Avoiding Taxes: Banks' Use of Internal Debt
37 Pages Posted: 18 Jun 2020
Date Written: May 22, 2020
This paper investigates how multinational banks use internal debt to shift profits to low-taxed affiliates. Using regulatory data on multinational banks headquartered in Germany, we show that banks use this tax avoidance channel more aggressively than non-financial multinationals do. We find that a ten percentage points higher corporate tax rate increases the internal net debt ratio by 5.7 percentage points, corresponding to a 20% increase at the mean. Our study also takes into account the existence of conduit entities, which simply pass through financial flows. If conduit entities are systematically located in low-tax countries, previous studies may have underestimated the extent of debt shifting.
Keywords: Profit Shifting, Internal Debt, Multinational Banks, Taxation
JEL Classification: H25, G21, F23
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