Taxation and Leverage in International Banking

36 Pages Posted: 11 Jan 2013

See all articles by Grace Weishi Gu

Grace Weishi Gu

University of California, Santa Cruz - Department of Economics

Tigran Poghosyan

International Monetary Fund (IMF)

Ruud A. De Mooij

International Monetary Fund (IMF); CESifo (Center for Economic Studies and Ifo Institute); Oxford University Centre for Business Taxation

Date Written: November 2012

Abstract

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.

Keywords: International banking, Capital, Taxation, Corporate taxes, Commercial banks, Economic models, Bank taxation, corporate tax, debt bias, leverage.

JEL Classification: G21, G32, H25

Suggested Citation

Steadmon, Weishi and Poghosyan, Tigran and De Mooij, Ruud A., Taxation and Leverage in International Banking (November 2012). IMF Working Paper No. 12/281, Available at SSRN: https://ssrn.com/abstract=2199300

Weishi Steadmon (Contact Author)

University of California, Santa Cruz - Department of Economics ( email )

Santa Cruz, CA 95064
United States
+1 (831) 459-4791 (Phone)

HOME PAGE: http://https://sites.google.com/site/graceweishigu/home

Tigran Poghosyan

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ruud A. De Mooij

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Oxford University Centre for Business Taxation ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

HOME PAGE: http://people.few.eur.nl/demooij/

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