Taxation and Leverage in International Banking
International Monetary Fund, Nov 30, 2012 - Business & Economics - 35 pages
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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1.62 percentage points abundant capital bank in country bank leverage bank subsidiaries baseline estimates capital relative Capital Tightness Capital-tight banks captures coefﬁcient column constant asset weights core tax variables debt bias debt shifting channel dependent variable deposit insurance distribution of bank effect is smaller effect on leverage endogeneity equity estimated coefficient foreign tax rates host country hypothesis hypothetical U.S. inﬂation insigniﬁcant international debt shifting international spillovers international tax difference Keen legal capital requirement less responsive leverage ratio local tax channel measured Mooij multinational bank outliers parent bank proﬁts quantile regressions reduce leverage reﬂecting Regression 17 regression 9 remain signiﬁcant remain statistically significant responsive to tax Robustness Checks sample to subsidiaries second term short-term debt significant negative coefficient standard errors statutory CIT rate subsidiary bank suggests tax channel tax coefficient tax difference variable tax effects tax exerts taxation tightest capital total leverage variable enters weakly significant negative