the reduction of explicit taxes, and research addresses a wide spectrum of
tax avoidance: tax management, tax planning, tax aggressiveness, tax evasion and tax sheltering. At one end of the spectrum,
taxes are a cost, and firms may engage in tax management or tax planning to reduce the cost, increase profitability, and add
shareholder value (e.g., Hanlon and Heitzman, 2010; Hanlon and Slemrod, 2009; Robinson et al., 2010). At the other end of the
spectrum, firms that engage in tax shelters or tax evasion, are making decisions based solely on the desire to reduce taxes and
hence are viewed as socially irresponsible (Erle, 2008; Schön, 2008).
Hanlon and Heitzman (2010) review 12 different measures of tax avoidance. Of the 12 measures, GAAP ETR (total income tax
expense divided by pretax income) and Cash ETR (cash tax expense divided by pretax income) are used in many studies (Desai
and Dharmapala, 2006; Dyreng et al., 2008, 2010; Minnick and Noga, 2010). GAAP ETR measure captures the effect on financial
accounting earnings, whereas Cash ETR captures the effect of cash outlay. Because financial reporting income and taxable income
generally differ, GAAP ETR and Cash ETR will also differ. Some firms are able to sustain a lower than average CASH ETR, but the
annual Cash ETR is not a good predictor of long-term Cash ETR (Dyreng et al., 2008). Thus, while the long-term Cash ETR is a
2
Where by institutional represents firms' roles as economic institutions; organizational represents a particular firm's public responsibilities; and individual
represents managerial discretion, i.e., managers' actions.
3
Where by stakeholder capital includes relationships with regulators, customers and communities; strategic governance includes performance monitoring and
traditional governance; human capital includes recruitment strategies and labor relations environment includes brand equity, innovation and cost/risk reduction.
better proxy for tax avoidance (Dyreng et al., 2008), there is evidence that firms also focus on reducing GAAP ETR (Armstrong et
al., 2011). A firm's tax avoidance strategy may differ between reducing the expense or the payment.
Explanations of effective tax rate variations are one objective of tax avoidance research. The first theoretical tax avoidance/corporate
governance studies link tax avoidance to a principal–agent framework and suggest that shareholders will structure incentives to ensure
that any tax avoidance activity should increase firm value (Crocker and Slemrod, 2005; Slemrod, 2004). Numerous studies apply the
principal–agent theory by using compensation for executives and board of directors as a proxy for corporate governance; the results are
mixed and vary across compensation measures. Desai and Dharmapala (2006) suggest that there is a complementary relationship
between managerial diversion and tax sheltering, such that increases in incentive compensation tend to reduce the level of tax
sheltering, mainly in firms with weak governance. Minnick and Noga (2010), when using various measures of executive compensation,
find that only one measure, high pay-performance compensation, is associated with effective tax rates, but the relationship with Cash
ETR is stronger than the relationship with GAAP ETR.
Different measures related to the board of directors also serve as proxies for corporate governance, such as stock ownership and
compensation of board membership or board membership tenure. Bhagat and Bolton (2008) find that stock ownership of board
members may be a stronger measure for corporate governance than composite scores, but Minnick and Noga (2010), using several
board related variables, find only staggered board membership significantly associated with higher GAAP and Cash ETR. Another
explanatory variable is diversity, a component of CSR. Gender diversity in management affects firm's organization culture and
governance (Dwyer et al., 2003), but research is mixed on what exactly is the effect. For example, the effect of gender diversity on
board of directors is linked to higher ROA, but has no impact on Tobin's Q (Carter et al., 2010). Women directors can add value by
bringing forth different perspectives, new ideas and increased monitoring (Adams and Ferreira, 2009), but the impact is dependent
on the organizational context (Dwyer et al., 2003). Adams and Ferreira (2009) surmise that gender diverse board of directors will
have a positive effect on firm performance in firms with weak governance, but a negative effect in firms with strong governance due
to over-monitoring. Also, studies using non-U.S. subjects find a difference in tax behavior between men and women. Men tend to be
less compliant, more likely to justify tax evasion, and more likely to behave strategically than women (Kastlunger et al., 2010; Torgler
and Valev, 2010). The results may not generalize to U.S. subjects, but the fact remains that it is reasonable to expect gender
differences. Given that diversity appears to have an impact, albeit mixed impact, on performance and plays a role in decision making
and monitoring, it is important to control for diversity when examining tax avoidance.
The limited amount of research on tax avoidance and CSR addresses tax aggressiveness and tax evasion. Lanis and Richardson (2012)
examine 408 publicly listed Australian corporations and conclude that firms with more social investment (i.e., support to charities and
communities) are less likely to be tax aggressive. Their measure for level of disclosure is a complex index; tax aggressiveness is measured
as income tax currently payable divided by book income or divided by operating cash flows. Focusing on tax evasions, Preuss (2010) finds
that firms with headquarters in tax havens tend to make stronger claims of social responsibility than U.S. headquartered firms, and thus
conclude that there is a conflict between claiming social responsibility and engaging in off-shore financial centers to reduce their tax
liabilities. Similarly, Sikka (2010) provides examples how companies who claim to have responsible conduct in regards to community
indulge in tax evasion. However, Sikka's conclusions are based on case examples, which provide anecdotal evidence, but the analysis lacks
rigor. The above studies provide insights about firm behavior, but do not provide evidence about the variation in effective tax rates due to
the level of CSR.
Carroll and Joulfaian (2005) analyze tax return date to determine whether firms make charitable contributions for the purpose
of receiving a tax deduction. Their results reveal that corporate giving declines when its after tax cost increases and rises with
increases in income and advertising, which suggests that charitable giving is not just the result of firms trying to minimize tax and
maximize profits. Carroll and Joulfaian (2005) provide evidence of the association between charitable contributions and tax costs.
They use a total tax cost, but the association may be generalized, and an assumption made, that community giving impacts tax
expense and tax payments.
A firm may employ a variety of strategies to lower taxes, one of which is the engagement of consultants. Mills et al. (1998) find
investing in in-house or outside consultants is negatively associated with a three year GAAP tax rate. The results provide indication of
an association between fee and rate, but are based on survey information whereby the cost of investing in tax services is limited to
costs for one year.
The in-house tax services may be viewed as a “profit center” within the firm. Evidence supports this concept by examining the
compensation of the tax director, whose responsibilities may include not only compliance, but also the determination of minimum
tax costs and the role of aggressive tax planning (Armstrong et al., 2011). Research finds that tax directors' incentives are positively
associated with lower GAAP ETRs but not Cash ETRs (Armstrong et al., 2011; Robinson et al., 2010). This indicates that the objective of
the “tax profit center” is to lower the financial statement tax expense, but not necessarily reduce tax cash outflows.
Unlike tax directors, CEOs are generally not tax experts, but they set the “tone at the top,” which may explain their role in a firm's
level of tax avoidance (Dyreng et al., 2010). Dyreng et al. (2010) track individual top executives during the years 1992 to 2006 and
conclude that for both GAAP and Cash ETR, individual executives participate in tax avoidance, but find little or no evidence that the
characteristics of the individuals are associated with changes in the effective tax rates, including gender. But, given that the outcomes
of the firm are associated with the actions or motives of the management, it would appear that diversity within the management
team, as within the board of directors, would provide insight about the firms CSR actions along with explaining firm motives and
outcomes in relation to firm performance or tax strategies.
Firms may engage as outside consultants their auditors for developing and or implementing tax strategies because the audit firm
has “spill over knowledge” concerning complex tax and operational issues (Lassila et al., 2010; Mills et al., 1998; Omer et al., 2006),
which in turn would provide a reduction in taxes (Omer et al., 2006). Legislative proposals of the Sarbanes–Oxley Act of 2002 (SOX)
included the banning of auditor-provided tax services. The view was that both the firms and the auditors should be held responsible
for the financial debacles (e.g., Enron, Worldcom) and that the multiple relationships (audit, tax, other fees) impaired public perception
of an independent relationship between the firm and its auditor. Auditor-provided tax services may affect public policy in terms of the
possible impact on tax equity (Omer et al., 2006). The final regulation does not ban auditor-provided tax services, but stipulates certain
requirements. The law requires audit committee approval of auditor-provided tax services and disallows tax advice with no business
purpose.
Within these constraints, a firm may use auditors for tax services because of “spill-over knowledge”, i.e., the auditors obtain
information about a firm's tax positions form their colleagues in the tax department, or a firm may discontinue the use of auditor-
provided tax services because of the perception of impaired independence. Using the 2000 to 2002 data, Gleason and Mills (2011)
find that auditor-provided tax services do not impair independence; in addition, they find that a more accurate recording of tax
expense for tax contingencies when auditor-provided tax services are used compared to non-auditor-provided tax services. Gleason
and Mills (2011) suggest that audit committees that are reluctant to use auditor-provided tax services because of the perception of
impaired independence, may want to reconsider given the benefit of “spill-over knowledge”.
Other studies that compare the initial effect of SOX find that firms with strong corporate governance are more likely to retain their
auditors than firms with weak governance, whereby the proxy for governance was either a single measure (Lei, 2009) or a composite
measure (Lassila et al., 2010). Using S&P Audit Fee Data, Omer et al. (2006) find a negative association between tax fees and subsequent
tax rates, an association that declined from 2000 to 2002. Maydew and Shackelford (2007) estimate that firms' payments for auditor-
provided tax work is one-fourth the amount paid for audit work in 2004 compared to equal amounts in 2001. They note that during this
time, large accounting firms' total tax practice fees remained constant, indicating a switch of clients rather than a decrease in services. It
appears that as a result of SOX, there was a decrease in the number of firms using auditor-provided tax services and those who retained
their auditors had a lower marginal tax rates. Lassila et al. (2010) also find that the retention of auditor was positively associated with
GAAP ETR, but not with Cash ETR. These studies provide evidence that there was an immediate effect of SOX on the retention of auditors
for tax services and on the change in effective tax rates. Research has yet to examine an extended period subsequent to the passage of
SOX.
In summary, the issues are complex and not yet fully understood: use of auditor-provided tax services is associated with corporate
governance and effective tax rates; corporate governance is integrated with CSR, making firms responsible not only to internal
stakeholders, but also external stakeholders; reduction of taxes increases profitability and/or cash flows, which may be beneficial to
shareholders but viewed as socially irresponsible by others. To address these issues, our research question is: Do tax management fees
and different levels of corporate social responsibility affect tax avoidance of firms that use auditor provided tax services? We use a sample of
firms that pay tax fees to their auditors for the period 2000 to 2008, which extends the pre- and post-SOX research on tax
management fees. We use three CSR variables, each of which is measured in terms of strengths and concerns: corporate governance,
community, and diversity. By measuring strengths and concerns, we capture the positive and negative social actions of a firm as
distinct measures (Mattingly and Berman, 2006). Two tax avoidance measures, Cash ETR and GAAP ETR, enable us to compare and
contrast the effect of CSR on a firm's strategy to reduce tax cash payments and/or expense.
3. Data and methodology
3.1. Data
Our sample consists of S&P500 firms (number of firms varies between 25 and 425 per year and depends upon the availability of
data). We focus on S&P500 firms because large firms are more effective in tax management (Dyreng et al., 2008). The variable
definitions and the data sources are summarized in Table 1. We measure our tax variables using data from Compustat and Audit
Analytics;4 for firm financial variables, we use Compustat, and to capture corporate social responsibility (CSR) we use data from KLD
STATS.5
Following Dyreng et al. (2008, 2010), we define tax avoidance broadly to encompass that which reduces the firm's taxes
relative to its pretax accounting income whereby taxes are either the expense or the payments. We use the following two
effective tax rate (ETR) measures (Dyreng et al., 2008; Minnick and Noga, 2010):
GAAP ETRi;t ¼ TaxExpensei;t =PretaxIncomei;t ð1aÞ

Cash ETRi;t ¼ CashTaxesPaidi;t = PretaxIncomei;t −SpecialItemsi;t : ð1bÞ
TaxExpense and PretaxIncome are Compustat data items 16 and 170, respectively. CashTaxesPaid is data item 317, PretaxIncome
is data item 170, and SpecialItems is data item 17. We compute three-year average values for both measures because a longer term
horizon differentiates tax management activities from isolated actions (Dyreng et al., 2008; Minnick and Noga, 2010).
We recognize that there are differences between tax expense and taxes paid. For example, tax expense includes deferred or
accrued taxes, which are determined according to accounting rules, but may be subject to earnings management (Hanlon and
4
The Audit Analytics database consists of public company disclosures. Website is http://www.auditanalytics.com/.
5
The KLD STATS database consists of annual ratings of firms environmental, social, and governance performance. KLD Research & Analytics, Inc. webpage is at
http://www.kld.com/research/stats/index.html.
Table 1
Variable definitions.
Panel A: Variable definitions and sources
Tax variables Variable definition Variable source
GAAP ETR Tax expense / pretax income Compustat

Cash ETR Income tax paid / (pretax income − special items) Compustat
TaxFeeRate Tax fee / pretax income Audit Analytics
TaxFee Tax fees in million dollars Audit Analytics
Firm characteristics
LogTA Natural logarithm of total assets Compustat
Leverage Total debt / total equity Compustat
DivDummy Equal to 1 if firm pays out dividend, zero otherwise Compustat
PB Price per share / book value of equity per share Compustat
INSTOWN Percentage of total outstanding shares held by institutional investors Compustat
ROA Earnings / total assets Compustat
CapExp Total capital expenditures / total assets Compustat
ForeignSales Foreign sales / total sales Compustat
Advertising expenses Advertising expenses / total assets Compustat
Corporate social responsibility

CGOV_STR Sum of corporate governance strengths KLD
CGOV_CON Sum of corporate governance concerns KLD
COM_STR Sum of community strengths KLD
COM_CON Sum of community concerns KLD
DIV_STR Sum of diversity strengths KLD
DIV_CON Sum of diversity concerns KLD
Panel B: Corporate social responsibility variables
Strengths Concerns
Corporate governance – Limited compensation — notably low levels of – High compensation — notably
compensation paid to top management. high levels of compensation paid to
– Owns company(ies) with social strengths (KLD) top management.
– Effective reporting of social/environmental measures – Owns company(ies) with social
– Leadership and transparencies on public policy issues concerns (KLD)
– Other – Weak reporting of social/
environmental
performance measures
– Controversies on accounting and/
or public policy issues
– Other
Community – Charitable giving – Investment controversies
– Innovative giving (financial institutions)
– Non-US charitable giving – Negative economic impact
– Support for housing – Indigenous peoples relations
– Support for education – Tax disputes
– Indigenous peoples relations – Other
– Volunteer programs
– Other
Diversity – Women or members of minority groups – Affirmative action controversies
including fines and penalties.
– Non-representation of women on
• In CEO position
board of directors or in
• On Board of Directors
senior management.
• Promotion
– Other
• Contracting
– Work/life benefits
– Employment of the disabled
– Gay & lesbian policies
– Other
Heitzman, 2010), whereas cash payments reflect cash outflows. The tax amounts will also differ because of differences in
reporting subsidiary income, foreign or domestic. Differences also result from tax credits, which reduce payments, but do not
affect the accounting tax expense. We do not investigate the differences between the two measures, nor do we examine whether
the firms in our sample engage in earnings management or tax aggressive behavior. But, taxes are the result of a firm's strategy
and decisions. Therefore, we investigate firms that as a strategy use their external auditor firms for tax management services by
analyzing the role of firms' CSR on the effect of that strategy on effective tax rates.
Firms that use external auditors for tax services must report the fees paid for tax services in their annual reports. We retrieve the
tax fee amounts from the Audit Analytics database and define our tax management variable, TaxFeeRate as the ratio of tax fees to total
pretax income for a given firm i, in a year t:
TaxFeeRatei;t ¼ TaxFeei;t =PretaxIncomei;t : ð2Þ
We take three-year average values of TaxFeeRate to reduce the impact of yearly fluctuations.
Table 2 shows our dataset for three-year averages of ETR and TaxFeeRate by year and by 2-digit GISC code. There are several
differences between the ETRs; average GAAP ETR declined by 4 percentage points from nearly 34% in 2000 to slightly more than 30% in
2008, whereas average Cash ETR increased by 2 percentage points from 23% in 2000 to nearly 25% in 2008. One possible reason for the
decrease in GAAP ETR is that firms engage in tax planning to reduce financial tax rates (Armstrong et al., 2011).
From an industry sector perspective, energy, consumer discretionary and utility firms have higher average GAAP ETR, while firms
in financial industry and informational technology have the lowest average GAAP ETR. Material and consumer discretionary firms
have higher average Cash ETR and energy and information technology firms have lower average Cash ETR. One reason for the
differences between GAAP and Cash ETR in energy firms is that the firms are highly profitable, which increases GAAP tax expense, but
the firms also receive tax breaks and subsidies, which reduces the actual tax liability. Material firms, which have business processes
related to the discovery, development and processing of raw materials, do not have the same level of tax subsidies.
TaxFeeRate also varies across industries and over time. Firms in industrials and information technology have the highest TaxFeeRate,
and firms in financials and utilities have the lowest TaxFeeRate. Overtime, the average tax fee rate decreased from 0.33% to 0.11%. The
decrease may be due to SOX for at least two possible reasons: (1) firms changed from auditor-provided tax services to either in-house
services or non-auditor provided tax services to maintain independence from their auditors (Maydew and Shackelford, 2007); and/or
(2) firms reallocated fee costs to comply with SOX internal control reports.
We use three variables from the KLD STATS database — corporate governance, community and diversity (shown in Table 1, Panel B),
to measure the impact of CSR on ETR. KLD STATS is valued because of its objectivity and management focus (Callan and Thomas, 2009;
Chand, 2006) and contains CSR measures used extensively in the literature (Chatterji et al., 2009; Dhaliwal et al., 2011; Kim et al., 2012).
First, corporate governance measure combines compensation, ownership and transparency aspects and relates to Carroll's (1991) legal
and responsibilities, Wood's (1991) institutional principle and Kiernan's (2005) strategic governance pillar. Second, community
measure combines factors such as support for community, tax disputes and investment controversies and relates to Carroll's (1991)
philanthropic responsibilities, Wood's (1991) organizational principle and Kiernan's (2005) stakeholder capital pillar. Third, diversity
measures the impact of the organizational employee structure of a firm and relates to Carroll's ethical and legal responsibilities, Wood's
organizational responsibility and Kiernan's human capital pillar.
KLD assigns “+1” for a sign of strength and “−1” for a sign of concern under each category. For each category we add the number of
strengths and concerns, separately reported in KLD STATS database. The governance category measures compensation, ownership,
transparency, and political accountability. For example, “limited compensation” is considered to be corporate governance strength, and
“high compensation” is corporate governance concern. The community rating reflects support for community, charitable giving, tax
disputes and investment controversies. “Providing support to charities” is community strength; “tax dispute” is community concern.
Finally, diversity score rates the organizational structure of firm. For example, “promotion of minorities” is considered diversity strength
and “affirmative action controversies” is diversity concern. By measuring strengths and concerns, for each variable, we capture both the
positive and negative social actions of a firm as distinct measures (Mattingly and Berman, 2006).
Thus, for a given firm and year CGOV_STR, COM_STR and DIV_STR are the sum of corporate governance (maximum is 3), community
(maximum is 4) and diversity strengths (maximum is 7). Similarly, for a given firm and year CGOV_CON, COM_CON and DIV_CON are the
sum of corporate governance (maximum is 4), community (maximum is 2) and diversity concerns (maximum is 2).
We control for financial and firm specific variables that previous studies have found to affect firm's ETR. Dyreng et al. (2008) find
that small and high-growth firms have higher ETRs. We control for these effects with a size variable measured as the log of total assets,
LogTA (Data item 6) and a performance variable measured by ROA [Data 18/Data 6]. We also use a book to market variable, measured
by the market value of equity divided by the book value of equity, PB [(Data199 * Data 25) / Data 60].
We control for other firm specific variables, such as dividend payout, leverage, capital expenditures, and foreign sales. Several
studies (for example, Chetty and Saez, 2005; Desai and Dharmapala, 2008; Morck, 2005) find that ownership and income tax structure
affect a firm's dividend policy. To control for the potential relationship between dividend policy and tax avoidance we use a dummy
variable, DivDummy that is one if firm pays dividend, zero otherwise. Capital structure affects taxes and the tax deductibility of interest
payments is one reason for firms to raise capital by issuing debt (Graham, 2003). We control for this effect by adding a leverage variable,
Leverage, measured by total debt divided by the book value of total equity [(Data 9+ Data 34) /Data 60].
Prior research relates the level of institutional ownership to corporate governance and finds that institutional ownership affects
firm's tax management (Desai and Dharmapala, 2006; Minnick and Noga, 2010). To control for this effect we include an institutional
ownership variable, INSTOWN (Data mnemonic IOTSHR0) measured by the percentage of total outstanding shares held by institutions.6
Because firms in capital intensive industries may have a lower ETR due to tax incentives for new investments (Armstrong et al.,
2011; Dyreng et al., 2008; Mills et al., 1998), we use capital expenditures divided by total assets, CapExp (Data item 126 /Data item 6) to
control for this effect. Some firms may be subject to various tax treaties and tax credits due to their involvement in international trade.
6
The institutional ownership percentages for each year are based on the ownership percentage in 2008, which is the Compustat data available at the time of
our study.
Table 2
Three year averages for tax fees and effective tax rates by industry and year. We show sector breakout by GISC code, where 10 is energy, 15 is materials, 20 is industrials, 25 is consumer discretionary, 30 is consumer staples,
35 is health care, 40 is financials, 45 is information technology, 50 is telecommunication services, and 55 is utilities. Variable definitions are presented in Table 1.
Year GISC codes 10 15 20 25 30 35 40 45 50 55 Averages N
2000 TaxFeeRate 0.30 0.63 0.23 0.08 0.71 0.09 0.33 25a
F. Huseynov, B.K. Klamm / Journal of Corporate Finance 18 (2012) 804–827

GAAP ETR 37.30 35.08 34.37 28.60 32.22 36.31 33.99
Cash ETR 14.48 21.58 25.74 22.73 16.81 36.05 23.05
2001 TaxFeeRate 0.24 0.59 0.63 0.31 0.15 0.24 0.25 0.37 0.18 0.20 0.33 144
GAAP ETR 36.28 31.15 33.43 37.13 36.74 28.15 26.34 32.36 36.83 35.90 33.30
Cash ETR 17.00 35.05 23.88 29.51 26.33 21.30 16.29 23.25 27.20 33.85 24.67
2002 TaxFeeRate 0.19 0.52 0.51 0.27 0.15 0.19 0.14 0.49 0.20 0.14 0.29 276
GAAP ETR 35.21 28.91 31.84 34.85 34.44 30.45 28.18 28.54 33.39 34.83 31.70
Cash ETR 15.15 23.85 19.37 26.58 19.66 21.19 24.38 19.75 19.67 26.89 21.82
2003 TaxFeeRate 0.18 0.29 0.37 0.22 0.16 0.17 0.09 0.36 0.17 0.13 0.22 324
GAAP ETR 35.46 30.73 30.58 34.47 33.05 30.59 27.29 27.71 30.35 32.39 31.11
Cash ETR 17.36 23.55 18.40 26.05 22.08 21.34 20.70 17.82 16.45 21.18 20.96
2004 TaxFeeRate 0.12 0.23 0.26 0.18 0.14 0.18 0.09 0.31 0.08 0.09 0.18 353
GAAP ETR 33.44 29.56 30.69 33.15 32.54 31.26 27.54 27.54 28.57 31.35 30.56
Cash ETR 17.66 21.42 19.72 27.39 25.14 22.71 21.66 17.52 14.91 18.52 21.57
2005 TaxFeeRate 0.06 0.17 0.16 0.14 0.10 0.11 0.07 0.20 0.10 0.07 0.12 354
GAAP ETR 33.13 29.31 31.38 32.33 32.57 31.32 28.13 28.02 30.43 32.91 30.75
Cash ETR 18.90 28.23 21.96 30.57 26.89 23.17 23.52 18.41 24.35 20.73 23.57
2006 TaxFeeRate 0.03 0.13 0.13 0.12 0.09 0.10 0.07 0.19 0.07 0.05 0.11 352
GAAP ETR 33.49 29.03 32.02 32.91 31.57 30.39 26.81 28.71 33.80 32.06 30.56
Cash ETR 23.10 30.16 24.60 30.85 28.40 24.50 22.67 19.25 22.04 21.64 24.83
2007 TaxFeeRate 0.03 0.12 0.14 0.12 0.08 0.12 0.08 0.15 0.05 0.04 0.10 347
GAAP ETR 33.62 29.71 31.67 33.73 31.39 29.22 27.61 26.79 35.04 32.85 30.49
Cash ETR 22.31 28.19 25.68 30.87 28.91 24.82 23.67 18.77 24.09 21.51 25.01
2008 TaxFeeRate 0.03 0.12 0.15 0.15 0.09 0.12 0.10 0.12 0.03 0.04 0.11 284
GAAP ETR 32.72 29.13 31.11 34.35 32.62 28.08 26.31 26.17 33.08 33.01 30.36
Cash ETR 21.49 25.84 25.52 30.37 30.56 25.51 25.55 18.87 22.73 19.48 24.97
Averages TaxFeeRate 0.11 0.23 0.28 0.17 0.12 0.15 0.10 0.26 0.11 0.09 0.17 2459
GAAP ETR 34.17 29.57 31.50 33.79 32.69 30.14 27.42 27.87 32.72 33.11 30.95
Cash ETR 19.21 27.26 22.13 29.01 26.18 23.33 22.67 18.76 21.49 22.82 23.39
N 214 132 343 359 206 301 344 347 31 182
a
N of 25 is lower than subsequent years due to data availability, i.e., firms were just starting to report tax fee amounts.
811
We control for this effect by adding foreign sales divided by total assets, ForeignSales (Data mnemonic TFSALEP). We also use advertising
expenses divided by total assets, AdvExp (Data item 45 /Data item 6), to control for publicity as Dyreng et al. (2008) and Hanlon et al.
(2007) suggest that high advertising firms are less likely to avoid taxes, and in turn, hope to avoid public criticism.
Table 3 presents the summary statistics for tax, financial, and CSR variables. Tax fees in dollar amount diminished during our sample
period from $2.5 million to about $1 million. Meanwhile, total audit fees rose from $3 million to nearly $7 million. Consequently, the
ratio of tax fees to audit fees decreased from 0.86% to 0.15%. This change is due in part to the increase in audit fees because of the
additional cost of complying with the SOX (e.g., Ettredge et al., 2007; Griffin and Lont, 2007). The tax fee rate and the ETRs are shown for
the current year along with a three year average. Similar to Table 2, GAAP ETR is higher than Cash ETR. The GAAP ETR declines from 2000
to 2008, whereas the Cash ETR fluctuates during the sample period. For the financial variables, ROA, institutional ownership, and foreign
sales increase overtime; there is fluctuation in pretax income, leverage, and capital expenditures.
On average, during our sample period, corporate governance strengths and concerns increased. Community strengths decreased
while concerns increased. Over the period, diversity strengths decreased first and then steadily increased after 2003, and concerns
increased slightly.
Table 4 shows the correlation between variables used in this study. The negative correlation between both GAAP and Cash ETR and
TaxFeeRate provides some evidence that firms engage in tax management services to lower their ETR. Firm size measured by total assets
is negatively correlated with tax fees and GAAP ETR. Larger firms may spend fewer dollars in outside tax management, but may have in-
house tax experts used to reduce income tax expense. Firms with higher institutional ownership engage in more tax services, shown by
the positive correlation between TaxFeeRate and INSTOWN. Both the strengths and concerns of each CSR variable, are negatively
associated with TaxFeeRate. Some studies (Desai and Dharmapala, 2006; Gompers et al., 2003) argue that institutional ownership is
associated with strong governance because institutional investors have stronger motivation and ability to monitor managerial
performance. However, our correlation results show that institutional ownership in our sample is negatively correlated with all three
CSR strengths, and community concerns.
The majority of CSR variables are correlated with GAAP ETR. Corporate governance strengths/concerns, and strengths of community
and diversity are all negatively associated with GAAP ETR, whereas community concerns are positively related to GAAP ETR. The only CSR
variable that is significantly associated with Cash ETR is diversity strengths. Thus, the correlation matrix signals some association
between CSR, tax management, and tax avoidance; however further investigation is necessary to clarify this role.
We find that strengths for each CSR category are strongly and positively correlated with each other. Concerns for each CSR
category are also strongly and positively correlated. However, the correlation matrix also shows that there is positive correlation
between CSR strengths and concerns (except for diversity concerns and three CSR strengths), although the coefficients are smaller.
For example, using Fisher's Z transformation method we find that the correlation between CGOV_STR and COM_STR (DIV_STR) is
significantly greater than the correlation between CGOV_STR and COM_CON (DIV_CON). The correlations provide an indication of the
Table 3
Summary statistics. Variable definitions are presented in Table 1.
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008
Panel A: Tax and fee variables

TAXFEE ($ millions) 2.47 2.03 1.37 1.30 1.09 0.80 0.81 0.86 0.90
TaxFeeRate (%) — one year 0.31 0.38 0.32 0.24 0.17 0.11 0.10 0.10 0.11
TaxFeeRate (%) — three year 0.33 0.33 0.29 0.22 0.18 0.12 0.11 0.10 0.11
GAAP ETR (%) — one year 35.64 34.48 31.29 30.88 30.37 30.98 30.91 30.12 30.37
GAAP ETR (%) — three year 33.99 33.30 31.70 31.11 30.56 30.75 30.56 30.49 30.36
Cash ETR (%) — one year 23.30 25.63 22.31 20.26 20.08 24.57 25.67 25.46 24.87
Cash ETR (%) — three year 23.05 24.67 21.82 20.96 21.57 23.57 24.83 25.01 24.97
AUDFEE ($ millions) 2.93 2.59 2.83 3.56 5.76 6.14 6.94 6.98 6.83
TaxFee/AudFee (%) 0.86 0.93 0.66 0.48 0.25 0.15 0.12 0.13 0.15
Panel B: Financial variables

Pretax income ($ mil.) 1,496.31 1,054.08 950.93 1,068.64 1,264.87 1,479.34 1,774.32 1,818.14 1,830.57
Total assets ($ mil.) 24,483.87 18,799.44 17,766.06 19,526.36 21,986.23 22,479.75 26,733.17 27,324.54 23,636.98
Leverage (%) 111.65 110.64 101.62 92.14 78.78 77.48 77.87 82.33 94.18
PB 4.77 3.94 3.49 4.36 4.66 5.78 4.12 4.34 2.59
ROA (%) 5.31 5.60 5.91 6.29 6.87 7.32 7.47 7.58 7.65
INSTOWNPERC (%) 76.84 76.34 77.72 76.90 76.82 76.86 76.34 76.66 77.29
Capital expenditures / TA (%) 5.72 5.98 4.68 4.42 4.21 4.56 4.79 5.07 5.45
Foreign sales (%) – – 30.68 36.48 35.72 36.63 36.67 38.14 41.56
AdvExp (%) 1.82 3.01 3.50 3.46 3.17 2.77 2.88 3.01 2.96
Panel C: Corporate social responsibility variables

CGOV_STR 0.12 0.10 0.07 0.08 0.06 0.23 0.22 0.27 0.24
CGOV_CON 0.59 0.46 0.57 0.63 0.80 0.70 0.84 0.89 0.91
COM_STR 0.59 0.34 0.37 0.36 0.34 0.37 0.42 0.40 0.37
COM_CON 0.18 0.17 0.18 0.18 0.13 0.20 0.21 0.23 0.26
DIV_STR 1.41 0.97 0.99 1.16 1.29 1.47 1.52 1.61 1.52
DIV_CON 0.12 0.22 0.27 0.22 0.24 0.25 0.22 0.24 0.24
F. Huseynov, B.K. Klamm / Journal of Corporate Finance 18 (2012) 804–827
Table 4
Correlation matrix. Variable definitions are presented in Table 1.
Variable 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
(1) GAAP ETR 1

(2) Cash ETR 0.36⁎⁎⁎ 1
(3) TaxFeeRate − 0.17⁎⁎⁎ − 0.06⁎⁎⁎ 1
(4) Log TA − 0.07⁎⁎⁎ − 0.04 − 0.29⁎⁎⁎ 1
(5) Leverage 0.03⁎ − 0.03 − 0.02 0.21⁎⁎⁎ 1
(6) DivDummy − 0.01 0.15⁎⁎⁎ − 0.10⁎⁎⁎ 0.33⁎⁎⁎ 0.10⁎⁎⁎ 1
(7) PB 0.03 − 0.01 − 0.02 − 0.10⁎⁎⁎ 0.14⁎⁎⁎ − 0.07⁎⁎⁎ 1
(8) INSTOWN − 0.03 − 0.08⁎⁎⁎ 0.18⁎⁎⁎ − 0.42⁎⁎⁎ − 0.13⁎⁎⁎ − 0.28⁎⁎⁎ 0.03 1
(9) CapExp 0.18⁎⁎⁎ − 0.07⁎⁎⁎ − 0.16⁎⁎⁎ − 0.08⁎⁎⁎ − 0.01 0.05 ⁎⁎ − 0.03 0.01 1
(10) ROA − 0.04⁎⁎ 0.07⁎⁎⁎ − 0.14⁎⁎⁎ − 0.40⁎⁎⁎ − 0.30⁎⁎⁎ − 0.08⁎⁎⁎ 0.15⁎⁎⁎ 0.09⁎⁎⁎ 0.11⁎⁎⁎ 1
(11) ForeignSales − 0.34⁎⁎⁎ − 0.12⁎⁎⁎ 0.06⁎⁎ − 0.10⁎⁎⁎ − 0.09⁎⁎⁎ − 0.06⁎⁎ 0.01 0.12⁎⁎⁎ − 0.04 0.22⁎⁎⁎ 1
(12) AdvExp 0.05 0.09⁎⁎⁎ − 0.08⁎⁎ − 0.03 0.16⁎⁎⁎ 0.24⁎⁎⁎ 0.14⁎⁎⁎ − 0.07⁎⁎ − 0.09⁎⁎⁎ 0.12⁎⁎⁎ − 0.07 1
(13) CGOV_STR − 0.04⁎⁎ 0.02 − 0.08⁎⁎⁎ 0.16⁎⁎⁎ − 0.03 0.10⁎⁎⁎ − 0.01 − 0.16⁎⁎⁎ 0.05⁎⁎ 0.08⁎⁎⁎ 0.11⁎⁎⁎ 0.15⁎⁎⁎ 1
(14) CGOV_CON − 0.06⁎⁎⁎ − 0.02 − 0.06⁎⁎⁎ 0.23⁎⁎⁎ − 0.08⁎⁎⁎ − 0.02 0.01 − 0.02 − 0.09⁎⁎⁎ 0.06⁎⁎⁎ 0.08⁎⁎⁎ − 0.02 0.07⁎⁎⁎ 1
(15) COM_STR − 0.08⁎⁎⁎ 0.02 − 0.05⁎⁎ 0.34⁎⁎⁎ 0.06⁎⁎⁎ 0.12⁎⁎⁎ 0.00 − 0.16⁎⁎⁎ − 0.01 0.00 0.07 ⁎⁎⁎ 0.24 ⁎⁎⁎ 0.27⁎⁎⁎ 0.18⁎⁎⁎ 1
(16) COM_CON 0.06⁎⁎⁎ − 0.01 − 0.10⁎⁎⁎ 0.27⁎⁎⁎ 0.07⁎⁎⁎ 0.18 ⁎⁎⁎ 0.01 − 0.20⁎⁎⁎ 0.21⁎⁎⁎ − 0.08⁎⁎⁎ − 0.06⁎⁎ 0.07⁎ 0.15⁎⁎⁎ 0.11⁎⁎⁎ 0.09⁎⁎⁎ 1
(17) DIV_STR − 0.10⁎⁎⁎ 0.04⁎⁎ − 0.13⁎⁎⁎ 0.42⁎⁎⁎ 0.06⁎⁎⁎ 0.12⁎⁎⁎ 0.04⁎⁎ − 0.24⁎⁎⁎ − 0.08⁎⁎⁎ 0.03⁎ 0.05⁎⁎ 0.18⁎⁎⁎ 0.31⁎⁎⁎ 0.27⁎⁎⁎ 0.45⁎⁎⁎ 0.10⁎⁎⁎ 1
(18) DIV_CON 0.004 − 0.02 − 0.07⁎⁎⁎ 0.09⁎⁎⁎ − 0.05⁎⁎ 0.02 − 0.03 − 0.02 0.11⁎⁎⁎ 0.01 − 0.01 0.06 − 0.1 0.08⁎⁎⁎ 0.00 0.06⁎⁎⁎ 0.00 1
⁎⁎⁎
Denotes significance at 1%.
⁎⁎
⁎
813
complexity of the relationships between CSR variables. One interpretation is that firms that have CSR concerns in one area may
attempt to achieve CSR strengths in other areas to avoid public criticism.
3.2. Methodology
We conduct our empirical test in three stages. In our first stage, we test the relationship between tax fees and two ETR measures by
regressing GAAP ETR and Cash ETR on TaxFeeRate and controlling for other firm specific variables. The models are:
GAAP ETRt;i or Cash ETRt;i ¼ α þ β1 TaxFeeRatet;i þ β2 LogTAt;i þ β3 Leveraget;i þ β4 DivDummyt;i þ β5 PBt;i

þβ6 INSTOWNt;i þ β7 ROAt;i þ β8 CapExpt;i þ β9 ForeignSalest;i þ β10 AdvExpt;i þ εi;t :
ð3Þ
Consistent with prior studies (e.g. Mills et al., 1998; Omer et al., 2006) we expect that external tax services, TaxFeeRate, are
negatively associated with ETR.
In our second stage, we test the role of CSR in the relationship between tax fees and ETR by regressing two measures of ETR on
TaxFeeRate and CSR variables. Because firms with strong corporate governance tend to use their external auditors for tax services
(Lassila et al., 2010) and because of the overlap between corporate governance and CSR (Jamali et al., 2008), we include interaction
terms between TaxFeeRate and each of our CSR variables. We control for the firm specific variables that are significant in Eq. (3). The
generalized form of our model is:
GAAP ETRt;i or Cash ETRt;i ¼ α þ β1 TaxFeeRatet;i þ β2 LogTAt;i þ β3 INSTOWNt;i þ β4 ROAt;i

þβ5 CapExpt;i þ β6 DivDummyt;i þ β7 ½CSR variablest;i ð4Þ
þβ8 ½CSR and TaxFeeRate Interaction termst;i þ εi;t :
To further investigate the role of CSR in tax management and tax avoidance for firms with different levels of CSR, we create two
portfolios for each CSR variable: a “strong” portfolio that includes firms with strengths only and a “poor” portfolio that includes firms with
concerns only. Independent variables include control variables, CSR variables (other than the one used to form portfolios) and CSR/tax fee
interactions. For example, for the portfolio of firms with “strong” corporate governance, we regress ETRs on: (1) tax fees, firm specific
variables, community variables, and tax fee/community interaction terms and (2) tax fees, firm specific variables, diversity variables and
tax fee/diversity interaction terms.
In our third and final stage, we use excess ETR as the dependent variable.7 Firms with similar financial and firm specific characteristics
may have a “natural” level of ETR. By using excess ETRs we examine the impact of CSR and tax fees on abnormal ETRs that is not explained
by financial and firm specific characteristics. We define excess GAAP and Cash ETR as the residuals from Eq. (5) where we regress ETR
measures on firm specific variables:
GAAP ETRt;i or Cash ETRt;i ¼ α þ β1 LogTAt;i þ β2 Leveraget;i þ β3 DivDummyt;i þ β4 PBt;i

ð5Þ
þβ5 INSTOWNt;i þ β6 ROAt;i þ β7 CapExpt;it;i þ εi;t :
Then we use excess ETRs as the dependent variables in Eq. (6) as follows:
Excess GAAP ETRt;i or Excess Cash ETRt;i ¼ α þ β1 TaxFeeRatet;i þ β2 ½CSR variablest;i

ð6Þ
þβ3 ½CSR and TaxFeeRate Interaction termst;i þ εi;t :
Although we expect that CSR variables and their interaction with TaxFeeRate will have a significant impact on ETRs, we do not posit
the sign of the relationships. On the one hand we expect overall that the CSR strengths and/or their interaction with tax fees are
negatively related to ETRs because one of the principles of CSR is that firm profitability and lower taxes lead to higher profitability and
cash flows. On the other hand, there is a basis for a positive or neutral relationship: CSR strengths provide proxies for firms' compliance
with the law, ethical behavior and good citizenship, and, given that taxes are subject to regulation and a social responsibility, firms' tax
management activities may be limited to tax compliance, with very little effect on ETRs. As to the role of CSR concerns, we do not have an
expected sign of the relationships with ETR. Although CSR concerns may signal socially irresponsible behavior, it is not clear whether
firms with CSR concerns will be involved in tax evasion or tax sheltering.
4. Empirical results
4.1. Tax management fees and effective tax rates
To test the effect of tax management fees on ETRs, we apply Eq. (3) in three different settings: in the first setting, we use our main
control variables, in the second and third settings we add foreign sales and advertising, respectively. Table 5 presents the results. In all
7
We thank the anonymous referee for this suggestion.
settings, there is a negative relationship between TaxFeeRate and both GAAP and Cash ETR, providing evidence that a benefit of external
tax services is a reduction in tax rates, and the reduction is larger for GAAP ETR. For example, in Column 1, a one percentage point
increase in TaxFeeRate reduces GAAP ETR by 6.6 percentage points. This effect is smaller for Cash ETR (Column 2) with 2.5 percentage
points.8 Our results agree with prior literature (Cook et al., 2008; Mills et al., 1998), but differ from Armstrong et al. (2011) who use
proprietary data and find no association between tax fees9 and GAAP ETR or Cash ETR.
Compared to prior literature, our results for firm specific variables are mixed. Firm size increases as tax rates decline in all but one of
the regression models. This is expected and is consistent with Dyreng et al. (2008) who conclude that smaller firms pay more taxes per
tax dollar earned. Similar to Minnick and Noga's (2010) findings, Leverage is not significant in three of our six equations, which is
inconsistent with the conventional hypothesis of increase in debt is associated with lower tax rates. Consistent with Minnick and Noga
(2010) DivDummy is positive and significant for all Cash ETR models and for GAAP ETR when advertising is included. Thus, firms that pay
dividends have lower Cash ETR. Different from Minnick and Noga (2010) we find a significant effect of PB only for Cash ETR when we
control for advertising expenses.
We find a strong association between higher institutional ownership, INSTOWN, and lower tax rates when we exclude foreign sales
and advertising. Higher institutional ownership is usually associated with increased monitoring over managerial performance to ensure
that management is focusing on an increase in shareholder wealth via a reduction in costs, which may include a reduction of taxes. In
contrast to Desai and Dharmapala (2006) who find that higher executive compensation reduces the extent of tax sheltering, specifically
in firms with low institutional ownership, we find that firms with higher institutional ownership that engage in tax management tend
to have lower ETR, which would increase firm performance.
Our results also show that ROA has a negative effect on GAAP ETR in all specifications, but a positive impact on Cash ETR (insignificant
in Column 4 when we control for foreign sales). This suggests that firms with higher profitability have lower income tax expenses, but
higher cash tax payments. Our results differ from Dyreng et al. (2008), Minnick and Noga (2010) and Armstrong et al. (2011) who find a
positive impact of ROA on both ETR measures.
We find two different effects of capital expenditures on ETR. Firms with higher capital expenditures have higher GAAP ETR, but lower
Cash ETR. The different effect may be related to long-term timing issues, i.e., longer depreciation periods for GAAP than for taxes. This is
consistent with Armstrong et al. (2011) who find a negative association between new investment (which includes capital expenditures)
and Cash ETR.
The effect of foreign operations on ETR, as shown in Columns 3 and 4, reveals that higher foreign sales are associated with lower tax
rates. This might be due to beneficial tax treatments for firms that export their products or have foreign subsidiaries. However, note
that the number of observations drops significantly when we include foreign sales in our equations. In Section 4.5 we further examine
the role of foreign sales by dividing our sample into high and low foreign sales portfolios and controlling for CSR variables.
When we control for advertising expenses, we observe no impact of advertising on either GAAP or Cash ETR (columns 5 and 6). This
result does not support Hanlon et al. (2007) who find that advertising expense is associated with lower deficiency in tax compliance
and Dyreng et al. (2008) whose descriptive analysis shows that low advertising firms are more likely to have lower Cash ETR. We
acknowledge that our insignificant result for advertising may be driven by limited number of observations with advertising expense.
Nevertheless, in Section 4.5, we divide our dataset into high and low advertising firms and investigate the impact of tax fees, CSR
variables on effective tax rates for each portfolio.
In sum, our results provide evidence that one benefit of engaging external auditors for tax services is a lower ETR. An increase of
one percentage point in tax fees is associated with a 6–9 percentage point reduction in GAAP ETR and a 2–4.5 percentage point
reduction in Cash ETR, depending on the specification. Next, we investigate the role of CSR in the relation between tax management
fees and ETR.
4.2. Corporate social responsibility and tax management fees
We separate our analysis of CSR by using three categories as shown in Table 6: corporate governance (Panel A), community (Panel B),
and diversity (Panel C). Because all the firms in our sample pay fees to auditors, the unique effect of each CSR category on tax avoidance is
the combination of coefficients of each CSR category (strength or concern) and its interaction with tax fees. We discuss the results by
category next.
4.2.1. Corporate governance

When we control for corporate governance strengths and concerns the results shown in Panel A indicate that TaxFeeRate remains
significantly negative for GAAP ETR, and only CGOV_STR is significant and negative. In contrast, neither TaxFeeRate, nor CGOV_STR has a
main effect on Cash ETR. However, the interaction term, CGOV_STR * TaxFee, is significant and negative. Thus, the effect of tax
management fees on Cash ETR is negative when firms have corporate governance strengths including low compensation, transparency
and accountability. Our results confirm the findings of prior research that there is an association between strong governance and the use
of auditors for tax services (Lassila et al., 2010; Lei, 2009). But, the impact on taxes differs. Lassila et al. (2010) find no association
8
We use a t-test to determine the statistical significance of the difference between the coefficient estimates of TaxFeeRate for two ETRs. It is computed as t = (b1 − b2) /
s1,2; where s1,2 is the standard error of the difference between two coefficient estimates and computed as the square root of sum of the squares of standard errors in two
coefficient estimates.
9
In this case, tax fees represents tax planning and is measured as the portion of tax fees paid to total fees paid.
Table 5
Multivariate regression analysis of tax management and effective tax rates. This table shows the regression results between tax management and effective tax
rates. Our largest dataset has 2337 firm-years and covers years from 2000 to 2008. The dependent variable is GAAP ETR or Cash ETR. We control for year and
industry effects. Variable definitions are presented in Table 1. T-statistics are provided in brackets.
Column GAAP (1) Cash (2) GAAP (3) Cash (4) GAAP (5) Cash (6)
Intercept 49.29⁎⁎⁎ 32.42⁎⁎⁎ 48.34⁎⁎⁎ 36.77⁎⁎⁎ 54.22⁎⁎⁎ 20.58⁎⁎⁎

(20.84) (9.53) (17.95) (9.23) (14.15) (4.06)
TaxFeeRate − 6.61⁎⁎⁎ − 2.49⁎⁎⁎ − 6.11⁎⁎⁎ − 2.15⁎⁎ − 9.03⁎⁎⁎ − 4.51⁎⁎⁎
(− 10.26) (− 2.73) (− 8.16) (− 1.98) (− 8.50) (− 3.26)
LogTA − 1.42⁎⁎⁎ − 0.76⁎⁎⁎ − 1.43⁎⁎⁎ − 1.20⁎⁎⁎ − 1.94⁎⁎⁎ − 0.52
(− 8.24) (− 3.05) (− 7.29) (− 4.06) (− 7.26) (− 1.48)
Leverage 0.001 − 0.003 0.004⁎ − 0.005 − 0.01⁎ 0.01⁎⁎
(0.33) (− 1.26) (1.84) (− 1.57) (− 1.77) (2.18)
DivDummy 0.05 4.18⁎⁎⁎ 0.42 5.76⁎⁎⁎ 2.43⁎⁎⁎ 6.29⁎⁎⁎
(0.11) (7.12) (0.96) (9.06) (3.99) (7.74)
PB 0.02 − 0.01 0.01 − 0.001 0.06 − 0.25⁎⁎⁎
(1.45) (− 0.43) (1.17) (− 0.07) (1.30) (− 3.87)
INSTOWN − 0.04⁎⁎⁎ − 0.05⁎⁎⁎ 0.01 − 0.05⁎ − 0.04 0.04
(− 3.04) (− 2.62) (0.38) (− 1.93) (− 1.57) (1.28)
ROA − 0.28⁎⁎⁎ 0.11⁎⁎ − 0.23⁎⁎⁎ 0.03 − 0.46⁎⁎⁎ 0.16⁎⁎
(− 7.18) (1.99) (− 5.22) (0.47) (− 7.54) (2.03)
CapExp 0.26⁎⁎⁎ − 0.21⁎⁎⁎ 0.18⁎⁎⁎ − 0.13⁎ 0.33⁎⁎⁎ 0.22⁎⁎
(7.29) (− 4.24) (3.70) (− 1.77) (4.40) (2.25)
ForeignSales − 0.11⁎⁎⁎ − 0.06⁎⁎⁎
(−12.92) (− 4.55)
AdvExp 0.01 0.04
(0.07) (0.37)
N 2337 2127 1521 1401 830 785
R-square 0.09 0.044 0.186 0.084 0.157 0.137
F-stat 29.05⁎⁎⁎ 12.29⁎⁎⁎ 38.30⁎⁎⁎ 14.12⁎⁎⁎ 16.96⁎⁎⁎ 13.70⁎⁎⁎
⁎⁎⁎
⁎⁎
⁎
(positive association) between cash taxes paid (income tax expense) and retention of auditor for tax services. We find that the use of tax
management fees is associated with lower ETR and more so for Cash ETR for firms with strong governance.
Our findings provide additional insight given the conflicting results of previous research. For example, while Desai and Dharmapala
(2006) find that higher compensation reduces tax avoidance, measured by book-tax difference, Armstrong et al. (2011) find that higher
compensation offered to tax directors is associated with more financial tax planning (i.e. lower GAAP ETR), and Minnick and Noga
(2010) find that higher pay-performance sensitivity for board of directors and CEOs reduces both GAAP and Cash ETR. The mixed results
may be due to using compensation as a proxy and not separately controlling for corporate governance strengths, concerns and the
interaction between corporate governance and tax management. We further examine both strengths and concerns in Section 4.3 when
we divide our dataset into portfolios.
4.2.2. Community
When we control for community strengths and concerns (Panel B), TaxFeeRate remains negative for both GAAP and Cash ETR and the
coefficient is larger for GAAP ETR. The number of community concerns affects this relationship as we find that the interaction term,
COM_CON * TaxFee is positive for both ETRs and the coefficient is larger for Cash ETR. This reveals that at high (any) number of
community concerns, i.e., controversial investments and tax disputes, the effect of tax fees on GAAP ETR (Cash ETR) is positive. We also
find that while the main effect of COM_CON is negative, its interaction with tax fees, COM_CON * TaxFee is positive, suggesting that at
high (low) tax fees community concerns are associated with higher (lower) Cash ETR.
Prior literature suggests that firms with community strengths are likely to be less tax aggressive (Lanis and Richardson, 2012;
Watson, 2011), but firms that claim social responsibility will also attempt to reduce their tax liabilities (Preuss, 2010; Sikka, 2010).
Dyreng et al. (2008) use advertising expense as a proxy for community involvement and find that low advertising, i.e. less community
supportive firms, are more likely to avoid taxes. Our results provide evidence that community strengths and concerns affect firm's tax
avoidance activities. Specifically, the effect of tax management fees on tax avoidance depends upon the number of tax disputes and
investment controversies, and different from our general finding, the effect is an increase in ETR when firms have community concerns.
4.2.3. Diversity
When we control for diversity strengths and concerns (Panel C), TaxFeeRate remains negative for GAAP ETR. There are no main effects
for diversity, but the interaction terms DIV_STR * TaxFee and DIV_CON * TaxFee are negative, and the coefficient of the latter is larger in
magnitude. For Cash ETR, neither TaxFeeRate, nor diversity main effects are significant, but the interaction term DIV_CON * TaxFee is
significant and negative. Thus, when firms have diversity concerns that include affirmative action controversies or non-representation of
women on board of directors, the negative impact of tax fees on GAAP and Cash ETR further strengthens. Hence, firms with diversity
Table 6
Corporate social responsibility effect on effective tax rates. This table shows the regression results for the relationship between corporate social responsibility, tax
management and effective tax rates. We control for year and industry fixed effects. Variable definitions are presented in Table 1. T-statistics are provided in
brackets.
Variables Panel A: Corporate governance Panel B: Community
GAAP ETR Cash ETR GAAP ETR Cash ETR
Intercept 48.75⁎⁎⁎ 31.09⁎⁎⁎ 48.76⁎⁎⁎ 31.57⁎⁎⁎

(19.61) (8.70) (19.49) (8.83)
TaxFeeRate − 6.40⁎⁎⁎ − 1.05 − 6.96⁎⁎⁎ − 3.45⁎⁎⁎
(− 7.11) (− 0.82) (− 9.39) (− 3.30)
LogTA − 1.38⁎⁎⁎ − 0.76⁎⁎⁎ − 1.42⁎⁎⁎ − 0.78⁎⁎⁎
(− 7.28) (− 2.76) (− 7.42) (− 2.83)
Inst. ownership − 0.05⁎⁎⁎ − 0.06⁎⁎ − 0.04⁎⁎ − 0.05⁎⁎
(− 2.98) (− 2.10) (− 2.56) (− 2.23)
ROA − 0.25⁎⁎⁎ 0.14⁎⁎ − 0.25⁎⁎⁎ 0.13⁎⁎
(− 6.25) (2.41) (− 6.43) (2.41)
Cap. Exp/TA 0.27⁎⁎⁎ − 0.21⁎⁎⁎ 0.25⁎⁎⁎ − 0.18⁎⁎⁎
(7.53) (− 3.97) (6.79) (− 3.39)
DivDummy 0.06 4.08⁎⁎⁎ − 0.01 4.07⁎⁎⁎
(0.15) (6.8) (− 0.01) (6.83)
CGOV_STR − 1.03⁎⁎ 0.88
(− 2.17) (1.31)
CGOV_CON 0.13 0.05
(0.41) (0.11)
CGOV_STR * TaxFeeRate 2.74 − 6.85⁎⁎
(1.25) (− 2.18)
CGOV_CON * TaxFeeRate − 0.53 − 1.88
(− 0.50) (− 1.25)
COM_STR − 0.43 0.45
(− 1.49) (1.09)
COM_CON 0.63 − 1.68⁎⁎
(1.35) (− 2.46)
COM_STR * TaxFeeRate − 0.12 − 1.47
(− 0.14) (− 1.09)
COM_CON * TaxFeeRate 3.41⁎⁎ 9.90⁎⁎⁎
(2.02) (4.23)
N 2243 2045 2243 2045
R-square 0.093 0.046 0.096 0.051
F-stat 22.82⁎⁎⁎ 9.73⁎⁎⁎ 23.77 10.98⁎⁎⁎
Variables Panel C: Diversity
GAAP ETR Cash ETR
Intercept 48.26⁎⁎⁎ 32.35⁎⁎⁎

(19.38) (9.06)
TaxFeeRate − 4.58⁎⁎⁎ − 1.3
(− 5.44) (− 1.08)
LogTA − 1.31⁎⁎⁎ − 0.89⁎⁎⁎
(− 6.64) (− 3.11)
Inst. ownership − 0.05⁎⁎⁎ − 0.05⁎⁎
(− 2.96) (− 2.29)
ROA − 0.25⁎⁎⁎ 0.12⁎⁎
(− 6.37) (2.22)
Cap. Exp/TA 0.26⁎⁎⁎ − 0.20⁎⁎⁎
(7.2) (− 3.77)
DivDummy − 0.16 3.82⁎⁎⁎
(− 0.38) (6.35)
DIV_STR − 0.08 0.27
(− 0.52) (1.23)
DIV_CON 0.67 0.68
(1.51) (1.1)
DIV_STR * TaxFeeRate − 1.24⁎⁎ − 0.19
(− 2.26) (− 0.23)
DIV_CON * TaxFeeRate − 6.06⁎⁎⁎ − 6.79⁎⁎⁎
(− 3.72) (− 2.96)
N 2243 2045
R-square 0.099 0.047
F-stat 24.72⁎⁎⁎ 10.13⁎⁎⁎
⁎⁎⁎
⁎⁎
⁎
concerns spend tax fees and achieve both financial and cash tax benefits which is consistent with Adams and Ferreira (2009) who find a
negative association between diversity and firm performance measured by Tobin's Q in strong governance firms. They argue that because
gender-diverse boards apportion more time to monitoring than non-gender-diverse boards, the diversity negatively affects firm
performance when corporate governance is strong (i.e., over-monitoring), but positively affects firm performance if corporate
governance is weak (i.e., monitoring is valuable).
In sum, strong governance, including limited compensation and leadership and transparencies on public policy issues, is associated
with lower tax expense and, when considering tax management fees, with lower tax payments. Community and diversity concerns
have opposite effects in relation to tax management fees. When firms with a number of community concerns (e.g., negative economic
impact activities or tax disputes) use tax management fees, the effect is an increase in tax expense and cash payments. Firms with a
number of diversity concerns (e.g., affirmative action controversies or non-representation of women executives) use tax management
fees to reduce both tax expense and cash payments. Our results indicate that CSR and its interaction with tax management fees affect
firms' managerial behavior on tax avoidance. The impact of one CSR variable may differ depending upon the strengths and concerns of
another CSR variable. Our next section uses CSR portfolios to further examine corporate governance, community, and diversity
variables.
4.3. Corporate social responsibility portfolios
The previous empirical tests analyzed the effect of each category of CSR, whereby in any given year a firm may have strengths and
concerns in multiple categories. Therefore, to further investigate the role of CSR strengths and concerns in the relationship between
tax fees and tax rates, we divide our dataset by category of CSR and create two portfolios within each category: “strong” that includes
firms with only CSR strengths, and “poor” that includes firms with only CSR concerns.
The descriptive statistics presented in Table 7, Panel A show that in general, for TaxFee, TaxFeeRate, GAAP and Cash ETR in each
category, there is a difference between the strong and poor portfolios. The only exception is the lack of significance for TaxFeeRate and
GAAP ETR in the diversity portfolio. The differences indicate that weak governance firms pay larger amount of tax fees to external
auditors and are more likely to avoid taxes than strong governance firms, and that strong community firms may engage in external tax
services to reduce their GAAP tax expenses. Firms with strong diversity pay a higher amount of taxes than firms with poor diversity.
The univariate results suggest that tax fees and tax rates vary among firms depending on the level of CSR. To gain additional
insights about the role of CSR, we use multivariate regression analysis and apply Eq. (4) for each category within each
portfolio. Although we control for firm specific variables in regression models, we tabulate and discuss only tax fees, CSR
variables and interaction terms.
4.3.1. Corporate governance

As shown in Panel B, when we control for community in strong governance firms TaxFeeRate is not significant for GAAP ETR. But
COM_STR is negative and significant. In contrast, for Cash ETR, TaxFeeRate and COM_CON are negative and significant. Thus strong
governance firms do not use tax fees to reduce tax expense. But those that are engaged in such activities as community involvement,
support to community and charities have a lower GAAP ETR. We also find that strong governance firms use tax fees to reduce the
amount of tax payments and those that are engaged in such activities as tax disputes have lower Cash ETR.
When we control for diversity in strong governance firms TaxFeeRate is positively and DIV_STR * TaxFee is negatively associated
with GAAP ETR. In contrast, for Cash ETR, TaxFeeRate is negative and DIV_STR * TaxFee is positive. These results suggest that in the
presence of high number of diversity strengths in strong governance firms tax management is associated with lower GAAP ETR and
higher Cash ETR. One possible interpretation is that strong governance firms with high diversity, i.e. women or minority groups in
management or board positions, use external tax services to obtain financial reporting benefits and potentially forgo cash tax savings
(Armstrong et al., 2011; Erickson et al., 2004). Another interpretation relates to the negative effect of diversity on firm performance.
Because more gender-diverse boards are associated with over-monitoring in strong governance firms (Adams and Ferreira (2009), it
is reasonable to expect a monitoring effect on tax strategy. The positive (negative) association between DIV_STR * TaxFee and Cash ETR
(GAAP ETR) indicates that women in high-level positions may be concerned with using the tax management fees to reduce the
expense, but also want the firm to pay its fair share of taxes.
Community and diversity play a slightly different role in the poor governance category. When we control for community,
TaxFeeRate is negative for GAAP ETR and both COM_STR * TaxFee and COM_CON * TaxFee are positive. While TaxFeeRate is also negative
for Cash ETR, neither community strengths nor concerns are significant. Thus, while firms with poor governance pay for tax services
that result in a reduction of tax expense and tax payments, the effect on the expense is reduced by the relationship between
community variables and tax fees paid. The effect can be explained by two conditions given that poor governance may be indicative of
significant accounting and public policy issues. First, community strengths may indicate social responsibility and this characteristic
may offset the negative impact of tax fees. Second, the auditors that provide tax services to firms with community concerns (tax
disputes or controversial investments) tend to accurately record the appropriate expense for tax (or other) contingencies, which
would increase the expense pending the outcome of the dispute (Gleason and Mills, 2011).
When we control for diversity we find that TaxFeeRate is negative only for GAAP ETR and that DIV_CON * TaxFee, is negative for both
ETRs. Thus in poor governance firms, the diversity concerns (e.g., affirmative action controversies, non-representation of women) may
signal under-monitoring (Adams and Ferreira, 2009) where tax fees result in lower ETRs.
Table 7
Corporate social responsibility portfolios and effective tax rates. This table shows the descriptive statistics and regression results for effective tax rates and tax
management fees in each corporate social responsibility portfolio. Strong includes firms with corporate responsibility strengths only and poor includes firms with
concerns only, and strong-poor is the difference between strong and poor. We control for year and industry fixed effects. Variable definitions are presented in
Table 1. T-statistics are provided in brackets.
Panel A: Descriptive statistics
Variables strong poor strong-poor
Corporate governance
TAXFEE ($ millions) 0.57 1.19 − 0.61⁎⁎⁎
TaxFeeRate 0.11 0.17 − 0.06⁎⁎⁎
GAAP ETR 32.10 30.89 1.21⁎
Cash ETR 25.08 23.16 1.92⁎
Community
TAXFEE ($ millions) 1.49 1.08 0.41⁎⁎⁎
TaxFeeRate 0.15 0.10 0.05⁎⁎⁎
GAAP ETR 30.39 32.90 − 2.51⁎⁎⁎
Cash ETR 23.79 22.23 1.56⁎
Diversity
TAXFEE ($ millions) 1.16 0.77 0.39⁎⁎⁎
TaxFeeRate 0.16 0.15 0.02
GAAP ETR 30.74 31.64 − 0.90
Cash ETR 23.74 21.95 1.79⁎⁎
Panel B: Corporate Governance
Variables Strong Poor
GAAP Cash GAAP Cash
Intercept 46.45⁎⁎⁎ 47.65⁎⁎⁎ 51.44⁎⁎⁎ 62.61⁎⁎⁎ 42.37⁎⁎⁎ 40.45⁎⁎⁎ 30.85⁎⁎⁎ 31.12⁎⁎⁎

(4.03) (3.84) − 2.87 − 3.27 (12.08) (11.61) − 5.91 − 5.99
TaxFeeRate − 1.49 11.97⁎ − 17.57⁎⁎ − 36.28⁎⁎⁎ − 7.39⁎⁎⁎ − 3.84⁎⁎⁎ − 3.12⁎⁎⁎ − 1.63
(− 0.29) (1.74) (− 2.08) (− 3.41) (− 7.53) (− 3.20) (− 2.17) (− 0.94)
COM_STR − 3.37⁎⁎ 1.97 − 0.57 0.72
(− 2.34) (0.86) (− 1.38) (1.17)
COM_CON 1.32 − 5.69⁎ 0.64 − 1.46
(0.85) (− 1.98) (0.95) (− 1.45)
COM_STR * Taxfee 12.13 − 4.82 2.84⁎⁎ − 2.39
(1.50) (− 0.37) (2.12) (− 1.25)
COM_CON * Taxfee − 1.99 13.43 6.59⁎⁎ 4.60
(− 0.21) (0.89) (2.17) (1.07)
DIV_STR 0.47 − 0.41 − 0.23 0.44
(0.80) (− 0.44) (− 1.10) (1.46)
DIV_CON 2.00 1.15 − 0.03 0.28
(0.95) (0.35) (− 0.06) (0.35)
DIV_STR * Taxfee − 6.97⁎ 14.24⁎⁎ − 1.20 − 0.51
(− 1.68) (2.22) (− 1.61) (− 0.47)
DIV_CON * Taxfee − 38.43 − 62.6 − 5.45⁎⁎⁎ − 6.27⁎⁎
(− 1.21) (− 1.29) (− 2.87) (− 2.30)
N 115 115 101 101 1227 1227 1127 1127
R-square 0.258 0.250 0.274 0.300 0.088 0.090 0.03 0.033
F-stat 3.61⁎⁎⁎ 3.47⁎⁎⁎ 3.40⁎⁎⁎ 3.86⁎⁎⁎ 11.79⁎⁎⁎ 12.04⁎⁎⁎ 3.40⁎⁎⁎ 3.81⁎⁎⁎
Panel C: Community
Intercept 51.65⁎⁎⁎ 51.16⁎⁎⁎ 11.83 14.83⁎ 31.37⁎⁎⁎ 31.24⁎⁎⁎ 30.22⁎⁎⁎ 30.18⁎⁎⁎

(8.67) (8.72) (1.44) (1.83) (5.08) (5.13) (2.82) (2.89)
TaxFeeRate − 3.21 − 2.72 − 0.41 − 5.57⁎⁎ 9.74⁎⁎⁎ 1.13 10.74⁎ − 1.07
(− 1.29) (− 1.59) (− 0.11) (− 2.37) (2.82) (0.28) (1.95) (− 0.17)
CGOV_STR − 2.07⁎⁎⁎ 1.75 − 0.86 1.89
(− 2.59) (1.62) (− 0.91) (1.20)
CGOV_CON 1.15⁎ − 0.18 0.95 0.19
(1.67) (− 0.18) (1.36) (0.16)
CGOV_STR * Taxfee 0.22 − 10.69⁎ 4.30 17.28
(0.06) (− 1.80) (0.59) (− 1.48)
CGOV_CON * Taxfee − 3.42 − 4.81 − 11.36⁎⁎⁎ − 7.63
(− 1.30) (− 1.19) (− 2.93) (− 1.22)
DIV_STR − 0.21 − 0.11 − 1.04⁎⁎⁎ 0.54
(− 0.71) (− 0.28) (− 2.83) (0.91)
DIV_CON 1.06 2.04 0.77 0.74
(1.06) (1.42) (0.73) (0.44)
(continued on next page)

Table 7 (continued)
Panel C: Community
DIV_STR * Taxfee − 2.51⁎⁎⁎ 0.37 5.11⁎ 8.45⁎
(− 3.22) (0.34) (1.79) (1.86)
DIV_CON * Taxfee 3.96 − 9.91 − 17.41⁎⁎⁎ − 24.75⁎⁎⁎
(0.69) (− 1.11) (− 3.01) (− 2.71)
N 432 432 385 385 269 269 245 245
R-square 0.173 0.189 0.185 0.177 0.084 0.113 0.144 0.188
F-stat 8.83⁎⁎⁎ 9.80⁎⁎⁎ 8.47⁎⁎⁎ 8.02⁎⁎⁎ 2.38⁎⁎ 3.30⁎⁎⁎ 3.95⁎⁎⁎ 5.40⁎⁎⁎
Panel D: Diversity
Intercept 56.83⁎⁎⁎ 56.65⁎⁎⁎ 26.77⁎⁎⁎ 27.16⁎⁎⁎ 35.73⁎⁎⁎ 35.78⁎⁎⁎ 56.64⁎⁎⁎ 61.07⁎⁎⁎

(17.17) (16.90) (5.21) (5.38) (4.40) (4.63) (5.75) (5.86)
TaxFeeRate − 7.99⁎⁎⁎ − 8.50⁎⁎⁎ − 2.00 3.38⁎ − 14.72⁎⁎⁎ − 11.85⁎⁎⁎ − 11.59⁎⁎⁎ − 14.6⁎⁎⁎
(− 7.05) (− 8.45) (− 1.29) (1.97) (− 3.72) (− 4.88) (− 3.86) (− 2.99)
COM_STR − 1.06⁎ 0.21 − 0.06 3.29
(− 1.88) (0.42) (− 0.02) (1.00)
COM_CON 0.29 − 1.75 − 0.92 − 0.60
(0.72) (− 1.83) (− 0.78) (− 0.28)
COM_STR * Taxfee 3.10 − 2.19 − 1.19 − 4.02
(1.41) (− 1.24) (− 0.03) (− 0.27)
COM_CON * Taxfee − 0.82 12.18⁎⁎⁎ 5.06 − 16.37
(− 0.62) (4.47) (1.17) (− 0.98)
CGOV_STR − 0.25 1.26 − 1.44 2.39
(− 0.78) (1.48) (− 0.56) (0.62)
CGOV_CON − 0.78 0.46 0.11 0.39
(− 1.29) (0.75) (0.06) (0.26)
CGOV_STR * Taxfee − 2.83⁎⁎⁎ − 9.1⁎⁎⁎ 21.82⁎ 2.85
(− 2.66) (− 2.75) (1.75) (0.06)
CGOV_CON * Taxfee 6.86⁎⁎⁎ − 4.6⁎⁎ 9.66 3.99
(3.84) (− 2.29) (0.70) (0.76)
N 1096 1096 988 988 253 253 232 232
R-square 0.162 0.177 0.063 0.056 0.136 0.144 0.255 0.253
F-stat 20.95⁎⁎⁎ 23.29⁎⁎⁎ 6.53⁎⁎⁎ 5.78⁎⁎⁎ 3.79⁎⁎⁎ 4.08⁎⁎⁎ 7.58⁎⁎⁎ 7.48⁎⁎⁎
⁎⁎⁎
⁎⁎
⁎
4.3.2. Community
As shown in Panel C, when we control for corporate governance in strong community firms, TaxFeeRate is not significant for GAAP
ETR but CGOV_STR (CGOV_CON) is significantly negative (positive). Thus, strong community firms do not appear to use tax fees to
reduce income tax expense, but if the firm has more corporate governance strengths than weaknesses, then the net effect will be a
reduction in tax expense. For Cash ETR, tax fees as a main effect are not significant, but CGOV_STR * TaxFee is associated with a reduction
in tax payments. Thus strong governance firms use tax fees to reduce ETRs while still supporting the community. Hence, these firms are
increasing shareholder value by reducing costs and at the same time giving back to society through charitable giving.
When we control for diversity, TaxFeeRate is still not significant for GAAP ETR but DIV_STR * TaxFee is negative, suggesting that
strong community firms with high diversity use external tax services to reduce financial tax rate. We also find that tax management is
associated with lower Cash ETR but find no evidence of impact of diversity on Cash ETR in strong community firms.
Corporate governance and diversity play a different role in the poor community category. When we control for corporate governance,
TaxFeeRate is positive for both GAAP ETR and Cash ETR. As stated above, for poor governance firms with community concerns, the positive
effect for GAAP ETR can be explained by the auditors' accurate recording of the expense for tax contingencies (Gleason and Mills, 2011).
This result is in contrast to the findings of Dyreng et al. (2008) who use advertising expenses as a proxy for community involvement and
find that low advertising firms are more likely to avoid taxes. But, the positive relationship is offset by the negative coefficient of
CGOV_CON * TaxFee for GAAP ETR, which suggests that when poor community firms have any governance concerns, tax fees reduce
income tax expense.
When we control for diversity in poor community firms TaxFeeRate is insignificant for GAAP ETR and Cash ETR. DIV_STR is associated
only with a lower GAAP ETR. However, for both ETRs, DIV_STR * TaxFee is positive and DIV_CON * TaxFee is negative, with the latter having
an overall stronger effect. Thus, in poor community firms, a diverse management is likely to use tax services without impacting tax
expense and instead use the service for compliance purposes. In contrast, firms without any women executives are likely to use tax
services to reduce both tax expense and tax payments.
4.3.3. Diversity
As shown in Panel D in strong diversity firms, TaxFeeRate and COM_STR are negative for GAAP ETR suggesting that these firms use
tax management to reduce income tax expense. Firms that are engaged in community giving may be perceived as being socially
responsible, but they also have lower GAAP ETR. While TaxFeeRate is not significant for Cash ETR, we find that COM_CON * TaxFee is
significant and positive. Thus, in the presence of community concerns, such as tax disputes, in firms with women and minorities in
senior management positions, tax management fees are associated with higher Cash ETR.
When we control for corporate governance in strong diversity firms, we find that TaxFeeRate is negative for GAAP ETR. The negative
sign for CGOV_STR * TaxFee suggests that in the presence of corporate governance strengths, more diverse firms use tax fees to reduce
income tax expense. The effect of corporate governance strengths is offset by the positive sign for CGOV_CON * TaxFee whereby at a
high number of corporate governance concerns, tax fees increase GAAP ETR. Our results for Cash ETR are different. While TaxFeeRate is
positive for Cash ETR, the interaction terms suggest that firms with corporate governance strengths or concerns tax fees reduce cash
tax payments.
Our results slightly differ for poor diversity firms. We find that in these firms when we control for community, TaxFeeRate is
negative for both GAAP and Cash ETR and community variables have no impact on either ETR. However, when we control for corporate
governance, TaxFeeRate remains negative for GAAP ETR, but CGOV_STR * TaxFee is positive and significant. The presence of governance
strengths in firms without women executives offsets the negative impact of tax fees.
In sum, our portfolio results indicate that the impact of tax fees on effective tax rates depends, in part, upon the level of CSR
and whether the firm is in a strong or poor category. It also appears that the outcomes may be similar, but driven by different
motives. This is most evident in relation to governance and diversity. Firms with governance strengths such as limited
compensation, effective social reporting and public policy leadership use tax fees to decrease tax payments. However, when
these firms also have strong diversity (women or minorities in executive positions) the impact of tax fees changes. Strong
governance firms with diversity strengths use tax services to obtain financial reporting benefits and potentially forgo cash tax
savings. The poor governance (i.e., high compensation, accounting or public policy issues) and community concern (i.e., tax
disputes) portfolios indicate that firms without women representation use tax fees to decrease both the expense and the cash
payments. In contrast, the presence of diversity strengths results in higher tax expense and payments for poor community
firms.
The role of community strengths and concerns varies among the portfolios. Support to community is associated with lower income
tax expense for strong governance and strong diversity firms. Community concerns are associated with lower cash tax payments for
strong governance firms. Depending upon the level of community strengths and concerns, tax fees result in an increase in expense for
poor governance firms.
Our analyses of CSR and auditor-provided tax services in relation to ETRs provide insights for regulators and stakeholders. For
regulators concerned with the effect of tax services on tax avoidance, our results indicate that tax fees do not always result in lower taxes.
The allowance of auditor-provided tax services appears to be beneficial for firms not only in reducing taxes but also for compliance
purposes. For both regulators and shareholders, our results show that the reduction of ETRs is, in some circumstances, offset by socially
responsible actions. In other circumstances, the change in ETR is due to actions that are deemed concerns. Thus, any evaluation of tax
strategy should also consider the firm's CSR.
4.4. Tax management and excess ETR
In the previous sections, we use GAAP and Cash ETR as dependent variables to regress on tax management and CSR variables
while controlling for firm specific factors. In this section, we use Excess ETR to capture the portion of tax rate that is not
associated with normal firm characteristics. First we run Eq. (5) and then use the residuals (Excess GAAP ETR and Excess Cash ETR,
respectively) as the dependent variable in Eq. (6). Panels A and B of Table 8 present the results for GAAP ETR. Similar to Column 1
in Table 5, LogTA, INSTOWN and ROA are negatively, CapExp is positively related to GAAP ETR and Leverage, DivDummy and PB
have no impact.
In Panel B we find that in all specifications, TaxFeeRate is negative for Excess GAAP ETR suggesting that regardless of control
variables, tax management is negatively associated with Excess GAAP ETR. We also find that CGOV_STR is associated with lower
Excess GAAP ETR. This is consistent with our finding for GAAP ETR in Panel A of Table 6. While COM_STR had no impact on GAAP
ETR (Panel B of Table 6), we find that COM_STR is associated with lower Excess GAAP ETR. However, consistent with our findings
for GAAP ETR, positive COM_CON * TaxFee suggests that for high number of community concerns tax management is positively
associated with Excess GAAP ETR. We also find that diversity strengths, DIV_STR is associated with lower GAAP ETR. Consistent
with our findings for GAAP ETR in Panel C of Table 6, both DIV_STR * TaxFee and DIV_CON * TaxFee are associated with lower Excess
GAAP ETR suggesting that both diversity strengths and diversity concerns strengthen the negative effect of tax fees on Excess
GAAP ETR.
Panels C and D present the test results for Excess Cash ETR. Firm size, dividend payout and ROA are associated with higher and CapExp
is associated with lower Excess Cash ETR. Leverage and PB ratio have no impact. Consistent with our findings for Cash ETR in Panel A of
Table 6, TaxFeeRate is insignificant for Excess Cash ETR but CGOV_STR * TaxFee is negative suggesting that in the presence of corporate
governance strengths, the partial effect of tax fees on Excess Cash ETR is negative. When we control for community our results are
consistent with our findings for Cash ETR in Panel B of Table 6. TaxFeeRate and COM_CON is negative suggesting that tax management
and community strengths are associated with lower Excess Cash ETR. However, COM_CON * TaxFee is positive and affects the impact of
tax fees. In the absence (presence) of community concerns tax fees are negatively (positively) associated with Excess Cash ETR. It is
possible that these firms have tax related community concerns and external tax services result in higher cash tax expenses than usual.
The same interaction term also suggests that at high (low) amount of tax fees community concerns are associated with higher (lower)
Excess Cash ETR.
When we control for diversity we find that only DIV_CON * TaxFee is negative suggesting that in the presence of diversity concerns
tax management is associated with lower Excess Cash ETR. These findings are also consistent with our results for Cash ETR in Panel D of
Table 6.
Overall, CSR has more main effects on Excess GAAP ETR: corporate governance strengths, community strengths and both diversity
strengths and concerns are associated with lower Excess GAAP ETR while community concerns are associated with higher Excess GAAP
ETR. Only interactions of tax fees with either corporate governance strengths or diversity concerns are associated with lower Excess
Cash ETR. The effect of community concerns is negative (positive) when a firm spends low (high) amount of tax fees.
Table 8
Corporate social responsibility and excess effective tax rates. This table shows the regression results between corporate social responsibility, tax management and
excess GAAP and Cash ETR. Residuals from the regression in Panel A, Excess GAAP ETR is used as dependent variable in Panel B. Residuals from the regression in Panel C,
Excess Cash ETR is used as dependent variable in Panel B. We control for year and industry fixed effects. Variable definitions are presented in Table 1. T-statistics are
provided in brackets.
Panel A : Dependent variable – GAAP ETR
Intercept LogTA Leverage DivDummy PB INSTOWN ROA CapExp
42.06⁎⁎⁎ − 0.82⁎⁎⁎ 0.0008 − 0.08 0.02 − 0.05⁎⁎⁎ − 0.17⁎⁎⁎ 0.32⁎⁎⁎

(18.22) (− 4.97) (0.48) (− 0.19) (1.62) (− 3.34) (− 4.43) (9.00)
N R-square F-stat
2337 0.05 17.37⁎⁎⁎
Panel B: Dependent variable — Excess GAAP ETR
Corporate governance Community Diversity
Intercept 1.19⁎⁎⁎ Intercept 1.13⁎⁎⁎ Intercept 1.23⁎⁎⁎

(3.91) (4.70) (4.23)
TaxFeeRate − 5.61⁎⁎⁎ TaxFeeRate − 5.90⁎⁎⁎ TaxFeeRate − 3.89⁎⁎⁎
(− 6.44) (− 8.54) (− 4.78)
CGOV_STR − 1.41⁎⁎⁎ COM_STR − 0.77⁎⁎⁎ DIV_STR − 0.27⁎⁎
(− 3.06) (− 2.83) (− 2.05)
CGOV_CON − 0.12 COM_CON 0.13 DIV_CON 0.47
(− 0.39) (0.3) (1.08)
CGOV_STR * TaxFee 3.57 COM_STR * TaxFee 0.02 DIV_STR * TaxFee − 1.08⁎⁎
(1.64) (0.02) (− 1.97)
CGOV_CON * TaxFee − 0.32 COM_CON * TaxFee 3.28⁎ DIV_CON * TaxFee − 5.74⁎⁎⁎
(− 0.30) (1.95) (− 3.55)
N 2243 N 2243 N 2243
R-square 0.041 R-square 0.45 R-square 0.049
F-stat 18.93⁎⁎⁎ F-stat 20.05⁎⁎⁎ F-stat 22.90⁎⁎⁎
Panel C: Dependent variable – Cash ETR
Intercept LogTA Leverage DivDummy PB INSTOWN ROA CapExp
29.71⁎⁎⁎ − 0.54⁎⁎ − 0.003 4.13⁎⁎⁎ − 0.006 − 0.06⁎⁎⁎ 0.15⁎⁎⁎ − 0.19⁎⁎⁎

(9.11) (− 2.27) (− 1.25) (7.04) (− 0.37) (− 2.71) (2.83) (− 3.84)
N R-square F-stat
2127 0.041 12.94⁎⁎⁎
Panel D: Dependent variable – Excess Cash ETR
Corporate governance Community Diversity
Intercept 0.282 Intercept 0.50 Intercept − 0.03

(− 0.65) (− 1.48) (− 0.07)
TaxFeeRate − 0.78 TaxFeeRate − 3.13⁎⁎⁎ TaxFeeRate − 0.96
(− 0.64) (3.21) (− 0.83)
CGOV_STR 0.65 COM_STR 0.29 DIV_STR 0.12
(1.02) (0.75) (0.65)
CGOV_CON − 0.10 COM_CON − 1.77⁎⁎⁎ DIV_CON 0.51
(− 0.23) (− 2.76) (0.83)
CGOV_STR * TaxFee − 6.50⁎⁎ COM_STR * TaxFee − 1.37 DIV_STR * TaxFee − 0.09
(− 2.10) (− 1.02) (− 0.12)
CGOV_CON * TaxFee − 1.72 COM_CON * TaxFee 9.68⁎⁎⁎ DIV_CON * TaxFee − 6.52⁎⁎⁎
(− 1.15) (4.16) (− 2.88)
N 2045 N 2045 N 2045
R-square 0.006 R-square 0.012 R-square 0.008
F-stat 2.65⁎⁎ F-stat 4.97⁎⁎⁎ F-stat 3.17⁎⁎⁎
⁎⁎⁎
⁎⁎
⁎
4.5. Sensitivity to foreign sales and advertising expenses
4.5.1. Foreign sales

Prior studies suggest that firms with heavy foreign operations may incline toward more aggressive tax management (Minnick and
Noga, 2010). Moreover firms with heavy foreign operations also have organizational complexity, greater variance in legal practices
and regulations across countries, all of which make achieving satisfactory levels of governance and CSR a challenge (Windsor, 2009).
To examine how tax management, tax avoidance and CSR may vary depending on foreign operations, we divide our dataset into high
and low ForeignSales portfolios based on the median value of ForeignSales and compare average TaxFeeRate and GAAP and Cash ETR
along with CSR strengths and concerns across ForeignSales portfolios. We also segment TaxFeeRate and GAAP and Cash ETR for each
foreign sales and CSR portfolio. Our results are presented in Table 9.
We find that high foreign sales firms spend more tax fees per dollar income earned and have lower GAAP and Cash ETR (Panel A)
than low foreign sales firms suggesting that they benefit from tax management and are more likely to avoid taxes. We also find that
high foreign sales firms have both high CGOV_STR and CGOV_CON (Panel B). It is possible that on one hand, engagement in foreign
sales forces firms to be more transparent and report more anticorruption efforts (Healy and Serafeim, 2011); on the other hand firms
with heavy foreign operations in countries with a low rule of law may engage in earnings management (Dyreng et al., 2011) or lack
Table 9
CSR, Tax management and ETRs in firms with foreign sales. This table shows the mean values of TaxFeeRate, GAAP and Cash ETR, and CSR variables in High and Low
ForeignSales portfolios. High ForeignSales (Low ForeignSales) includes firms with foreign sales higher (lower) than median. Min–max is the number of minimum
and maximum strengths or concerns. High–low is the difference between high and low. Strong includes firms with CSR strengths only, and poor includes firms with
concerns only. Variable definitions are presented in Table 1. Refer to Table 1 for variable descriptions.
Panel A: Foreign sales, tax fees and tax avoidance
AdvExp portfolio TaxFeeRate GAAP ETR Cash ETR
High 0.21 27.84 22.02

N 764 764 705
Low 0.18 32.80 24.64
N 765 765 696
High–low 0.04⁎⁎ − 4.96⁎⁎⁎ − 2.62⁎⁎⁎
Panel B: Foreign sales and CSR
ForeignSales CGOV_STR CGOV_CON COM_STR COM_CON DIV_STR DIV_CON N
High 0.25 0.88 0.45 0.15 1.51 0.22 739

min–max (0–3) (0–4) (0–4) (0–2) (0–7) (0–2)
Low 0.13 0.76 0.33 0.19 1.34 0.21 740
min–max (0–2) (0–4) (0–3) (0–2) (0–6) (0–2)
High–low 0.13⁎⁎⁎ 0.12⁎⁎⁎ 0.12⁎⁎⁎ − 0.04⁎ 0.17⁎⁎ 0.02
Panel C: Foreign sales and tax fees in CSR portfolios
Foreign Corporate governance Community Diversity

sales
Strong Poor Strong Poor Strong Poor
High 0.11 0.21 0.17 0.11 0.21 0.23

N 32 418 168 56 391 75
Low 0.15 0.16 0.17 0.10 0.17 0.13
N 36 435 128 84 367 60
High–low − 0.04 0.05⁎⁎ − 0.01 0.02 0.04 0.10⁎⁎
Panel D: Foreign sales and GAAP ETR in CSR portfolios
High 28.63 27.85 26.58 28.76 27.51 29.42

N 32 418 168 56 391 75
Low 32.86 32.56 33.02 35.11 31.99 33.09
N 36 435 128 84 367 60
High–low − 4.23⁎⁎ − 4.71⁎⁎⁎ − 6.45⁎⁎⁎ − 6.35⁎⁎⁎ − 4.48⁎⁎⁎ − 3.67⁎⁎⁎
Panel E: Foreign sales and Cash ETR in CSR portfolios
High 21.47 21.70 21.15 22.17 21.66 23.29

N 32 418 168 56 391 75
Low 27.42 24.33 25.24 21.94 25.49 20.99
N 36 435 128 84 367 60
High–low − 5.95⁎⁎ − 2.63⁎⁎⁎ − 4.08⁎⁎⁎ 0.23 − 3.82⁎⁎⁎ 2.30
⁎⁎⁎
⁎⁎
⁎
political accountability. Moreover, high foreign sales firms have more COM_STR and fewer COM_CON than low foreign sales firms.
High foreign sales firms are likely to engage in more community giving, such as participating in non-US charitable programs. High
foreign sales firms have more DIV_STR, such that foreign operations may require a more diverse employee base.
Our results also show that high foreign sales firms with either corporate governance or diversity concerns have significantly higher
TaxFeeRate than low foreign sales firms (Panel C). This suggests that poor governance and less diversity may induce firms with larger
foreign operations to engage in tax management. For all CSR portfolios, high foreign sales firms have lower GAAP ETR than low foreign
sales firms (Panel D). In both corporate governance portfolios (i.e., strong and poor firms), and strong community and strong diversity
portfolios, high foreign sales firms have lower Cash ETR than low foreign sales firms (Panel E).
4.5.2. Advertising expenses

Dyreng et al. (2008) find that advertising expense differs among firms with high, mid and low Cash ETR: advertising expense is
the lowest in low Cash ETR group (long-run tax avoiders). Their result is consistent with the idea that firms susceptible to public
punishment (those with higher spending on advertising) may not avoid taxes to such a large degree because they fear a public
backlash for poor corporate citizenship. This is consistent with Hanlon et al. (2007) who find that high advertising expense is
associated with lower deficiency in tax compliance. Hanlon and Slemrod (2009) also use advertising expense as a proxy for public
backlash, but find no significant impact on stock returns due to the limitations of data. Also, Carroll and Joulfaian (2005) find that
contributions rise with a firm's reliance on advertising.
To investigate how tax management and tax avoidance vary among firms with different levels of advertising expense, we divide our
dataset into high and low (above or below median) advertising firms based on the level advertising expenses, AdvExp. Then we examine
the differences in TaxFeeRate, GAAP and Cash ETR, and CSR strengths and concerns across high and low advertising portfolios. CSR may
vary across advertising portfolios and affect tax management and tax avoidance accordingly. Therefore, we also segment TaxFeeRate and
GAAP and Cash ETR for each advertising expenses and CSR portfolio. Our results are shown in Table 10.
In Panel A we find that high advertising firms have lower TaxFeeRate and significantly higher GAAP and Cash ETR. These results are
consistent with prior studies (Dyreng et al., 2008; Hanlon and Slemrod, 2009; Hanlon et al., 2007) that find that due to the public
criticism high advertising firm are less likely to avoid taxes.
We also find that high advertising firms have more CGOV_STR suggesting that high advertising firms are more transparent and
politically more accountable than low advertising firms (Panel B). Consistent with Carroll and Joulfaian's (2005) results, our results
indicate that high advertising firms have higher COM_STR, such as charitable giving and support for community. Thus, high advertising
firms are more likely to be concerned about achieving positive public perception. Our results also show that high advertising firms have
more DIV_STR and DIV_CON. However, we note that the difference is much greater for diversity strengths suggesting that high
advertising firms are more likely to have women and minorities in top management.
In Panel C we find that high and low advertising firms have similar amount of tax fees regardless of the CSR portfolios, except
in poor corporate governance portfolio where we find that high advertising firms have lower tax fees per dollar income earned.
Our results in Panel D show that in poor governance portfolio high advertising firms have higher GAAP ETR and are less likely to
avoid income taxes. In strong community portfolio high advertising firms have higher GAAP ETR, and even with community
strengths, low advertising firms are more likely to avoid income taxes. The impact of diversity is mixed. Both in strong and poor
diversity portfolios, high advertising firms have higher GAAP ETR, but the difference is higher in low diversity group. Thus, low
advertising firms with DIV_STR are more likely to avoid income tax expenses. In Panel E we find that both strong and poor
corporate governance portfolio high advertising firms have higher Cash ETR, but the difference is larger in strong governance
group. Finally, we find that high advertising firms with diversity strengths have higher Cash ETR and are less likely to avoid cash
taxes.
5. Conclusions
Corporate social responsibility (CSR) consists of economic, legal, ethical, and philanthropic responsibilities (Carroll, 1991). Taxes
fall within this definition, but in a conflicting role. The reductions of tax expense can be viewed as economically necessary, i.e., the
reduction of costs improves profitability, increases shareholder wealth, and provides a basis for charitable giving. But, taxes are also
subject to regulations and used to support governmental social programs. Tax avoidance, for any reason, may be viewed by some as
socially irresponsible, i.e., a firm “not paying its fair share.” Given that a firm has internal (shareholders) and external stakeholders
(tax authorities, general public), its tax strategy may be viewed either positively or negatively.
Our results provide insight into the one of the strategies firms use in tax management, i.e., use of auditor-provided tax services.
This study is the first to investigate the role of CSR in the relationship between tax management and tax avoidance, measured as firms'
effective tax rates (ETR). By separating strengths and concerns of each CSR category — corporate governance, community and
diversity, we also examine the impact of positive and negative social actions. Portraying the effect of CSR on tax management fees and
ETR provides additional information about firm characteristics to regulators who are concerned about the independence of auditors
and any level of tax avoidance. While in general tax management fees are associated with lower ETR, there are instances when tax
management fees have no effect, i.e., the service is mainly for compliance, or the effect is positive, i.e., expense and/or payments
increase.
We find that tax fees are associated with lower GAAP ETR regardless of a firm's strengths or concerns for corporate governance or
diversity, but are associated with lower Cash ETR when a firm has corporate governance strengths or diversity concerns. However, tax
fees are associated with higher GAAP ETR in a firm with a high number of community concerns and with higher Cash ETR in a firm
Table 10
CSR, Tax management and ETRs in firms with advertising expenses. This table shows the regression results between tax fees and effective tax rates after dividing
dataset into High and Low ForeignSales and high and low AdvExp portfolios. Dependent variable is GAAP and Cash ETR. High AdvExp (Low AdvExp) includes firms
with advertising expenses higher (lower) than median. High–low is the difference between high and low. Strong includes firms with CSR strengths, and poor
includes firms with concerns. Variable definitions are presented in Table 1.
Panel A: Advertising expenses, tax fees and tax avoidance
Advertising TaxFeeRate GAAP ETR Cash ETR
High 0.15 32.22 25.56

N 418 418 403
Low 0.20 30.37 23.69
N 417 417 385
High–low − 0.04⁎ 1.86⁎⁎⁎ 1.87⁎⁎⁎
Panel B: Advertising expenses and CSR
Advertising CGOV_STR CGOV_CON COM_STR COM_CON DIV_STR DIV_CON N
High 0.30 0.92 0.63 0.14 2.20 0.28 400

min–max (0–3) (0–4) (0–4) (0–2) (0–6) (0–2)
Low 0.13 0.85 0.33 0.11 1.47 0.16 401
min–max (0–3) (0–3) (0–4) (0–2) (0–6) (0–1)
High–low 0.17⁎⁎⁎ 0.06 0.29⁎⁎⁎ 0.02 0.73⁎⁎⁎ 0.12⁎⁎⁎
Panel C: Advertising expenses and tax fees in CSR portfolios
Advertising Corporate governance Community Diversity
Strong Poor Strong Poor Strong Poor
High 0.15 0.15 0.14 0.17 0.15 0.15

N 17 214 114 19 233 16
Low 0.11 0.21 0.16 0.15 0.19 0.20
N 17 250 78 26 228 22
High–low 0.04 − 0.05⁎ − 0.01 0.02 − 0.04 − 0.05
Panel D: Advertising expenses and GAAP ETR in CSR portfolios
High 33.87 32.09 31.82 33.52 31.76 34.64

N 17 214 114 19 233 16
Low 30.15 29.52 29.57 35.75 29.33 29.58
N 17 250 78 26 228 22
High–low 3.73 2.57⁎⁎⁎ 2.25⁎ − 2.23 2.43⁎⁎⁎ 5.05⁎⁎
Panel E: Advertising expenses and Cash ETR in CSR portfolios
High 28.75 25.20 24.74 26.04 24.43 28.69

N 17 207 108 19 222 16
Low 20.79 23.01 23.31 28.90 22.89 25.00
N 17 230 73 23 216 20
High–low 7.97⁎⁎ 2.19⁎⁎ 1.43 − 2.86 1.54⁎ 3.68
⁎⁎⁎
⁎⁎
⁎
with any community concerns. We find additional evidence that the interactions between different CSR categories and tax fees affect
tax avoidance, when we divide our data set into CSR portfolios. Strong governance (diversity) firms use tax fees to decrease tax
payment (tax expense) and poor governance and diversity firms use tax fees to reduce both tax payment and expense. In poor
community firms tax fees are associated with higher income tax expense and payment. However, we find that the role of diversity has
a strong impact on the use of tax fees in both poor community and poor governance firms. The presence of diversity concerns results
in tax fees associated with lower tax expense and payment. In contrast, in poor community firms, high levels of diversity result in tax
fees associated with increased expense and payments. This may be due to the strength of monitoring attributed to women in senior
management. The role of community strengths and concerns varies among the portfolios. Support to community is associated with
lower income tax expense for strong governance and strong diversity firms. Community concerns are associated with lower cash tax
payments for strong governance firms.
Firms with strong CSR that strategize to lower costs may be doing so not only for the benefit of shareholders, but also for the benefit
of society. Profitable firms are in a better position to participate in charitable giving, and in some instances, it may be socially acceptable
to reduce the tax expense/payment. To counter the view that a firm that “cheats the government may cheat its shareholders”,
our results provide evidence that firms that reduce tax expense or payment may have strong governance, community, or diversity,
which dispels the notion that shareholders may “be cheated”.
Our study is limited because we focus on firms that use their external auditors for tax services, and it is not clear whether the results
are applicable to other firms. Future research may extend our analysis by using a sample of firms that engage non-auditor tax providers
or in-house personnel to determine the effect of CSR on tax avoidance. Future research may also investigate why firms with certain CSR
characteristics have higher ETRs.
Acknowledgments
The authors would like to thank Jeffrey Netter (editor) and the anonymous reviewer for their comments and suggestions that
led to the improvement of this manuscript.
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Journal of Corporate Finance 18 (2012) 804–827

Contents lists available at SciVerse ScienceDirect

Journal of Corporate Finance

Tax avoidance, tax management and corporate social responsibility

3. Data and methodology

GAAP ETRi;t ¼ TaxExpensei;t =PretaxIncomei;t ð1aÞ

Panel A: Variable deﬁnitions and sources

Tax variables Variable deﬁnition Variable source

GAAP ETR Tax expense / pretax income Compustat

Corporate social responsibility

Panel B: Corporate social responsibility variables

TaxFeeRatei;t ¼ TaxFeei;t =PretaxIncomei;t : ð2Þ

Year GISC codes 10 15 20 25 30 35 40 45 50 55 Averages N

F. Huseynov, B.K. Klamm / Journal of Corporate Finance 18 (2012) 804–827

Panel A: Tax and fee variables

Panel B: Financial variables

Panel C: Corporate social responsibility variables

(1) GAAP ETR 1

GAAP ETRt;i or Cash ETRt;i ¼ α þ β1 TaxFeeRatet;i þ β2 LogTAt;i þ β3 Leveraget;i þ β4 DivDummyt;i þ β5 PBt;i

GAAP ETRt;i or Cash ETRt;i ¼ α þ β1 TaxFeeRatet;i þ β2 LogTAt;i þ β3 INSTOWNt;i þ β4 ROAt;i

GAAP ETRt;i or Cash ETRt;i ¼ α þ β1 LogTAt;i þ β2 Leveraget;i þ β3 DivDummyt;i þ β4 PBt;i

Excess GAAP ETRt;i or Excess Cash ETRt;i ¼ α þ β1 TaxFeeRatet;i þ β2 ½CSR variablest;i

4.1. Tax management fees and effective tax rates

4.2. Corporate social responsibility and tax management fees

4.2.1. Corporate governance

Intercept 49.29⁎⁎⁎ 32.42⁎⁎⁎ 48.34⁎⁎⁎ 36.77⁎⁎⁎ 54.22⁎⁎⁎ 20.58⁎⁎⁎

Variables Panel A: Corporate governance Panel B: Community

GAAP ETR Cash ETR GAAP ETR Cash ETR

Intercept 48.75⁎⁎⁎ 31.09⁎⁎⁎ 48.76⁎⁎⁎ 31.57⁎⁎⁎

Variables Panel C: Diversity

GAAP ETR Cash ETR

Intercept 48.26⁎⁎⁎ 32.35⁎⁎⁎

4.3. Corporate social responsibility portfolios

4.3.1. Corporate governance

Panel A: Descriptive statistics

Variables strong poor strong-poor

Panel B: Corporate Governance

Variables Strong Poor

GAAP Cash GAAP Cash

Intercept 46.45⁎⁎⁎ 47.65⁎⁎⁎ 51.44⁎⁎⁎ 62.61⁎⁎⁎ 42.37⁎⁎⁎ 40.45⁎⁎⁎ 30.85⁎⁎⁎ 31.12⁎⁎⁎

Intercept 51.65⁎⁎⁎ 51.16⁎⁎⁎ 11.83 14.83⁎ 31.37⁎⁎⁎ 31.24⁎⁎⁎ 30.22⁎⁎⁎ 30.18⁎⁎⁎

(continued on next page)

Intercept 56.83⁎⁎⁎ 56.65⁎⁎⁎ 26.77⁎⁎⁎ 27.16⁎⁎⁎ 35.73⁎⁎⁎ 35.78⁎⁎⁎ 56.64⁎⁎⁎ 61.07⁎⁎⁎

4.4. Tax management and excess ETR

Panel A : Dependent variable – GAAP ETR

Intercept LogTA Leverage DivDummy PB INSTOWN ROA CapExp

42.06⁎⁎⁎ − 0.82⁎⁎⁎ 0.0008 − 0.08 0.02 − 0.05⁎⁎⁎ − 0.17⁎⁎⁎ 0.32⁎⁎⁎

Panel B: Dependent variable — Excess GAAP ETR

Corporate governance Community Diversity

Intercept 1.19⁎⁎⁎ Intercept 1.13⁎⁎⁎ Intercept 1.23⁎⁎⁎

Panel C: Dependent variable – Cash ETR

Intercept LogTA Leverage DivDummy PB INSTOWN ROA CapExp

29.71⁎⁎⁎ − 0.54⁎⁎ − 0.003 4.13⁎⁎⁎ − 0.006 − 0.06⁎⁎⁎ 0.15⁎⁎⁎ − 0.19⁎⁎⁎

Panel D: Dependent variable – Excess Cash ETR

Corporate governance Community Diversity

Intercept 0.282 Intercept 0.50 Intercept − 0.03

4.5. Sensitivity to foreign sales and advertising expenses

4.5.1. Foreign sales

Panel A: Foreign sales, tax fees and tax avoidance

AdvExp portfolio TaxFeeRate GAAP ETR Cash ETR

High 0.21 27.84 22.02

Panel B: Foreign sales and CSR

ForeignSales CGOV_STR CGOV_CON COM_STR COM_CON DIV_STR DIV_CON N