Avoiding Taxes: Banks' Use of Internal Debt

37 Pages Posted: 18 Jun 2020

See all articles by Franz Reiter

Franz Reiter

Ludwig Maximilian University of Munich (LMU)

Dominika Langenmayr

CESifo (Center for Economic Studies and Ifo Institute); Catholic University of Eichstaett-Ingolstadt

Svea Holtmann

Catholic University of Eichstaett-Ingolstadt

Multiple version iconThere are 2 versions of this paper

Date Written: May 22, 2020

Abstract

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

Suggested Citation

Reiter, Franz and Langenmayr, Dominika and Langenmayr, Dominika and Holtmann, Svea, Avoiding Taxes: Banks' Use of Internal Debt (May 22, 2020). Available at SSRN: https://ssrn.com/abstract=3609882 or http://dx.doi.org/10.2139/ssrn.3609882

Franz Reiter

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Dominika Langenmayr (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Catholic University of Eichstaett-Ingolstadt ( email )

Auf der Schanz 49
Ingolstadt, D-85049
Germany

Svea Holtmann

Catholic University of Eichstaett-Ingolstadt ( email )

Auf der Schanz 49
Ingolstadt, D-85049
Germany

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