Unveiling The Dark Side Of Corporate Social Responsibility (CSR): When Philanthropy Masks Tax Evasion

Introduction

In the realm of corporate social responsibility (CSR), where businesses are expected to contribute positively to society, a disturbing trend has emerged: the violations of CSR initiatives as a simple cover for commercial tax evasion.[i] The purpose of companies´ CSR activities is twofold: to support a normal social development of society and environmental protection, while some companies turned the good cause to their advantage, spending money that could have been used for real benefit switched to tax-deductible activities. This point is a great example of the recent happenings – NALCO and SAIL’s case, on the one hand, and controversies around the PM Cares Fund, on the other – which increase the level of awareness on the issue. On top of that, tax evasion scams lead to CSR funding fraud which also puts in sharper focus this ethical dilemma that urgently needs to be addressed. Looking at CSRR and tax evasion from this complex intersection point, it is challenging to comprehend the possible effects and find the right strategy to solution this problem correctly. Through this blog we will present to you the ins and outs of CSR-driven tax evasion, check its consequences and make some offers how these issues can be better resolved by implementing higher transparency, more accountability and ethics among corporations.

Corporate Social Responsbility & Tax Evasion.

Corporate Social Responsibility (CSR) has since long been regarded as a business practice that philanthropically go beyond their mere pursuit of profit-seeking and try to equally contribute positively to the society and the environment at large. However, beneath the surface of philanthropic gestures and sustainability initiatives lies a darker reality: abuse of CSR as a gap in the VAT payment system and for tax evasion. Even though CSR should be geared towards social impact, some companies abuse this mechanism to actually carry out tax avoidance, and this for the worst scenario leads to the negative side of corporate social responsibility. In this blogpost we break down the damaging impact of CSR being re-purposed for tax shelters, considering the underlying dynamics and the demand for more transparency and responsibility in a philanthropy business.[ii]

CSR reflects the ethical duty for businesses to contemplate the welfare of the society and the environment, besides their traditional aims to earn a profit. It covers not only ethical conduct, but also sustainable development and environmental conservation, social improvement, responsibility as well as corporate governance. Ethics with implications of operation on stakeholders and environment is necessary and that being mindful of environment usage and conservation is an essential aspect of it. Social impact-wise, it includes community service, education, healthcare, food assistance, affordable housing programs, and employment support. Today, a well-determined CSR policy is a necessary instrument in meeting the target audience’ expectations, boosting business reputation and brand image, mitigating risks, and creating environmentally friendly and sustainable business models.

At the same time, corporate social responsibility may be abused to avoid paying taxes, which makes ethics and law risk a serious problem. Corporations use different technicalities, such as inflating the expenditures, misstating activities, exploiting the legal loopholes, remaining under the radar of shifting taxes or setting up corporate havens for tax evasion to avoid paying taxes. These practices breach the CSR code of integrity into pieces and can bring the negative effect to the society such as corruption, of failure to fulfill the tax obligation and failure to provide public services. Although CSR is the key to social welfare, the abusive implication for tax-evasion is a violation of ethics in corporate to a great extent, which stresses the requirement of greater transparency and responsibility in corporate operations in the market.

Recent Cases 

NALCO, the National Aluminium Company Limited, a state-owned commercial sector unit, has been implicated in allegations of misusing CSR funds. It is alleged that NALCO channeled welfare funds into activities allowable for corporate tax deductions, thereby undermining the intended purpose of CSR and raising ethical concerns. Similarly, another major public sector company, SAIL (Steel Authority of India Limited), has also faced scrutiny for its handling of CSR funds. Reports suggest that funds raised by community fundraising organizations associated with SAIL were diverted to tax-saving avenues, contradicting the core mission of CSR.[iii]

The PM Cares Fund, established during the COVID-19 pandemic, has also come under scrutiny for the utilization of funds received from corporate entities. Questions have been raised about whether the funds were genuinely directed towards pandemic relief efforts or diverted for other purposes.

In a recent incident, the IT department uncovered a tax evasion scam involving CSR funds, where individuals were caught with a significant amount of cash in Noida.[iv] This investigation revealed a complex network involving agents, NGOs, and politicians allegedly misusing CSR funds for tax evasion or as a front. From the legal viewpoint tax evasion through CSR not only has negative impacts on the government’s utilization of the money for the development but also the utilization of various tax avoidance strategies are legally lenient whereas morally it’s under acceptable level. By means of legal gaps, exploitation of lawfulness can pass CSR budget negotiations.

 Recommendations

To cure the problems of tax avoidance by tax evasion, proposed advantages are suggested. First, an audit of CSR funds must be in place to confirm that the funds are used as stated in official documents. It implies that there has to be strong checks in place so that CSR activities will indeed benefit the society and not getting appropriately exploited for tax avoidance. Along with that, cuts in corporate tax rates provide the reason for the companies avoidance evasion methods. Including in this, eliminating duplications between NGO activities is one of such vital things which would be barely a mere use of CSR funds for society resulting in minimalized impact.

Implications

CSR-powered tax evasions are destructive, multidimensional, and affect a wide range of operations in a company. Well, the economic effect of these practices is a rise in tax revenue such that the government is less financed to offer the public with the essential critical services like education, health service and infrastructure. Besides, the tax evading companies gain an edge over compliant companies since they are not subjected to all the costs upon the companies which distorts market competition. As a result the market dynamics are affected. Also on social level, negative impact is the same one, as the societies where social programs are damaged and inequality is increased, such civil conscious and living of the people are under the pressure. Another serious consequence, trust erosion, comes into place as more corporate transparency occurs and corporations’ credibility as a result diminishes when CSR money is diverted for tax evasion, which causes reputational damage and infuriates estakeholders.

As such, attaining an ideal equilibrium between enforcing CSR and preventing tax avoidance will entail stimulating corporations to behave responsibly, collect the taxes and guarantee the welfare of society. Through tightening of regulatory mechanisms, promotion of transparency and adherence to the ethics of CSR, the businesses will be able to sustain the core ideals of CSR and, as a result, support the growth of the sustainable development process.[v]

Innovative Approaches and Global Cooperation in Combating CSR-Driven Tax Evasion

The tax evasion by the multinational companies due to the gained CSR becomes rather a complicated issue, requiring creative solutions and the world collaboration. The interactive model envisioned for co-evolutionary modeling[vi] holds great potential in routine billions, not only by detecting tax fraud but also by assessing tax evasion schemes that keep on emerging and testing auditing policies. Therefore, in order to meet the challenge of smart tax cheats/evaders who are capable of adopting new evasion strategies as soon as audit rules are changed, tax authority may find it helpful to monitor how these strategies keep pace with the changing enforcement method. The key tool in analyzing the big data volume is the non-intrusive techniques of data and analytics processing using electronic data.[vii] Thus, the detection of the suspect and anomaly patterns is performed very well by these methods. Furthermore, the non-stop monitoring which is often aided by AI and machine learning helps in identifying criminal activities that might otherwise have remained undetected thus relegating reactive approaches.[viii] In fact, global cooperation is in the neccesity as this is the only thing that will enable the eradication of tax evasion completely. Plans of impositions on a world’s billionaires to be reduced by taxes above a certain threshold intends to weaken involvement with offshore structures.[ix] Such fast changing tax evasion approaches require innovative treatments and joint efforts among relevant stakeholders to fortify this continuous struggle of auditor is against tax evaders.

Recommendation

Increased transparency and reporting form the basis which one can use to successfully control CSR related tax avoidance. Stakeholders’ trust is sustained via corporations with an integrity mindset, they do this by giving full disclosures of their CSR reports, enlightening on how money is channeled to ensure society equitable has a sustainable benefit vision and prevent misuse such as tax evasion. The independent auditing bodies perform a wide range of functions, including the exposure of discrepancies, guaranteeing that CSR resources match stated goals and not consumed for tax evasion. Stakeholders’ carefulness is vital here, as shareholders, employees, and consumers look into the matter. The perception of misuse is bad if detected. The issue of governance includes the importance of building regulatory regime straightening the disclosure and operation of CSR reporting and using fines as an instrument of criminal responsibility for misusage of funds. To emphasis the ethical responsibilities of executives and boards on CSR misuse is very crucial, and so in-house training programs which are aimed at informing everyone on any responsible decision making are of the highest priority. Mutual interaction is the key between sectors, be it the business associations, NGOs and academia, with the need to engage in research and the blowing of the whistle in the weeds of CSR tax evasion through the sharing of experiences and case studies. Ultimately, responsible CSR practices benefit society when rooted in genuine intentions, ethical behavior, and transparency.[x]

Conclusion

Finally, CSR and tax evasion interlink at a very ethical position at which probability is required to be persecuted thus action. Unlike CSR, that is meant to foster social change, it is ironical that CSR abuse for tax avoidance defeats CSR objectivity and erodes public confidence concerning corporate charities. The exposures of cases, such as those of NALCO, SAIL, PM Cares Fund and the Noida cash seizure scam, reveal the need for the action to take place and early enough be undertaken

In order to curb CSR-motivated tax evasion, it is required to elevate transparency and responsibility so that CSR reporting and spending are completely noutilized. The mandatory body of independent audits, watchfulness of stakeholders, governmental supervision, and legal restraints are inevitably regarded as inevitable parts of the tackling strategy for this phenomenon. On the other hand, managers and boards need to be guided against the abuse of CSR funds and as societies we need to collaborate across the sectors in order to have responsible business practices.

However, towards the end, companies need to keep their ethics very high and make sure the money they pay in taxes is responsibly used and also helps in society development that leads to sustainability. To achieve the true meaning of CSR, companies must be truthful in their intentions, they must conduct their business in an ethical way and they must also be transparent. This duality of being will help them maintain their social responsibility and regain the trust of the public. Thus, a more equitable and sustainable future will be created.

Author:- Harsh Srivastava, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

[i]  Montenegro, Tânia Menezes. “Tax Evasion, Corporate Social Responsibility and National Governance: A Country-Level Study.” Sustainability 13, no. 20 (2021): 11166. MDPI: https://www.mdpi.com/2071-1050/9/10/1710

[ii] Gupta, Manan. “CSR, Tax Evasion and Avoidance in India,” IJLMH, accessed April 14, 2024, https://ijlmh.com/paper/csr-tax-evasion-and-avoidance-in-india/.

[iii] “Tax Evasion, Avoidance and CSR Mandates: Indian Corporates at Crossroads.” Lawful Legal, Date of Publication, https://lawfullegal.in/tax-evasion-avoidance-and-csr-mandates-indian-corporates-at-crossroads/

[iv] Times of India. (2022, December 11). Noida cash seizure trail leads I-T sleuths to multi-crore CSR scam https://timesofindia.indiatimes.com/city/noida/noida-cash-seizure-trail-leads-i-t-sleuths-to-multi-crore-csr-scam/articleshow/95519851.cms.

[v] Contractor, Farok J. (2016). Tax Avoidance by Multinational Companies: Methods, Policies, and Ethics. Rutgers Business Review, Vol 1, No. 1, 17-20. [from SSRN: https://ssrn.com/abstract=3005385]

[vi] Hemberg, E., Rosen, J., Warner, G., Wijesinghe, S., & O’Reilly, U.-M. (2016). Detecting tax evasion: a co-evolutionary approach. Artificial Intelligence and Law, 24, 149–182

[vii] Editor4. (2023, August 3). Rising GST & Tax Evasion: An Insight into Efforts & Statistics. Tax Guru

[viii] Asif, S. A. (2023, October 26). Deciphering Tax Evasion: A Legal Perspective on Leveraging AI/ML for Robust Enforcement. IndiaCorpLaw

[ix] TPA Global. (2023, November 7). The Changing Landscape of International Tax Evasion and the Quest for Tax Justice

[x] Chu, X., Bai, Y., & Li, C. (2023). The Dark Side of Firms’ Green Technology Innovation on Corporate Social Responsibility: Evidence from China. Journal of Business Ethics, 11201