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.
Highlights
In the last years, the Organisation for Economic Co-operation and Development (OECD) and G20 have started an unprecedented initiative against Base Erosion and Profit Shifting (BEPS)
Using panel regressions with and without affiliate fixed effects, we find that a ten percentage points higher corporate tax rate increases the internal debt-to-assets ratio by about 5.1 percentage points
We find that a ten percentage points higher corporate tax rate increases the internal net-debt-to-assets ratio by 5.7 percentage points, which corresponds to an increase of 20% at the mean
Summary
The Organisation for Economic Co-operation and Development (OECD) and G20 have started an unprecedented initiative against Base Erosion and Profit Shifting (BEPS). To our paper, Overesch and Wamser (2014) use bilateral internal debt data; they find significantly positive effects of the bilateral tax rate differential, the most precise measure for debt shifting incentives. We contribute to this literature in two ways: As a first contribution, we point out the importance of modelling conduit entities, showing that the dependent variable should be net (and not gross) internal debt.
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