Taxation and Leverage in International Banking
IMF Working Papers, November 30, 2012
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Bibliographic details
- Authors: Grace Weishi Gu, Ruud A. de Mooij, Tigran Poghosyan
- Published: November 30, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475572209.001
Summary
- This paper explores how corporate taxes affect the financial structure of multinational banks.
- Tests conducted:
- (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, the paper finds that taxes matter significantly through both channels.
- The international debt shifting channel is more robust and tends to be quantitatively more important.
- The results imply that taxation causes significant international debt spillovers through multinational banks, with potentially important implications for tax policy.
Data and Methodology
- Dataset: subsidiary-level dataset covering 558 commercial bank subsidiaries of the 86 largest multinational banks.
- Analytical framework: guided by a simple theory of optimal capital structure to test traditional domestic debt bias and international debt shifting due to tax differentials.
Key Findings
- Taxes significantly influence subsidiary bank leverage through:
- The traditional debt bias channel (domestic corporate tax incentives to use debt).
- International debt shifting induced by international corporate tax differentials vis-a-vis foreign subsidiary banks.
- The international debt shifting channel:
- Is more robust across analyses.
- Is quantitatively more important than the traditional domestic debt bias channel.
- Policy-relevant implication: taxation induces significant international debt spillovers via multinational banks.
Subjects and Keywords
- 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
Source: IMF Working Papers — "Taxation and Leverage in International Banking" (Working Paper No. 2012/281), authors Grace Weishi Gu, Ruud A. de Mooij, Tigran Poghosyan, November 30, 2012.