Tax Avoidance - Are Banks Any Different?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. AbstractWhile the public has noticed the need for the detection of potential tax loopholes and demand further improvement in the taxation of banks, there is scarce empirical evidence of whether banks' degree of tax avoidance actually differs from that of non-banks. We try to close this gap by investigating U.S. banks' tax avoidance behavior for a sample period from 2004 to 2016. To anchor banks' tax avoidance, we use annual Cash ETRs and GAAP ETRs and compare them to the tax avoidance behavior of non-banks. As there are various channels of tax avoidance, we account for differences in several areas such as corporate fundamentals, the degree of multinationality and regulatory scrutiny. We provide cautious evidence that banks have significantly larger Cash ETRs than non-banks. Via the use of quantile regression we find evidence that the assocation between banks and ETRs is not constant over the whole tax avoidance distribution, but shows a positive association for lower parts of the tax avoidance distribution and a negative association for higher parts. In line with recent research, we provide some evidence that the difference in Cash ETRs between banks and non-banks is more pronounced for worse-capitalized, than for better-capitalized banks.

The impact of financial constraints on banks’ cash tax avoidance

“…For example, during the 2007-2009 financial crisis, the US Treasury provided about US$205bn to 707 financial institutions in 48 states under the Capital Purchase Program (CPP), with the largest Impact of financial constraints investment being US$25bn and the smallest being US$301,000 (U.S. Department of Treasury, 2015). However, whether banks can make up for their received bailouts and pay their fair share of taxes remains open to question (Gawehn and Müller, 2019). Interestingly, Merz and Overesch (2016) document that the tax sensitivity of reported profits for banks is more than twice as large as that found for non-financial multinational companies, suggesting that banks have enhanced opportunities for tax planning.…”

“…Department of Treasury, 2015). However, whether banks can make up for their received bailouts and pay their fair share of taxes remains open to question (Gawehn and Müller, 2019). Interestingly, Merz and Overesch (2016) document that the tax sensitivity of reported profits for banks is more than twice as large as that found for non-financial multinational companies, suggesting that banks have enhanced opportunities for tax planning.…”

“…Our research complements several other concurrent studies to shed light on the practices of banks’ tax avoidance. For example, Gawehn and Müller (2019) document that banks have a significantly lower level of cash tax savings than non-banks, and that this difference in cash tax savings is more pronounced for undercapitalized banks than for fully capitalized banks. Some researchers (Merz and Overesch, 2016; Langenmayr and Reiter, 2020) find that banks relocate proprietary trading to shift profits to jurisdictions with lower taxes.…”

Are Financial Institutions Tax Aggressive? Evidence From Corporate Tax Return Data

“…Furthermore, tax paid by financial institutions, particularly banks, might decrease their available cash, thereby weakening their reserves and curbing their lending activities. The prudential regulation environment, therefore, enhances any existing financial motivation of the institutions, especially banks, to be more tax aggressive compared to their nonbank counterparts (Gawehn and Müller, 2019).…”

A CEO's expertise power and bank diversification

“…Most studies exclude banks and other financial institutions because of differences in the business model and regulations, even though banks are an integral part of the economy. For example,Gawehn and Müller (2019) highlight two reasons why banks are excluded: the business model and the impact of regulations. Banks are subject to different accounting treatments (rules) as a result of the model change.…”