Relationship between Corporate Social Responsibility and Tax Avoidance Based on Bayesian Network

As social communities, companies have to fulfill their social responsibility. Companies carry out social responsibility activities to meet the needs of their various stakeholders. Because corporate social activities especially affect firm value and profitability from enhancing company image, the managements faithfully fulfill their social responsibilities for strategical purposes. On the other hand, companies sometimes avoid taxes to reduce tax expenses but are generally passive about tax avoidance actions since they defame company image. Companies that are vigorously engaged in social responsibility activities, in particular, remain cautious about tax avoidance because their good company image can suffer greatly from tax avoidance. Therefore, it is presumed that corporate social responsibility activities are related to corporate tax avoidance. The purpose of this study is to identify various financial variables that affect the corporate tax avoidance tendency and examine how corporate social responsibility activities are related to corporate tax avoidance. To this end, this study presents the Markov Blanket, which is the minimum set of explanatory variables affecting corporate tax avoidance and conducts a Sensitivity Analysis reflecting various real-world situations based on the causal relationship deduced. Previous studies related to corporate social responsibility activities and tax avoidance assume linearity between explanatory variables and dependent variables, and thus are limited in reflecting various real-world situations. In this study, the interdependency between variables is examined using the General Bayesian Network so as to determine what effects each variable ultimately has on corporate tax avoidance. The results of this study can strengthen the function of supervisory agencies that are concerned with corporate tax avoidance allowing them to preemptively identify companies that area paying less tax, and thereby contribute to enhancing the efficiency of supervision task. In addition, this study can be used as a useful reference to improve the system for reducing corporate tax avoidance tendency by suggesting the relationship between corporate tax avoidance tendency and corporate social responsibility activity.