Taxation and Leverage in International Banking

By Grace Weishi Gu, Ruud A. de Mooij, Tigran Poghosyan

November 30, 2012

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Grace Weishi Gu, Ruud A. de Mooij, and Tigran Poghosyan. Taxation and Leverage in International Banking, (USA: International Monetary Fund, 2012) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper explores how corporate taxes affect the financial structure of multinational banks. Guided by a simple theory of optimal capital structure it tests (i) whether corporate taxes induce subsidiary banks to raise their debt-asset ratio in light of the traditional debt bias; and (ii) whether international corporate tax differentials vis-a-vis foreign subsidiary banks affect the intra-bank capital structure through international debt shifting. Using a novel subsidiary-level dataset for 558 commercial bank subsidiaries of the 86 largest multinational banks in the world, we find that taxes matter significantly, through both the traditional debt bias channel and the international debt shifting that is due to the international tax differentials. The latter channel is more robust and tends to be quantitatively more important. Our results imply that taxation causes significant international debt spillovers through multinational banks, which has potentially important implications for tax policy.

Subject: Banking, Corporate income tax, Debt bias, Deposit insurance, Financial crises, Tax allowances, Tax policy, Taxes

Keywords: Bank leverage, Bank taxation, Banking sector, Capital requirement, Corporate income tax, Corporate tax, Debt bias, Debt ratio, Deposit insurance, Global, Leverage, Parent bank, Short-term debt, Subsidiary bank, Tax allowances, Tax credit, Tax difference, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/281
Stock No:

WPIEA2012281
ISBN:

9781475572209
ISSN:

1018-5941

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