Banks as Tax Planning Intermediaries

Posted: 13 Jun 2019

See all articles by John Gallemore

John Gallemore

University of North Carolina Kenan-Flagler Business School

Brandon Gipper

Stanford University Graduate School of Business

Edward L. Maydew

University of North Carolina at Chapel Hill

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2019

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 nontax 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 (March 1, 2019). Journal of Accounting Research, Vol. 57, No. 1, 2019, Kenan Institute of Private Enterprise Research Paper No. 19-24, Available at SSRN: https://ssrn.com/abstract=3396055

John Gallemore (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.johngallemore.com

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

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
1,549
PlumX Metrics