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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86 largest abundant capital asset weights bank leverage bank’s Bosnia and Herzegovina capital requirement capital structure Capital Tightness Check Estimation Results CIT rate corporate tax country fixed effects country’s debt bias debt finance debt ratio debt shifting channel denote significance Deposit insurance equity expected signs Financial crises financial leverage GDP growth host country fixed Huizinga impact Inﬂation international debt shifting International Monetary Fund international spillovers international tax difference Lag of Collateral larger legal capital requirement leverage ratio log of total minimum capital requirement Mooij multinational group non-debt tax credit OLS with host parent bank percent level percentage points performed using OLS positive reﬂect regressions are performed responsive to tax Robust t-statistics Robustness Check Estimation sample second term smaller square log statutory CIT rate subsidiary bank subsidiary host country t-statistics and expected tax channel tax difference variable tax shields tax variable taxation total assets growth traditional debt bias