Debates surrounding the legal, social, political, economic and ethical responsibility of corporations can be dated back to the 18th century when Adam Smith wrote the Theory of Moral Sentiments and Lectures on Jurisprudence. The ethical influence of globalization continues to complicate the economics of the firms when moral responsibilities towards citizens, societies and the environment are required. The rise in the importance of corporate social responsibility (CSR) is increasingly setting the expectation that today’s businesses have the fundamental societal obligations to go beyond the legal or business case and distinctly take on “actions that appear to further some social good, and beyond the interests of the firm and that which is required by law,” as described by Abagail McWilliams and Donald Siegel in Corporate Social Responsibility: A Theory of the Firm Perspective.

For multinational enterprises (MNEs), meeting global “societal obligations” is an arduous task because globalization has complicated corporate behaviour as firms operate beyond national borders. Conducting cross-border operations becomes exceedingly challenging when it is required to factor in different social norms and ethical standards across multiple jurisdictions.

From a global taxation standpoint, the Organization for Economic Cooperation and Development (OECD) continues to strengthen its effort to identify the appropriate taxing rights for cross-border transactions. The Base Erosion and Profit Shifting (BEPS) Action Plan addresses the tax challenges of intercompany transactions of MNEs as the OECD focuses on allocating taxing rights for cross-border activities based on nexus and profit allocation in MNEs according to their global value chains. It seeks to identify a mechanism to match the local value contribution with the global profit allocation.

This article aims to analyse the complexities caused by cross-cultural CSR in multiple locations and the impact on each MNE’s transfer pricing (TP) policies. As an MNE engages in social responsibilities, local social intangibles are developed when its subsidiaries invest in highly country-specific culture, norms and customs. Such local social intangibles affect the MNE globally through its cross-border operations. In ascertaining its TP policy, an MNE needs to align its CSR value and intangibles generated locally with its global value chain. When the local social intangible moves across the border via cross-border transactions, a proper TP method must be carefully selected to analyse the intercompany transactions. This is because the nexus and profit allocation within the MNE must be in line with the value-generating activities in each country.

CSR – the creation of social institutional value

Historically, many perceive that firms take social responsibilities as nothing more than a rational reaction to external market pressures, such as changes in the global market, competition or the introduction of new technology. For example, if customers do not want to purchase products produced by pollution-generating plants, an MNE either adapts to such demand or choose not to operate in that market altogether. Or, if social norms demand that specific codes of conduct be applied, such as child labour law or new ISO standards, firms would passively adopt these exogenous standards.

However, according to the “theory of the firm,” most firms take a more proactive stance. The relationship between a corporation’s right to operate and the ownership of property rights, corporate governance, and stakeholder accountability are closely linked. Similarly, the fundamental societal obligation of the firm in CSR resides with its investment in the society and claims the ownership to the social value, that is the value of “societal and environmental wellbeing.” The social value or intangible is created as the firm takes ownership to improve the quality of life for the local community and to establish an authentic relationship with society.

The “institution theory” also explains a firm’s relationship with its stakeholders and the fundamental impact on the development of its business. CSR is considered as an important tool in maintaining this relationship. The process of developing social value when engaging CSR could increase a firm’s institutional value through linking the social conscience and institutional strategy of a firm and allowing it to develop and enhance the firm’s social intangibles.

CSR can help create social institutional value for a firm. Such social value or intangible manifests the firm’s reputable relationship with its stakeholders. As such, CSR directly impacts the firm’s structure and corporate behaviour; and institutional value, such as corporate branding and reputation, is created by establishing an authentic relationship between the firm and its stakeholders in society.

CSR in multiple jurisdictions

For MNEs rights and responsibilities in multiple countries can prove complicated to manage. When incorporating social elements to contextualize CSR factors in different location, the global strategy of an MNE’s operation becomes more intricate.

With CSR playing an important role in cross-border business, MNEs are expected to incorporate it as part of their global initiatives. Many MNEs therefore tend to standardize CSR practice globally. However, such cookie-cutter practices may not only create social obstacles to developing authentic relationships with local communities, but it is likely to prevent an MNE from generating institutional value. This is because institutional value associated with CSR practices ordinarily remains at the country level. Thus, despite the MNE having a stock of knowledge to handle complex global business issues, it must still rely on its local entities to take initiatives to embrace local social norms and ethical standards.

Therefore, to successfully operate in foreign markets, each MNE must consider its interactions within both cross-cultural and cross-jurisdiction contexts as stakeholders often have different expectations for how businesses operate. For instance, Asian businesses are less likely to have an official corporate policy on working hours and conditions, wage structures, and less commitment to freedom of association and promoting staff development than their European or North American counterparts. This means that different CSR approaches are needed as socio-economic conditions, such as economic freedom, economic prosperity and political environment, differ.

In the cross-jurisdiction model, the complexity of the social norms and cultural standards in each country require local entities to perform local CSR for the MNE. As such, each local subsidiary may generate local social intangible through CSR. As the MNE accumulates these locations-specific intangibles, it needs to manage them from its global value chain standpoint. The following section discusses how cross-cultural CSR impacts the MNE’s value creation and intercompany pricing policy.

Cross-cultural CSR and transfer pricing

Since the OECD/G20 delivered the initial BEPS Action Plan in 2015, the global effort to combat “exploiting gaps and mismatches in tax rules” has strengthened. Much of the BEPS discussion focuses on effectively and accurately identify value creation within MNEs, especially intangible assets that drive their businesses. The Revised Guidance on the Application of the Transactional Profit Split Method published in 2018 further provides guidance to MNEs on the redistribution of profit based on value created among related parties. These frameworks stipulate MNEs to re-evaluate their transfer pricing policies and global value chains and to use it to determine the assignment of profits to entities within MNEs.

Value creation in global CSR

In Corporate Social Responsibility and Financial Performance: Correlation or Misspecification McWilliams et al. suggest that the value of CSR resides in its linkage with intangible assets. Effectively, an MNE aims to obtain an efficient social operating structure and to establish rapport with its socio-political stakeholders through CSR. In the presence of CSR, McWilliams et al. show how the “new intangibles” – such as sociopolitical relationships, ecological processes, ethical or moral principles, business values, and brands and reputation – have the ability to provide institutional value and operational effectiveness. As mentioned earlier, these intangibles are highly localized and are key to the local business operation. However, these intangibles are also quite fluid and often spill over to other territories where the MNE operates (e.g. through social media and advertising).

When CSR creates valuable social intangibles in multiple jurisdictions, the MNE must re-evaluate its intangible assets as it analyses its cross-border operation and related party transactions.

Transfer pricing method and global CSR

Since CSR intangibles developed impact the global operation of an MNE, it may need to restructure its cross-border transactions and intercompany pricing models when incorporating CSR into its TP decision-making process.

By incorporating CSR into its TP model, an MNE must carefully analyse all institutional factors that help to create social intangibles in the local jurisdictions. In order not to distort the local social value generated in its cross-border transactions, proper a TP method must be employed to analyse an all-inclusive effect of the intercompany price setting of the MNE. Specifically, cross-country, cross-cultural and environmental factors cannot simply be bundled into product prices. This is because CSR intangibles are considered as non-routine and location-specific in nature, and these intangibles bear multi-faceted impacts when the allocation of profit within the MNE. Since multiple entities own, develop and exploit these specific intangibles within the MNE, a proper valuation method should be used to examine each of the social intangible from a global value chain perspective.

In the presence of CSR, the MNE needs to reformulate its financial statements to include social costs and benefits while engaging in the sociopolitical spectrum. It must scrutinize the financial impact from its cross-border transactions when it engages in CSR. For example, a limited risk distributor that purely undertakes trading function but without any marketing and advertising capacity should only receive a distribution return for its function. However, when the distributor engages in CSR activities and creates institutional value in its territory, its operating profile has changed and embodies the capability to undertake economic activities and control economic risks to develop, exploit and own social and business value. The inclusion of the social intangible in the related party transaction modifies the whole TP pricing mechanism.

In managing its TP strategy in each domestic jurisdiction, the MNE must first evaluate the value of the social intangibles. Then it needs to examine to what extent each social intangible affects other group affiliates. This is because the costs of CSR would alter the financial performance of the local entity. The value of CSR, however, may carry global influence that affects other affiliates of the group. For instance, entity A of an MNE group generates certain corporate reputation in Country A. This valuable externality spills over into Countries B and C. In the same way, entities in Countries B and C also create location-specific social intangibles that benefit Country A. When these social intangible assets criss-cross and co-share benefits for entities in the MNE, the individual value of each social intangible must be determined from a TP standpoint. Therefore, the cross exploitation of these social intangibles, from a TP perspective, has complicated the TP analysis to assess arm’s length pricing policy.

To summarize, we see that many exogenous social factors directly impact cross-border transactions of the MNE. In the presence of CSR activities, social intangibles become an integral part of the MNE’s global value chain. As cross-cultural CSR influences the business structure and intangible ownership rights of an MNE, the proper TP method must be adopted to evaluate the cross-border transactions and the global value chain of the MNE.


In conclusion, the proper allocation of profit for the MNE’s affiliates must match their value created under the OECD BEPS Action Plan. This means that a proper TP method and policy must be applied to cross-border transactions between related parties. As MNEs become socially responsible in the countries where they operate, the social costs incurred and intangibles created in these countries directly impact their related party transactions. As such, their TP policies must be re-evaluated, and proper methods should be adopted to analyse their global value chain to ensure that local intangible contribution matches the global profit allocation mechanism. To complicate matters, when engaging in multiple jurisdiction CSR, MNEs must factor in all cross-border cultural, social and ethical issues. Hence, MNEs need to carefully manage their intercompany transactions when they engage CSR in multiple jurisdictions and face local TP legislations. In particular, when location-specific CSR intangibles influence the MNEs’ overall global value chain, appropriate TP methods must be utilized.

This article is contributed by Enoch H. Hsu Ph.D, Director of Transfer Pricing at BDO Tax Limited.

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