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Taxation and Leverage in International Banking

Author/Editor: Grace Weishi Gu | Ruud A. de Mooij | Tigran Poghosyan
Authorized for Distribution: November 30, 2012
Electronic Access: Free Full Text (PDF file size is 1,031KB)
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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.
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Series: Working Paper No. 12/281
Subject(s): International banking | Capital | Taxation | Corporate taxes | Commercial banks | Economic models
    Published:   November 30, 2012        
    ISBN/ISSN:   9781475572209/1018-5941   Format:   Paper
    Stock No:   WPIEA2012281   Pages:   35
    Price:   US$18.00
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