Effective tax rates for bank entities across European Union. The role of loan loss provisions

The paper investigates the impact of loan loss provisions (LLPs) on bank-specific effective tax rates (ETRs) using data of 2943 banks from European Union during 2007-2014.As control variables we used size, equity, fixed assets and return on assets (ROA), while the specific country-year tax reforms were captured using Devereux-Griffith effective tax rates. The results prove robust to different model estimators and sample selections, which suggests that LLPs act systematically towards the reduction of the bank entities’ corporate tax burden. When distinguishing between two banking business models, respectively shareholders-value (commercial banks) and stakeholders-value banks (savings and cooperative banks), empirical findings indicate that provisions negatively affects the former (commercial banks) specific ETRs, whereas for the latter (savings and cooperative banks), no statistical significant effect was detected. From policy perspective, in the context of the switch from the incurred-loss model to the expected-loss model with respect to LLPs (IFRS 9), this may signal additional tax bill reduction for bank entities, if decision makers fail to react promptly. Finally, looking at types of banks investigated, the results show that among all three categories of banks, commercial banks manage to avoid the increase of tax bill driven by some bank-specific determinants (i.e. ROA), while maximizing the tax savings driven by others (i.e. capital intensity), thus suggesting more tax planning oriented behaviour as compared to savings and cooperative banks.