Corporate Electoral Donations and Tax Aggressiveness

Abstract

Objective: To investigate whether companies that donate to winning electoral campaigns are more aggressive in terms of tax planning than companies that do not make these contributions. The relationship between politicians and companies may be signaled by political connections in which companies try to get political benefits in exchange for providing politicians with campaign financing. Our hypothesis is that a quid pro quo occurs in which these companies benefit from favorable tax treatment that reduces their relative tax burden. Methodology: The focus of this study is donations which were made in the presidential elections of 2010 and 2014. The sample covers the period between 2010 and 2016 for companies listed on the B3, using proxies for tax aggressiveness computed based on Value Added Reporting. Through linear regressions we have tested whether the companies that made these campaign contributions tend to have a lower tax burden. Results: The proposed hypothesis was confirmed, revealing that a political connection between campaign donations reduces the tax burden for donating companies during the years following the election. These donations appear to depict an environment characterized by an exchange of favors, in which these donating companies exhibit greater tax aggressiveness as compared to non-donating companies. Originality/Value: The current study deals with a subject that has not yet been examined empirically in Brazil, and reinforces the position adopted by the Supreme Court in prohibiting campaign donations to inhibit quid pro quo practices. The study offers additional arguments for the criminalization of the so-called “second set of books” used to record electoral campaign contributions.