The Tax Burden on Banks Over the Period 2006-2014

Abstract

Following the establishment of the Single Supervisory Mechanism (SSM), concerns about having a level playing field become more important due to the heterogeneity in bank taxation rules across Europe: measuring the tax burden can provide a first rough measure of the extent of heterogeneity across countries. After a review of the main differences in banks taxation between Italy, France, Germany, Spain and the UK, the paper provides estimates for the tax burden and deferred tax assets in these countries over the years 2006-2014; the impact of differences in taxation on bank profitability is also examined. Moreover, the paper carries out a more in-depth analysis of Italian banks by considering both individual balance sheet data and aggregate tax return data. The impact of tax measures on financial stability and on profitability is further analysed. The comparative analysis points to a wide heterogeneity across countries in the tax treatment of the banking sector. This suggests that it would be advantageous to explore possible ways to make the tax systems of the countries participating in the SSM more homogeneous; a first step could be to harmonize tax bases.JEL Classification: G21, H25, H87, K34.

An Inquiry into the Determinants of the Profitability of Italian Banks

“…(2) Tax rate on bank revenues in line with the rest of the euro area. In the period preceding the global financial crisis (2005-07), taxation on bank profits was higher in Italy than in nonstressed euro-area countries, the effective tax rates for the banks included in our sample being 30 and 24 per cent, respectively; the extra tax burden in Italy thus amounts to 6 p.p., a figure in line with the evidence reported in Ricotti et al (2016) for the same time period. All else being equal, the higher taxation results in lower post-tax profits and hence lower bank capital.…”

“…3. These findings are in line with those of Ricotti et al, 2016). 12 The situation appears to have reversed in the course of the sovereign crisis; this is partly a side effect of the 10 In addition to the initiatives listed in the text, the Bank of Italy has recently launched a new survey aimed at providing potential investors with reliable and detailed information on bad loans characteristics, on the guarantees used to back them and on the status of recovery procedures (Visco, 2016).…”

“…Nonetheless, should profitability return close to its historical values, the tax regime would still negatively affect Italian banks, even though less than in the past. A deeper harmonization of tax systems, at least for the countries participating in the Single Supervisory Mechanism, is arguably still warranted (Ricotti et al,2016).…”