ESG performance, financial pressure, and corporate tax avoidance: Evidence from Taiwan before and during COVID-19

Abstract

Purpose: This study investigates the relationship between environmental, social, and governance (ESG) performance and corporate tax avoidance, and further examines whether financial pressure induced by the COVID-19 pandemic affects firms' tax avoidance behavior. Using Taiwan as an emerging-market context, this research aims to clarify whether ESG engagement reflects ethical commitment or strategic opportunism. Design/methodology/approach: The study employs panel data from 5,668 firm-year observations of listed and OTC companies in Taiwan between 2017 and 2020. ESG performance is measured using a comprehensive proprietary ESG index constructed from TEJ data, covering environmental, social, and governance dimensions. Corporate tax avoidance is proxied by book-tax differences (BTD) and permanent book-tax differences (PBTD). Multiple regression models, including robustness tests with random-effects models, subsample analyses, and alternative tax avoidance measures, are applied. Findings: The empirical results reveal a significant positive association between ESG performance and corporate tax avoidance, supporting the strategic or opportunistic ESG perspective. All three ESG dimensions-environmental, social, and governance-are positively related to tax avoidance. Moreover, firms exhibited higher levels of tax avoidance during the COVID- 19 pandemic, suggesting that heightened financial pressure incentivized more aggressive tax planning. Overall, the findings indicate that ESG initiatives may coexist with, rather than constrain, opportunistic financial behavior. Research limitations/implications: This study focuses on Taiwanese listed firms, which may limit the generalizability of the results to other institutional settings. Additionally, while BTD and PBTD are widely used proxies for tax avoidance, they may capture elements beyond intentional tax planning. Future research could incorporate cross-country comparisons, alternative ESG measures, or qualitative analyses to further explore the motivations underlying ESG engagement. Originality/value: This study contributes to the literature by providing emerging-market evidence on the ESG-tax avoidance relationship and by incorporating the COVID-19 pandemic as an exogenous financial shock. It offers new insights into how financial pressure shapes corporate tax behavior and highlights the potential misuse of ESG practices as a strategic tool rather than a purely ethical commitment.