Negative Interest Rates and Corporate Tax Behavior in Banks

69 Pages Posted: 13 Sep 2021 Last revised: 4 Oct 2021

See all articles by Alexander Edwards

Alexander Edwards

University of Toronto - Rotman School of Management

Michael Marin

University of Toronto at Mississauga - Department of Management

Yuchen Wu

Ludwig Maximilian University of Munich (LMU); TRR 266 Accounting for Transparency

Date Written: August 1, 2021

Abstract

This study examines the impact of negative interest rate (NIR) regimes on corporate tax behavior. We argue that NIRs act as a de-facto tax levied by central banks and investigate how this ‘tax’ affects banks’ corporate tax planning. Using a sample of domestic banks in OECD countries and a difference-in-difference research design, we find that banks affected by negative interest rate policies exhibit an increase in tax planning following the adoption of NIR, compared to unaffected banks. We document that the introduction of NIRs is associated with a 2.3 to 2.6 percentage point decrease in GAAP ETR and that the effects of NIRs are more pronounced in banks with a lower distance to default or lower reserves, and in countries with lower levels of tax enforcement or lower levels of trust in the government. Collectively, our results suggest that NIRs lead banks to increase tax planning as a funding source.

Keywords: Tax planning, negative interest rates, financial institutions

JEL Classification: H26, E58, M40, G18

Suggested Citation

Edwards, Alexander S. and Marin, Michael and Wu, Yuchen, Negative Interest Rates and Corporate Tax Behavior in Banks (August 1, 2021). WU International Taxation Research Paper Series No. 2021-09, TRR 266 Accounting for Transparency Working Paper Series No. 63, Rotman School of Management Working Paper No. 3921343, Available at SSRN: https://ssrn.com/abstract=3921343 or http://dx.doi.org/10.2139/ssrn.3921343

Alexander S. Edwards (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Michael Marin

University of Toronto at Mississauga - Department of Management ( email )


Canada

Yuchen Wu

Ludwig Maximilian University of Munich (LMU) ( email )

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

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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