Do environmental, social, and corporate governance (ESG) scores reduce tax avoidance?

ABSTRACT

This study examines the impact of environmental, social, and corporate governance (ESG) scores on the tax avoidance of Brazilian companies. The sample comprises 542 firm-year observations from the period 2010-2021. ESG data were sourced from the Refinitiv Eikon® database, while financial and control variables were retrieved from Economática®. The results indicate that ESG performance is associated with reduced tax avoidance; however, findings were mixed during and after the COVID-19 pandemic. While tax avoidance declined in the post-pandemic period, the strategic disclosure of ESG practices as a signal of reputational capital increased. This study distinguishes itself by disaggregating the analysis into pre- and post-pandemic periods, thereby shedding light on whether corporate managers tend to adopt more opportunistic behaviors during times of crisis. The results suggest that Brazilian firms with higher ESG scores are more likely to disclose such information to enhance transparency, potentially signaling a lower risk of tax-related scrutiny.

Keywords:
ESG; tax avoidance; Corporate Culture Theory.

RESUMO

Este estudo analisa a influência das pontuações ambientais, sociais e governança corporativa (ASG) na agressividade tributária das empresas brasileiras. A amostra é constituída por 542 observações no período 2010-2021. Os dados ASG foram obtidos da Refinitiv Eikon®, enquanto as outras variáveis foram coletadas na Economática®. Os resultados mostram que o ASG reduz a evasão fiscal, embora durante e após a pandemia da Covid-19 os resultados tenham sido mistos. A evasão fiscal diminuiu após a pandemia, mas a divulgação de práticas ASG com o propósito de indicar boa reputação aumentou. O estudo se diferencia segregando a análise no período anterior e posterior ao início da pandemia, revelando se os gestores têm um comportamento mais ou menos oportunista em tempos de crise. Os achados sugerem aos usuários que as empresas brasileiras com pontuações ASG mais altas tendem a divulgar tais informações visando aumentar a transparência, sendo um indicativo de menor risco de autuações fiscais.

Palavras-chave:
ASG; agressividade tributária; Teoria da Cultura Corporativa.

1. INTRODUCTION

In academic research, tax avoidance refers to corporate practices aimed at reducing tax liabilities (Slemrod, 2004), whether through legal, questionable, or outright illegal means (Goh et al., 2016). Scholars have examined the relationship between tax avoidance and Corporate Social Responsibility (CSR), based on the premise that companies more committed to CSR tend to engage in less aggressive tax strategies (Yoon et al., 2021; Zeng, 2019). This is because fair tax contribution is regarded as a form of social justice (Zeng, 2016) and an indicator of corporate transparency (Bressan, 2023; Yoon et al., 2021).

The literature uses various metrics to represent CSR, including participation in the Corporate Sustainability Index (ISE) (Martinez & Ramalho, 2017); CSR scores from structured databases (Melo et al., 2020; Zeng, 2019); scores constructed from companies’ primary disclosures (López-González et al., 2019); and, more recently, Environmental, Social, and Governance (ESG) indicators (Yoon et al., 2021).

Measures of tax avoidance are generally based on income taxes (Martinez & Ramalho, 2017). Common proxies include book-tax differences (Martinez & Ramalho, 2017; Zeng, 2019); abnormal BTD (Brunozi Júnior et al., 2018); effective tax rate (ETR) (Martinez & Ramalho, 2017); long-term ETR (Dyreng et al., 2008); cash ETR (Martinez, 2017); book-tax conformity (BTC) (Atwood et al., 2010); permanent BTD (Frank et al., 2009); and deferred taxes (Phillips et al., 2003).

Several studies have explored the relationship between CSR and tax avoidance, including those by Kobbi-Fakhfakh and Bougacha (2023), Jiang et al. (2024), Lee et al. (2021), Martinez and Ramalho (2017), Yoon et al. (2021), and Zeng (2019). Martinez and Ramalho (2017) examined whether companies listed on the ISE engage in more or less aggressive tax planning. Zeng (2019) investigated whether CSR practices reduce tax avoidance among publicly traded firms across 35 countries. Yoon et al. (2021) studied the relationship between ESG scores and tax avoidance among South Korean firms and Lee et al. (2021) assessed whether Korea’s most admired companies display less opportunistic behavior, analyzing the role of ESG and its interaction with corporate reputation. Kobbi-Fakhfakh and Bougacha (2023) explored the effects of the COVID-19 pandemic on tax avoidance in S&P 500 companies while Jiang et al. (2024) analyzed whether ESG practices mitigate tax avoidance in Chinese firms.

This study differs from prior research by comparing periods before and after the COVID-19 pandemic. This distinction is relevant given the sharp decline in corporate revenues triggered by lockdowns and market disruptions (Kobbi-Fakhfakh & Bougacha, 2023). It allows for an assessment of whether Brazilian companies leveraged the crisis to engage in more aggressive tax behavior in pursuit of improved financial results. Conversely, one might expect companies to increase their ESG commitments during turbulent periods, signaling greater transparency and thereby reducing tax avoidance.

Against this backdrop, the present study investigates the influence of ESG scores on the tax avoidance of Brazilian firms. To this end, it sets out two specific objectives: (i) to examine whether ESG engagement and tax avoidance changed significantly after the onset of the pandemic; and (ii) to assess the influence of ESG scores on tax avoidance, distinguishing between the pre- and post-pandemic periods.

This study contributes by offering empirical evidence in support of Corporate Culture Theory (CCT) as it relates to tax avoidance. According to this theory, firms with stronger ESG practices are expected to foster a corporate culture that promotes fair tax payment for two key reasons. First, the fair payment of taxes is viewed as an institutionalized norm in such companies, which results in increased public revenues and, consequently, greater government investment in societal well-being (Weisbach, 2002). Second, managers may perceive that doing the “right” thing-such as complying with tax obligations-helps prevent the company from being perceived as unethical or irresponsible (Yoon et al., 2021), thereby mitigating reputational risk in the marketplace (Carpenter & Jones, 2015).

Kobbi-Fakhfakh and Bougacha (2023) examined the impact of the COVID-19 pandemic on corporate tax behavior, investigating whether managerial decision-making in times of crisis tends to favor more aggressive tax strategies and whether companies adopting ESG practices show reduced tax avoidance. The present study focuses specifically on the Brazilian context, as the country ranks among those with the highest levels of tax evasion globally (Kurauone et al., 2021). By demonstrating that ESG practices are associated with lower tax avoidance during periods of heightened uncertainty, this study offers valuable insights to support user decision-making. This is because stakeholders may interpret that, on average, Brazilian firms with stronger ESG practices tend to exhibit less aggressive tax behavior.

Zeng (2019) argues that ESG practices offer important signals to users of accounting information, suggesting that more sustainable companies may represent safer investment opportunities due to their lower exposure to reputational harm and reduced risk of tax-related sanctions. ESG metrics can also inform investment strategies for risk-tolerant investors, as firms with low ESG scores or valuations may exhibit greater opacity, prompting such investors to demand higher returns in exchange for increased exposure to tax and reputational risk.

The choice of Brazil as the research setting is based on several factors. First, most ESG-related studies have been conducted in developed economies, leaving significant scope for investigation in emerging markets (Khemir, 2019). Second, a record number of investors turned to the Bolsa, Brasil, Balcão (B3) in 2020 (Brasil Bolsa Balcão, 2020), the largest stock exchange in Latin America. Third, a survey by Morningstar found that ESG-focused funds in Brazil raised more than R$ 2.5 billion in 2020 (Ecossis - Soluções Ambientais, 2021). Finally, given Brazil’s persistently high levels of tax evasion (Kurauone et al., 2021), the country offers a fertile context to assess whether ESG practices can serve as indicators of less aggressive tax behavior.

2. BUILDING THE HYPOTHESES

The term ESG (Environmental, Social, and Governance) emerged in 2004, when the United Nations (UN) published the report Who Cares Wins, which sought to propose enhancements in the integration of financial markets with ESG initiatives (WorldBank, 2004). Yoon et al. (2021) note that ESG practices are viewed as an extension of Corporate Social Responsibility (CSR), given that corporate efforts to implement ESG policies are tied to a management philosophy grounded in transparency and ethical conduct.

CSR has been discussed since the 1970s and, according to Carroll (1979), encompasses all responsible practices adopted by companies toward society, implying that a firm’s focus should extend beyond mere profit maximization. CSR includes all corporate actions that impact various stakeholders, such as shareholders, employees, society, government, and consumers (Moser & Martin, 2012). Acar and Temiz (2020) point out that stakeholders increasingly demand stronger corporate CSR commitments to reconcile financial and non-financial performance outcomes.

Corporate Culture Theory (CCT) offers a framework for explaining companies’ varying levels of engagement in ESG practices. From this perspective, firms may adopt such practices to signal a commitment to transparency, reinforce a culture of fair tax compliance, and indicate to the market that their corporate values are incompatible with aggressive tax strategies (Murray & Montanari, 1986; Yoon et al., 2021).

CSR adoption, however, operates under two different theoretical lenses (Carroll, 1991). The first sees CSR as a philanthropic and ethical initiative to enhance organizational value and reputation (Lee et al., 2021). Accordingly, CSR adoption may increase a firm’s long-term value through higher sales, a more skilled workforce, and an improved corporate image. In this context, ESG practices can signal an institutionalized belief in the importance of non-financial considerations within the organizations (Hoi et al., 2013). Therefore, from this perspective, ESG practices motivate organizations to preserve value and to seek the reduction of excessive taxation (Lee et al., 2021).

Weisbach (2002) suggests that companies engaging in ESG initiatives are allocating efforts to promote stakeholder well-being. In this context, tax avoidance influences government claims on the company, affecting the firm’s ability to contribute to societal well-being. Moreover, the adoption of more aggressive tax practices is regarded as unethical and irresponsible behavior. Consequently, firms that are more committed to ESG practices are less likely to adopt aggressive tax strategies (Bressan, 2023; Yoon et al., 2021). When such strategies are exposed, firms risk losing senior leadership, facing political backlash, incurring financial penalties, and suffering consumer boycotts (Chen et al., 2019).

The second theoretical perspective adopts an opportunistic view of managerial behavior, wherein CSR is implemented with short-term objectives in mind. In this scenario, managers pursue private interests at the expense of shareholders, often resulting in diminished corporate performance (Brammer & Millington, 2006). Here, tax avoidance jeopardizes the organization’s reputation and exposes shareholders to financial risk through tax-related penalties (Godfrey, 2005). As such, companies may use ESG as a preemptive, opportunistic defense mechanism to mitigate the potential fallout from negative events (Lee et al., 2021).

Thus, managers may adopt ESG initiatives to mask opportunistic behaviors. In such cases, firms may choose to incur ESG-related expenditures primarily to protect their reputations, while simultaneously engaging in aggressive tax planning (Zeng, 2019). ESG thus becomes a form of risk management, whereby firms adopt these practices to guard against political, regulatory, and social penalties triggered by negative corporate incidents (Godfrey, 2005). In such situations, managers seeking to improve performance may avoid tax (Goh et al., 2016). However, out of concern for reputational loss, they concurrently embrace ESG practices to maintain a favorable market image.

A loss of reputation can reduce a company’s market value, increase political and media scrutiny, heighten the risk of fines and penalties, and even trigger consumer boycotts, characterizing the situation as a moral hazard (Dell’Anno, 2009; Hanlon & Slemrod, 2009; Wilson, 2009). As a result, managers may adopt ESG practices to demonstrate to society that the company is socially responsible and sustainable. If, at any point, the company engages in aggressive tax strategies, it is less likely to arouse suspicion. And if such actions are discovered, the company can point to its established ESG practices as evidence of its broader commitment to social justice.

Indeed, several researchers have explored how CSR practices influence tax avoidance. The majority of these studies report a negative and statistically significant relationship between CSR and tax avoidance (Carpenter & Jones, 2015; Yoon et al., 2021). Table 1 summarizes selected studies on the link between CSR and tax avoidance.

Table 1
Summary of research linking CSR and tax avoidance

Authors	Objective	Sample Origin	CSR Metric	Tax avoidance Metric	Results
Zeng (2016)	To examine the relationship between CSR, tax avoidance, and firm market value.	Canada	Corporate Knights Research Group CSR Ranking	ETR and Cash ETR	Negative association between CSR and tax avoidance; higher CSR also increases a firm's market value.
Martinez e Ramalho (2017)	To investigate tax avoidance among firms listed on the ISE.	Brazil	ISE Dummy Variable	ETR and BTD	ISE-listed companies exhibit lower levels of tax avoidance compared to non-ISE firms.
López-González et al. (2019)	To analyze the impact of CSR and family ownership on tax avoidance.	28 countries	Score from Ethical Investment Research Service (EIRIS)	ETR and Cash ETR	Negative association between social/environmental performance and tax avoidance.
Zeng (2019)	To assess the relationship between CSR, tax avoidance, and governance interaction.	35 countries	Score from Datastream	ETR, total BTD, and BTD residuals regression on accruals	Positive association between CSR and tax avoidance; country-level governance positively influences CSR.
Melo et al. (2020)	To examine the effects of CSR on tax avoidance levels.	Brazil	Thomson Reuters® database	ETR	Negative association between CSR and tax avoidance, regardless of firm size.
Lee et al. (2021)	To examine whether corporate admiration influences tax practices.	South Korea	KMAC Consulting database	BTD residuals regression on accruals	Negative association between corporate admiration and tax avoidance.
Yoon et al. (2021)	To analyze the relationship between ESG and tax avoidance.	South Korea	ESG Score from Korea Corporate Governance Services	BTD	Negative association between ESG and tax avoidance.
Kobbi-Fakhfakh e Bougacha (2023)	To examine the impact of COVID-19 on corporate tax evasion.	United States	Datastream database	BTD, ETR, and Cash ETR	Negative association between ESG and tax avoidance.
Jiang et al. (2024)	To assess whether ESG reduces tax avoidance in Chinese firms.	China	ESG score from the Wind database	BTD	Negative association between ESG and tax avoidance.

• Source: Elaborated by the authors

The data presented in Table 1 show that the studies primarily analyze two variables as proxies for tax avoidance: book-tax differences (BTD) and the effective tax rate (ETR). In this study, three measures are employed to characterize BTD. The first is abnormal BTD, which serves as the primary indicator of tax avoidance, as it captures opportunistic managerial behavior (Brunozi Júnior et al., 2018). Formigoni et al. (2009) explain that abnormal BTD arises when managers exploit ambiguities and uncertainties in tax legislation to reduce the company’s tax liability.

Given that Corporate Culture Theory (CCT) posits that firms adopt ESG practices to signal their commitment to transparency and fair tax compliance-thereby conveying to the market a corporate culture rooted in ethics and social responsibility (Bressan, 2023; Murray & Montanari, 1986; Yoon et al., 2021)-the study proposes its first hypothesis:

• H₁: There is a negative association between abnormal BTD and ESG.

The second measure is normal BTD, which results from structural differences between accounting and tax regulations (Shackelford et al., 2011), and is not necessarily associated with aggressive tax behavior. Since normal BTD stems from institutional factors rather than managerial discretion, it is considered consistent with higher financial and tax compliance (Cappellesso et al., 2019). This leads to the second hypothesis of the study:

• H₂: There is no significant association between normal BTD and ESG.

The third measure is total BTD, which combines abnormal and normal BTD (Tang, 2005). Based on CCT and the premise that companies adopting ESG practices aim to ensure fair tax contributions, thereby avoiding the market perception of a corporate culture marked by unethical or socially irresponsible conduct (Bressan, 2023; Murray & Montanari, 1986; Yoon et al., 2021), the third hypothesis is proposed:

• H₃: There is a negative association between total BTD and ESG.

The effective tax rate (ETR) reflects the tax planning and tax avoidance activities that affect a firm’s reported profit for the period and is commonly used to estimate an entity’s overall tax burden (Robinson et al., 2010). Calculated as total income tax expense divided by pre-tax income, a lower ETR indicates higher tax avoidance (Formigoni et al., 2009; Shackelford & Shevlin, 2001). Considering that greater ESG disclosure is expected, under CCT, to reduce tax avoidance, the study formulates its fourth hypothesis:

• H₄: There is a positive association between ETR and ESG.

In addition to its social and human toll, the pandemic also had significant economic repercussions for companies, particularly through a marked decline in revenues caused by market closures and quarantines that disrupted organizational activity (Kobbi-Fakhfakh & Bougacha, 2023). This context may have prompted managers to adopt more aggressive tax strategies as a means of reducing tax liabilities and improving financial performance (Kobbi-Fakhfakh & Bougacha, 2023). Accordingly, during periods of heightened uncertainty-conditions more conducive to opportunistic behavior-firms that adopted stronger ESG practices are expected, under Corporate Culture Theory (CCT), to have exhibited less aggressive tax conduct (Bressan, 2023; Murray & Montanari, 1986; Yoon et al., 2021).

This theoretical foundation rests on the premise that aggressive tax behavior can lead to the loss of senior executives, political and regulatory pressure, financial penalties, and consumer backlash (Chen et al., 2019). Weisbach (2002) notes that by engaging in broad ESG initiatives, firms redirect efforts toward promoting the welfare of multiple stakeholders. In contrast, tax avoidance can heighten government scrutiny, undermining the firm’s capacity to contribute to societal well-being. Moreover, such behavior is widely regarded as unethical and irresponsible, making companies with a stronger emphasis on ESG practices less likely to adopt aggressive tax strategies (Bressan, 2023; Yoon et al., 2021). In light of this context, the study proposes its fifth hypothesis:

• H₅: During the pandemic, there was an increase in the degree of tax avoidance among Brazilian companies.

3. RESEARCH DESIGN

The ESG data were obtained from the Refinitiv Eikon® database, while the remaining variables were sourced from Economática®. It is important to note that only non-financial publicly traded companies listed on the Bolsa, Brasil e Balcão (B3) were included, as financial institutions are subject to specific regulatory frameworks that could affect the calculation of BTD and other variables (Hanlon, 2005). Data were collected from 2009 to 2021, with the study window spanning 2010 to 2021 due to lagged variables scaled by total assets. The initial dataset comprised 4,433 observations.

Additionally, firms with negative Earnings Before Taxes (EBT) (1,025 observations) were excluded, as these may generate deferred tax assets (Hanlon, 2005) as well as observations with missing data (2,866), resulting in a final sample of 542 observations. Missing data refers to cases lacking information on at least one of the variables used in the econometric models. Only Brazilian companies with ESG data on Refinitiv Eikon® were considered, contributing to the sample size reduction. The data were winsorized at the 1st and 99th percentiles to mitigate the impact of outliers. Subsequently, the Bacon test indicated no remaining outliers.

The dependent variable is tax avoidance, with the first measure being abnormal BTD, derived from the residuals calculated using Equation 1:

$${BTD}_{i,t}={\beta }_0+{PPE}_{i,t}+{∆REV}_{i,t}+{NOL}_{i,t}+{DTE}_{i,t}+{(SE-NI)}_{i,t}+{\Delta INV}_{i,t}+{\epsilon }_{i,t}$$ (1)

Where: BTD is the difference between EBT and TI (taxable income) for company i in year t, scaled by lagged total assets. EBT is reported in the companies’ financial statements, while TI is not typically disclosed in the notes to the financial statements of Brazilian companies. It is estimated by dividing the Current Tax Expense (CTE) by the statutory tax rate in Brazil (34%). PPE represents net property, plant, and equipment, calculated as the sum of investments, fixed assets, intangible assets, and deferred charges (if any), scaled by lagged total assets. ΔREV is the change in net revenue from year t-1 to year t, scaled by lagged total assets. NOL is the tax loss carryforward, which, due to not being widely disclosed in financial statements, is estimated by dividing the positive CTE of company i in year t by 0.34. If the current CTE value is not positive, the value is assumed to be zero (Martinez & Passamani, 2014). DTE is the Deferred Tax Expense of company i in year t, scaled by lagged total assets. SE - NI is the difference between shareholders’ equity (SE) and net income (NI) of company i in year t, scaled by lagged total assets. ΔINV is the change in inventories from year t-1 to year t, scaled by lagged total assets.

The second tax avoidance measure is total BTD, which is calculated according to Equation 2.

$${BTD}_{i,t}=({EBT}_{i,t}-\frac{{DTE}_{i,t}}{\mathrm{0,34}})$$ (2)

Where: EBT = profit before income tax and social contribution for company i in year t; DTE = current tax expense for company i in year t; other variables are defined above.

The third variable related to tax avoidance is normal BTD, calculated as total BTD minus abnormal BTD, according to Equation 3:

$${NormalBTD}_{i,t}={TotalBTD}_{i,t}-{AbnormalBTD}_{i,t}$$ (3)

The dependent variable ETR is calculated according to Equation 4:

$${ETR}_{i,t}=\left(\frac{{TTE}_{i,t}}{{EBT}_{i,t}}\right)$$ (4)

Where: ETR = effective tax rate; TTE = total tax expense for company i in year t; other variables are defined above.

Table 2 presents the definitions of each explanatory and control variable and their expected relationships with tax avoidance.

Table 2
Definition of the explanatory and control variables and the expected relationship with the dependent variable

Variable	Definition	Expected BTD Effect	Expected ETR Effect	Authors
Explanatory variable
ESG	ESG score ranging from 0 to 100, based on more than 630 indicators in the Refinitiv Eikon® database. A higher score indicates stronger ESG practices.	-	+	(Lee et al., 2021; Martinez & Ramalho, 2017; Yoon et al., 2021; Zeng, 2019).
Control Variables
Return on Assets (ROA)	More profitable firms may have greater incentives for tax avoidance to minimize tax liability.	+	-	(Araújo & Filho, 2018)
PPE	Firms with a higher ratio of investments, fixed assets, intangible assets, and deferred charges (if any) to total assets are more likely to reduce tax payments.	+	-	(Manzon Jr. & Plesko, 2002)
Indebtedness	More indebted firms may aim to reduce tax payments to meet financial obligations and attract financing. However, such firms may also be more closely monitored.	+/-	-/+	(Clarkson et al., 2011)
CFO	Higher cash flow is expected when firms pay less in taxes.	+	-	(Marchesi & Zanoteli, 2020)
Size	Larger firms may engage in aggressive tax planning to remain competitive, though increased investor scrutiny may limit such behavior.	+/-	-/+	(Hochberg, 2012)
ΔREV	Firms with higher sales revenues tend to report higher profits, which increases the tax base. Tax avoidance can help reduce tax obligations.	+	-	(Manzon Jr. & Plesko, 2002)

• Source: Elaborated by the authors
• Legend: Variables previously defined.

Therefore, the study model is presented in Equation 5:

$${TAVOX}_{i,t}={\alpha }_0+{\beta }_1{ESG}_{i,t}+{\beta }_2{ROA}_{i,t}+{\beta }_3{PPE}_{i,t}+{\beta }_4{Indebtedness}_{i,t}+{\beta }_5{CFO}_{i,t}+{\beta }_6{Size}_{i,t}+{\beta }_7{∆REV}_{i,t}+sector+year+{\epsilon }_{i,t}$$ (5)

Where: TAVOX represents the tax avoidance measures for company i in year t (i.e., total BTD, abnormal BTD, normal BTD, and ETR). Note that the BTD-related variables were used in absolute and modulus values; the other variables have been previously defined.

The data were processed using unbalanced panel data and the Wilcoxon test. The F-Chow, Hausman, and Breusch-Pagan Lagrangian Multiplier tests were applied to determine whether the appropriate panel structure was Pooled OLS (POLS), fixed effects, or random effects. The Wooldridge test was used to detect autocorrelation, and the maximum likelihood estimator was employed to check for heteroscedasticity (Fávero & Belfiore, 2020). Since heteroscedasticity was identified, the Generalized Least Squares (GLS) model was adopted, with adjustments made for both heteroscedasticity and autocorrelation (Stata, 2022). Additionally, no multicollinearity was detected, as indicated by Variance Inflation Factor (VIF) values below the threshold of 5.0.

The Wilcoxon test was also used to determine whether the onset of the pandemic affected ESG disclosure and tax avoidance among Brazilian companies. As this test requires paired observations, only companies present in both periods were included (Fávero & Belfiore, 2020), resulting in a sample of 72 observations-spanning the pre-pandemic period (2018-2019) and the post-outbreak period (2020-2021).

4. RESULTS

4.1. Descriptive statistics

Table 3 presents the descriptive statistics. The positive average of total BTD (0.0345) aligns with the findings of Santos et al. (2016) on Brazilian companies, which also observed that accounting profits tend to exceed taxable profits.

Table 3
Descriptive statistics

Variables	Mean	Coefficient of Variation	Minimum	Maximum
BTD	0.0345	141.9740	-0.0755	0.2084
BTDm	0.0433	95.6225	0.0000	0.2084
ABTD	-0.0004	-8348.0354	-0.0863	0.1224
ABTDm	0.0275	88.6386	0.0000	0.1224
NBTD	0.0347	79.6734	-0.0418	0.1223
NBTDm	0.0373	64.5116	0.0002	0.1223
ETR	0.2250	181.0544	-1.3167	2.9376
ESG	54.2431	33.7762	14.3412	87.3692
E	50.5857	45.0844	2.8856	90.9643
S	57.5959	39.5363	4.6444	95.3563
G	53.4071	38.0898	11.2802	90.1553
ROA	0.0982	57.1248	0.0153	0.2910
PPE	0.5257	48.9063	0.0103	1.3059
Indebtedness	0.5835	27.7986	0.1853	0.9777
CFO	0.1025	72.4132	-0.1649	0.3269
Size	16.7516	6.9019	13.9785	20.4395
ΔREV	0.0876	163.1606	-0.2296	0.5929

• Source: Research Data
• Legend: BTD - Book-Tax Difference; BTDm - Book-Tax Difference (absolute value); ABTD - Abnormal Book-Tax Difference; ABTDm - Abnormal Book-Tax Difference (absolute value); NBTD - Normal Book-Tax Difference; NBTDm - Normal Book-Tax Difference (absolute value); ESG - Environmental, Social, and Governance composite score; E - Environmental component of ESG; S - Social component of ESG; G - Governance component of ESG; ROA - Return on Assets; PPE - Net Property, Plant, and Equipment scaled by total assets; Indebtedness - Total liabilities divided by total assets; CFO - Cash Flow from Operating Activities; Size - Natural logarithm of total assets; ΔREV - Change in net revenue, year-over-year, scaled by lagged total assets.

The mean of ABTD was negative (-0.0004), which is consistent with Sant’anna e Brunozi Júnior (2019), who also reported a negative mean for Brazilian companies. NBTD had a positive mean (0.0347), indicating that differences between accounting and tax standards typically result in a higher accounting profit than tax profit. The average ETR was 0.2250, lower than that reported by Melo et al. (2020) , which was 0.3011, suggesting that firms, on average, pay a lower effective tax rate than the nominal statutory rate.

The average ESG score was 54.2431, indicating that, on average, Brazilian companies have ESG ratings above the median (50), according to Refinitiv Eikon®. Regarding the ESG components, the averages were: (i) environmental (E) = 50.5857, (ii) social (S) = 57.5959, and (iii) governance (G) = 53.4071. Notably, the environmental component exhibited both the lowest average and the highest coefficient of variation, indicating that aligning operational activities with environmental standards remains a significant challenge.

Brazilian firms reported positive average profitability (ROA), suggesting they are generally profitable. This may incentivize the adoption of more aggressive tax strategies to reduce tax liabilities and further increase profits (Araújo & Filho, 2018). The data also show that over half of corporate assets (0.5257) are invested in long-term resources, which may make these companies more inclined to adopt tax-reducing practices (Manzon Jr. & Plesko, 2002).

4.2. Hypothesis testing

The Wilcoxon test (Table 4) indicates that the pandemic period did not have a statistically significant effect on corporate tax avoidance.

Table 4
Wilcoxon Test for the Impact of COVID-19 on Tax avoidance and ESG

Variables	Mean	Median	Variables	Mean	Median	Z
BTD (Before)	0.04039	0.03631	BTD (After)	0.045448	0.038225	-0.258
ABTD (Before)	0.007461	-0.00112	ABTD (After)	0.010644	0.007761	-0.471
NBTD (Before)	0.032539	0.034152	NBTD (After)	0.034953	0.034141	-0.881
ETR (Before)	0.229139	0.227698	ETR (After)	0.166868	0.209649	0.926
BTDm (Before)	0.048402	0.038138	BTDm (After)	0.053874	0.04249	-0.499
ABTDm (Before)	0.026689	0.017259	ABTDm (After)	0.030119	0.023118	-1.341
NBTDm (Before)	0.035473	0.034626	NBTDm (After)	0.036826	0.035302	-0.76
ESG (Before)	56.10901	58.34075	ESG (After)	60.50596	63.2759	-3.375*
S (Before)	59.38877	60.75235	S (After)	63.8033	63.41435	-1.891***
E (Before)	53.88868	57.2721	E (After)	57.35731	58.93475	-2.856*
G (Before)	55.22725	58.01935	G (After)	60.39673	61.40375	-3.317*

• Source: Research Data
• Legend: Variables defined previously.
• Note: “Before” refers to the pre-pandemic period (2018-2019), and “After” refers to the post-pandemic onset period (2020-2021).

Table 5 presents the regression results on the relationship between tax avoidance and ESG. The findings indicate that ESG practices are associated with reduced tax avoidance across all models, except for normal BTD (column 6), where the association was not statistically significant.

Table 5
Relationship between tax avoidance and ESG

Variables	Statistic	BTD	BTDm	ABTD	ABTDm	NBTD	NBTDm	ETR
		(1)	(2)	(3)	(4)	(5)	(6)	(7)
Intercept	Coefficient	-0.0484	-0.0112	-0.0578	-0.0250	0.0677	0.0800	0.0194
	StE	0.0254	0.0219	0.0213	0.0194	0.0158	0.0150	0.1629
ESG	Coefficient	-0.0003*	-0.0003*	-0.0002*	-0.0001**	0.0000	-0.0001*	0.0012*
	StE	0.0001	0.0001	0.0001	0.0001	0.0000	0.0000	0.0003
ROA	Coefficient	0.4158*	0.3407*	0.3080*	0.0955*	0.0022	-0.0052	0.1623
	StE	0.0274	0.0225	0.0184	0.0166	0.0149	0.0134	0.1206
PPE	Coefficient	0.0113**	0.0073**	0.0078*	0.0048	0.0008	0.0021	-0.0365*
	StE	0.0046	0.0036	0.0027	0.0031	0.0028	0.0025	0.0205
Indebtedness	Coefficient	-0.1152*	-0.0797*	-0.0268*	-0.0270*	-0.0755*	-0.0610*	0.3211*
	StE	0.0090	0.0060	0.0058	0.0059	0.0049	0.0046	0.0376
CFO	Coefficient	0.0000**	0.0000	0.0000*	0.0000***	0.0000	0.0000	0.0000
	StE	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000
Size	Coefficient	0.0060*	0.0039*	0.0021***	0.0036*	0.0006	-0.0004	-0.0008
	StE	0.0016	0.0013	0.0012	0.0012	0.0010	0.0010	0.0092
ΔREV	Coefficient	0.0248*	0.0240*	0.0180**	0.0129**	0.0060	0.0065	0.0719***
	StE	0.0089	0.0080	0.0075	0.0057	0.0048	0.0040	0.0421
Sector control		Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year control		Yes	Yes	Yes	Yes	Yes	Yes	Yes
Observations		542	533	533	542	542	542	533
Groups		83	74	74	83	83	83	74
?2		626.81*	838.25*	1313.09*	155.51*	372.18*	354.32*	518.71*

• Source: Research Data
• Legend: StE = standard erros; variables previously defined.

The relationship between tax avoidance and ESG was also analyzed with a focus on the pandemic period. The analysis separately assessed how ESG influenced Brazilian companies' tax avoidance before and after the COVID-19 pandemic. This approach is justified by the increased financial strain faced by firms during the pandemic, which may have incentivized more aggressive tax strategies to improve financial performance and reduce tax liabilities. Table 6 shows that before the pandemic, higher ESG engagement was associated with lower tax avoidance across all models, except for column 4 (abnormal BTD in modulus), where the relationship was insignificant.

Table 6
Summary of the relationship between tax avoidance and ESG components segregated by pandemic period

Variables	Statistic	BTD	BTDm	ABTD	ABTDm	NBTD	NBTDm	ETR
		(1)	(2)	(3)	(4)	(5)	(6)	(7)
Panel A - Pre-pandemic period (2010-2019)
Intercept	Coefficient	0.006	-0.3000	-0.0651*	0.0039	0.0779*	0.0724*	0.5636*
	StE	0.0266	0.0248	0.0200	0.0236	0.0155	0.0156	0.1441
ESG	Coefficient	-0.0003*	-0.001**	-0.0004*	-0.0001	-0.0000	-0.0001***	0.0007**
	StE	0.0001	0.0001	0.0001	0.0001	0.0000	0.0000	0.0003
The remaining variables were held constant.
Observations		412	412	409	412	412	412	409
Groups		63	63	60	63	63	63	60
?2		356.76*	349.34*	321.73*	57.44*	399.56*	425.89*	278.92*
Panel B - Post-pandemic period (2020-2021)
Intercept	Coefficient	-0.1726*	-0.0966*	-0.0933*	-0.0657*	-0.0039	0.0488*	0.2123
	StE	0.0214	0.0279	0.0270	0.0183	0.0221	0.0178	0.4799
ESG	Coefficient	-0.0001	-0.0002*	-0.0003*	-0.0002**	0.0001**	0.0000	0.0012**
	StE	0.0001	0.0001	0.0001	0.0001	0.0001	0.0000	0.0006
The remaining variables were held constant.
Observations		130	130	106	130	130	130	106
Groups		77	77	53	77	77	77	53
?2		773.38*	1,365.60*	23,063.38*	351.88*	2,074.49*	1,903.33*	1,199.62*

• Source: Research Data
• Legend: Variables previously defined.

4.3. Sensitivity analysis

The sensitivity analysis aimed to assess how each component of ESG relates individually to tax avoidance, as shown in Table 7.

Table 7
Summary of the relationship between tax avoidance and ESG components (Disaggregated)

Statistic	BTD	BTDm	ABTD	ABTDm	NBTD	NBTDm	ETR
	(1)	(2)	(3)	(4)	(5)	(6)	(7)
Panel A - Environmental Component
Intercept	-0.0541*	-0.0030	-0.0520*	-0.0195	0.0648***	0.0759***	0.0791
	(0.0257)	(0.0219)	(0.0218)	(0.0195)	(0.0169)	(0.0159)	(0.1474)
Environmental	-0.0002***	-0.0002***	-0.0001*	-0.0000	-0.0000	-0.0001**	0.0012***
	(0.0001)	(0.0000)	(0.0000)	(0.0000)	(0.0000)	(0.0000)	(0.0002)
Observations	542	533	533	542	542	542	533
?2	661.5094	906.5007	1.4e+03	181.8598	377.7941	360.8149	634.0445
Groups	83	74	74	83	83	83	84
Panel B - Social Component
Intercept	-0.0532*	-0.0151	-0.0635**	-0.0189	0.0596***	0.0756***	0.0931
	(0.0249)	(0.0229)	(0.0210)	(0.0169)	(0.0150)	(0.0148)	(0.1580)
Social	-0.0002***	-0.0002***	-0.0003***	-0.0001**	-0.0000	-0.0001***	0.0011***
	(0.0001)	(0.0000)	(0.0000)	(0.0000)	(0.0000)	(0.0000)	(0.0002)
Observations	542	533	533	542	542	542	533
?2	682.2180	863.3263	1.5e+03	166.6835	402.5218	376.6427	434.8765
Groups	83	74	74	83	83	83	84
Panel C - Governance Component
Intercept	-0.0239	0.0069	-0.0477*	-0.0154	0.0723***	0.0882***	0.0735
	(0.0256)	(0.0213)	(0.0211)	(0.0196)	(0.0156)	(0.0141)	(0.1544)
Governance	-0.0001	-0.0001*	-0.0001*	-0.0001**	-0.0000	-0.0000	0.0005*
	(0.0001)	(0.0000)	(0.0000)	(0.0000)	(0.0000)	(0.0000)	(0.0002)
Intercept	-0.0239	0.0069	-0.0477*	-0.0154	0.0723***	0.0882***	0.0735
	(0.0256)	(0.0213)	(0.0211)	(0.0196)	(0.0156)	(0.0141)	(0.1544)
Observations	542	533	533	542	542	542	533
?2	638.4418	724.2014	1.1e+03	163.3498	361.6157	345.8436	371.0106
Groups	83	74	74	83	83	83	84

• Source: Research Data
• Legend: Variables previously defined.

The results indicate that all three ESG components negatively associate with ABTD, suggesting that discretionary tax avoidance decreases as ESG practices increase. Conversely, normal BTD, which arises from normative accounting-tax differences, displays a positive and significant relationship across all three components.

5. DISCUSSION OF RESULTS

The descriptive statistics indicate that Brazilian companies, on average, adopt an aggressive stance toward taxation, as evidenced by an effective tax rate lower than the nominal rate of 34%. The average ESG score of Brazilian companies is higher than that reported in other studies on organizations in emerging economies (see Garfatta, 2021; Yen-Yen, 2019). yet lower than the levels observed in developed countries (see Gonçalves et al., 2021; Velte, 2019). One possible explanation for this finding is that companies in developed markets are more likely to lead by example, aligning economic activity with sustainable practices and serving as benchmarks for firms in other regions and countries. Therefore, it is recommended that managers of Brazilian companies pay greater attention to ESG strategies, as they can generate long-term value (Frisari et al., 2020; Yoon et al., 2018) and contribute to building a more equitable society.

According to the Wilcoxon test (Table 4), there was no empirical support for H5, which hypothesized that companies increased aggressive tax practices during the pandemic. This result was unexpected, given the significant decline in corporate revenues due to market shutdowns and quarantines that disrupted business operations (Kobbi-Fakhfakh & Bougacha, 2023). On the other hand, the lack of a significant relationship may be explained by managers’ possible decision to recognize additional expenses during the downturn as a way to “clean up” the balance sheet, as suggested by (Scott, 2015).

The Wilcoxon test also revealed that Brazilian firms significantly increased their ESG scores after the onset of the pandemic. Santos and Tavares (2023) similarly found that ESG indicators among Latin American firms, 45% of which were Brazilian, improved post-pandemic. This trend may be attributed to the perception of ESG as a “capital vaccine” against financial market collapse (Dai, 2022). Consequently, Brazilian managers may have enhanced ESG disclosures to attract investors, reduce the cost of capital, mitigate volatility, increase returns, and limit share price declines, as supported by prior studies (Broadstock et al., 2021; Díaz et al., 2021).

The results presented in Table 5 for total BTD (column 1) and total BTD in modulus (column 2) support the findings of Yoon et al. (2021), Bressan (2023), and Jiang et al. (2024), who argue that companies with higher ESG scores exhibit lower BTD. These results suggest that Brazilian firms with stronger ESG practices tend to adopt less aggressive tax strategies, consistent with the principles of Corporate Culture Theory (CCT) (Bressan, 2023; Murray & Montanari, 1986; Yoon et al., 2021). Thus, the results confirm H3, which posits that ESG reduces aggressive tax behavior. However, the low economic magnitude of the coefficients indicates that Brazilian companies could further enhance ESG initiatives to achieve greater transparency and a more substantial impact on reducing tax avoidance.

Regarding abnormal BTD (column 3), the results align with the study by Lee et al. (2021), who observed that tax avoidance decreases in stronger ESG engagement. Firms with higher ESG scores exhibit less discretionary behavior and opportunism in financial reporting, meaning they are less likely to adopt aggressive accounting and tax strategies. These findings confirm H1, which suggests that ESG practices mitigate aggressive tax behavior among Brazilian firms, as proposed by CCT (Bressan, 2023; Murray & Montanari, 1986; Yoon et al., 2021).

Regarding normal BTD (column 5), the results indicated no significant association, thereby corroborating H2 of the study. This suggests that higher levels of ESG disclosure do not influence differences between accounting and tax profits arising from regulatory discrepancies. However, when analyzing the modulus (column 6), the results suggest that greater ESG disclosure is associated with lower levels of normal BTD.

As shown in column 7 (Table 5), there was a positive and significant association between ETR and ESG, confirming H4. This indicates that firms with higher ESG scores tend to report higher effective tax rates, placing them closer to the statutory nominal rate of 34%. Accordingly, these firms appear to adopt a less aggressive tax posture, consistent with Corporate Culture Theory (CCT) (Bressan, 2023; Murray & Montanari, 1986; Yoon et al., 2021).

The findings of this study align with the principles of CCT, suggesting that companies more engaged in ESG disclosure tend to refrain from discretionary practices aimed at minimizing tax liabilities. This is explained by the belief, internalized within such firms, in the importance of acting “correctly” when it comes to fair tax payment (Bressan, 2023; Murray & Montanari, 1986; Yoon et al., 2021). Thus, these results indicate that, on average, Brazilian companies with higher ESG engagement exhibit greater transparency.

By demonstrating an inverse relationship between ESG practices and tax avoidance, the findings may serve as a signal to stakeholders that companies with stronger ESG commitments pose lower investment risks. Moreover, Rego and Wilson (2012) argue that firms engaging in more aggressive tax planning incur higher operational and administrative costs-including those related to tax advisory services-as well as increased exposure to penalties imposed by tax authorities.

Fair tax payment, beyond promoting social justice, may also signal to stakeholders a reduced likelihood of tax audits-an outcome that can further influence a firm’s reputation (Carpenter & Jones, 2015; Zeng, 2019). In turn, reputational damage can lead to consumer boycotts, heightened political and media scrutiny, and an increased risk of fines and penalties-factors that contribute to moral hazard (Dell’Anno, 2009; Hanlon & Slemrod, 2009; Wilson, 2009).

The most profitable companies, identified by higher ROA values, were found to be more tax aggressive across all BTD models (columns 1 to 4). This may be explained by their drive to sustain profitability through strategies that contribute to enhanced financial outcomes. These findings are consistent with Sant’anna e Brunozi Júnior (2019), who also identified a positive relationship between ROA and abnormal BTD.

The volume of fixed, intangible investment and deferred assets (PPE) was positively associated with levels of total BTD, total BTD in modulus, and abnormal BTD. This result was anticipated, as such assets provide greater flexibility for adopting tax reduction strategies (Manzon Jr. & Plesko, 2002). For example, modifying asset useful lives can alter expense recognition in the income statement, affecting taxable income and accounting profit. Conversely, ETR (column 7) showed a significant and negative relationship with PPE, indicating that firms with more non-current assets pay lower effective tax rates. This is likely due to increased deductible expenses, which reduce taxable income.

Higher indebtedness was negatively associated with tax avoidance across models 1 to 6. This implies that more indebted firms may adopt tax minimization strategies to cope with financial constraints. Additionally, they may seek to avoid breaching debt covenants and preserve their ability to secure further financing (Clarkson et al., 2011). At the same time, greater indebtedness was associated with a lower ETR, suggesting that more leveraged firms are more likely to adopt practices to reduce taxes on profits relative to EBT. Therefore, indebtedness appears to increase the degree of tax avoidance among Brazilian companies.

Companies with higher levels of total BTD (column 1) and abnormal BTD (columns 3 and 4) exhibited lower cash flow levels. This result was unexpected, as greater tax avoidance would typically reduce tax-related cash outflows, positively impacting operating cash flow. However, it is important to note that this finding lacks economic significance, given that the coefficient equals zero.

Company size showed a significant positive association with both total and abnormal BTD (columns 1 to 4). This suggests that larger firms, in their efforts to maintain a reputation for strong financial performance, may resort to tax avoidance as one means of presenting more favorable results.

Revenue variation demonstrated a positive and significant relationship with total and abnormal BTD (columns 1 and 4), as well as with ETR (column 7). This implies that, as revenues increase, assuming that costs do not rise proportionally, profitability also tends to increase, which can lead companies to adopt tax strategies aimed at minimizing their tax burden.

In the pre-pandemic period (Table 6), the results for total BTD in modulus (column 2) and abnormal BTD (columns 3 and 4) indicate that greater ESG disclosure is associated with less aggressive tax behavior. Conversely, normal BTD in modulus (column 2) suggests that greater ESG disclosure is linked to higher tax avoidance. However, it is important to emphasize that normal BTD arises from accounting-tax regulatory differences rather than discretionary or opportunistic management practices. The ETR displayed a positive relationship with ESG, indicating that firms with more responsible practices tend to exhibit lower levels of tax avoidance. These findings are consistent with those of Kobbi-Fakhfakh and Bougacha (2023), who studied North American companies between 2019 and 2021.

In light of these findings, future research with a broader sample and more recent data is warranted to determine whether post-pandemic ESG disclosure reflects a genuine shift in corporate culture toward fair tax practices or merely serves as a tool for enhancing market perception.

The sensitivity analysis revealed that total BTD (in absolute terms) has a negative and significant relationship with the social and environmental components, while in modulus terms, the relationship is negative across all three components. Regarding abnormal BTD, when using modulus data, the results showed a negative and significant association across all three ESG dimensions (absolute value) and in the social and governance components. These findings suggest that firms with higher levels of ESG engagement tend to be less tax aggressive, thereby supporting H1.

Normal BTD showed no significant relationship in the absolute value models and in the governance component of the modulus data, confirming H2, which states that higher levels of ESG practices do not account for variations in normal BTD. The ETR exhibited a positive and significant relationship across all components, suggesting that higher levels of ESG practices are consistently associated with a reduction in aggressive tax behavior.

6. CONCLUDING REMARKS

This study aimed to analyze the influence of ESG scores on the tax avoidance of Brazilian companies. The specific objectives were: (i) to investigate whether there was a significant increase in ESG engagement and tax avoidance following the onset of the pandemic, and (ii) to examine the influence of ESG scores on tax avoidance by comparing the periods before and after the pandemic. The sample comprised 542 observations from 2010 to 2021.

The findings conclude that companies more committed to ESG practices tend to exhibit more ethical and transparent behavior. This is reflected in the fair payment of taxes, supporting the assumptions of Corporate Culture Theory (CCT). It is important to note that fair tax compliance contributes to greater public revenue, enabling governments to invest in initiatives that promote social development.

Given that Brazil is considered one of the countries with the highest levels of tax evasion in the world (Kurauone et al., 2021), this study advances beyond the work of Kobbi-Fakhfakh and Bougacha (2023), who analyzed the United States during the pandemic period. This research provides decision-makers with relevant and timely insights by showing that ESG practices help reduce corporate tax avoidance in times of heightened uncertainty, such as during the pandemic.

Theoretically, the study reinforces Corporate Culture Theory, suggesting that Brazilian managers adopt ESG practices to demonstrate a commitment to a culture of fair tax compliance. In practical terms, the findings indicate that investors may face lower tax-related risks when investing in ESG-oriented companies, as such firms are, on average, less aggressive. For regulators, the results imply that ESG-aligned companies may require less scrutiny due to their higher transparency. For auditors, this could support the case for lower audit fees, given the reduced risk profile of these entities.

Future research could explore the relationship between ESG and the quality of financial information. Metrics such as earnings management, value relevance, accounting conservatism, and earnings persistence could be employed to further this line of inquiry. Additionally, future studies might assess whether companies that benefit from tax incentives linked to ESG practices exhibit lower effective tax rates. It would also be relevant to investigate whether Brazilian firms used the pandemic period to “take a bath” by accelerating expense recognition, thereby facilitating the reversal of losses in subsequent periods to meet performance targets.

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• DATA AVAILABILITY STATEMENT
  The datasets related to this article will be available upon request to the author.

Edited by

• EDITOR-IN-CHIEF (AS OF 01/01/2025)
  Marcia Juliana d’Angelo https://orcid.org/0000-0003-1436-5812

• ASSOCIATE EDITOR
  Verônica de Fátima Santana https://orcid.org/0000-0002-9105-7488

Data availability

The datasets related to this article will be available upon request to the author.

Publication Dates

• Publication in this collection
  23 Mar 2026
• Date of issue
  2026

History

• Received
  16 Aug 2024
• Reviewed
  18 Aug 2024
• Accepted
  20 Apr 2025