Tax governance as a social responsibility of the firm: evidence from the Italian cooperative compliance program

Purpose This study aims to explore the antecedents and consequences of entering Cooperative Compliance (CC) programs, a new enhanced cooperation scheme between corporate taxpayers and tax authorities. By examining the factors influencing firms’ decisions to participate in CC programs and the subsequent impact on their tax avoidance behaviours and Environmental, Social and Governance (ESG) performance, the research evaluates whether firms value their social commitment to be good corporate citizens over potential savings from tax avoidance. Design/methodology/approach This study employs a quantitative research method using financial statement data from Italian firms to analyse the impact of the CC program on tax avoidance and ESG performance. First, a probit regression analysis is conducted to evaluate the likelihood of adopting the regime. Second, the research adopts a quasi-experimental design, leveraging the staggered implementation of the CC program across firms. This design is justified because it allows for causal inference in a non-randomised setting by comparing treated and untreated firms over time. Findings The study identifies key factors driving firms’ adoption decisions, showing that larger, more profitable and less leveraged firms are more likely to enter the CC program. Firms participating in the CC program exhibit lower levels of tax avoidance. However, after the adoption, the ESG score deteriorates, suggesting a substitution effect between tax avoidance and ESG performance. Originality/value To the best of the authors’ knowledge, this research is the first to investigate tax avoidance and ESG performance under a CC program using firm-level financial statement data. The study contributes to the limited empirical evidence on the effectiveness of CC programs and provides insights into the interplay of tax compliance, ESG performance and social responsibility.