Trading Offshore: Evidence on Banks' Tax Avoidance

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Little is known about how banks shift profits to low-tax countries. Because of their specific business model, banks use profit shifting channels different from those of other firms. We propose a novel and bank-specific method of profit shifting: the strategic relocation of proprietary trading to low-tax jurisdictions. Using regulatory data from the German central bank, we show that a one percentage point lower corporate tax rate increases banks' fixedincome trading assets by 4.0% and trading derivatives by 9.0%. This increase does not arise from a relocation of real activities (i.e. traders); instead, it stems from the relocation of book profits. Terms of use: Documents inJEL-Codes: H250, G210, F210.

Tax Avoidance - Are Banks Any Different?

“…Their key findings are that banks' response to taxation is stronger compared to a consensus estimate of studies analyzing non-banks' profit shifting and that trading gains are highly responsive. This finding is corrobated by Langenmayr and Reiter (2017) who show that German banks relocate their trading gains to low-tax countries to benefit from the low tax rate while the employees conducting the trade remain in the headquarter, i.e. the high-tax country.…”

“…One the one hand, several studies (e.g. Demirgüç-Kunt andHuizinga (2001), Merz andOveresch (2016), Langenmayr and Reiter (2017), Shaxson (2018)) and governmental reports (e.g. OECD (2009), OECD (2010), and OECD (2011)) emphasize that banks have either more or other 9 As far as we know there is no study that explicitly looks at the level of tax avoidance and tax avoidance determinants for banks and compares the outcomes to non-banks.…”

“…There are only a few studies which address to whether banks' income is responsive to tax rate differentials, i.e. whether banks engage in profit shifting and hence, reduce their tax base (Meeks and Meeks (2014), Merz and Overesch (2016), Schandlbauer (2017), Langenmayr and Reiter (2017)) or whether banks act as a channel for tax avoidance (Gallemore et al (2019)). Our study is different to the aforementioned studies as they focus on specific parts of banks' tax avoidance (i.e.…”

“…In contrast to non-banks, banks might have other tax avoidance strategies at hand than non-banks. Langenmayr and Reiter (2017), for example, show that banks are able to shift proprietary trading gains to low-tax countries while keeping the employees conducting the trades at the headquarters in a high-tax country.…”

Increasing Tax Transparency: Investor Reactions to the Country-by-Country Reporting Requirement for EU Financial Institutions

“…The underlying reason is that a purely domestic group has no possibility and incentive to shift profits cross-border, and therefore the CbCR does not provide any incremental information on 7 These studies document a tax semi-elasticity of banks' overall reported profits of about 2.4 (Merz & Overesch, 2016) and of certain trading gains of about 3.4 to 4.0 (Merz & Overesch, 2016;Langenmayr & Reiter, 2017 For each treated bank , we calculate the daily abnormal return , as the difference between the actual realized return , and the expected return , on trading day .…”