Banks as Tax Planning Intermediaries

77 Pages Posted: 17 Jun 2016 Last revised: 14 Nov 2018

See all articles by John Gallemore

John Gallemore

University of Chicago - Booth School of Business

Brandon Gipper

Stanford University Graduate School of Business

Edward L. Maydew

University of North Carolina at Chapel Hill

Date Written: October 2018

Abstract

We provide the first large-scale empirical evidence of banks functioning as tax planning intermediaries. We posit that some banks specialize in assisting corporate clients with tax planning. In this role, banks make use of their centrality in financial relationships; access to private information; and ability to structure, execute, and participate in tax planning transactions for clients. We measure bank-client relationships using loan contracts and measure client tax planning using either the cash effective tax rate or the unrecognized tax benefit balance. Using a difference-in-differences design, we find that firms experience meaningful tax reductions when they begin a relationship with a bank whose existing clients engage in above-median tax planning. The effects of pairing with such tax intermediary banks are concentrated in relationships with larger or longer maturity loans, clients with foreign income or greater credit risk, and when the bank is an industry specialist or has above-median investment banking activities. Finally, we find that potential clients are more likely to choose tax intermediary banks than non-tax intermediary banks, suggesting that tax intermediary banks benefit by attracting new business. Collectively, our results suggest that some banks act as tax planning intermediaries, a role beyond the traditional one of financial intermediary.

Keywords: banks, borrowers, tax planning

JEL Classification: G21, H25, H26

Suggested Citation

Gallemore, John and Gipper, Brandon and Maydew, Edward L., Banks as Tax Planning Intermediaries (October 2018). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2796132 or http://dx.doi.org/10.2139/ssrn.2796132

John Gallemore (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Brandon Gipper

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650)498-4350 (Phone)

Edward L. Maydew

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

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