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Forward-looking effective tax rates in the banking sector

Author

Listed:
  • Ernesto Zangari

    (Bank of Italy)

  • Elena Pisano

    (Bank of Italy)

Abstract

The paper extends to the banking sector the Boadway-Bruce-Mintz framework used to compute marginal and average effective tax rates for non-financial firms. The model focuses on loans and considers the interactions between taxation, accounting, company law and regulation for the Italian banking sector, following the Nordic view of corporate taxation. It allows to disentangle the tax components of loan price, namely tax rates, deductibility of the cost of equity under partial and full ACE systems, taxes on net worth, and limits to the deductibility of interests and loan loss provisions (LLPs), also highlighting the role played by deferred tax assets. The effective tax rates on loans indicate, among other things, that the ACE introduced in 2011 has been effective in reducing the debt bias, and that until 2015 the deductibility limits on LLPs could have generated several distortions, discriminating between borrowers, economic sectors and geographical areas, inducing a pro-cyclical increase in the cost of credit during downturns, and providing disincentives to the timely setting aside of sufficient provisions for non-performing loans.

Suggested Citation

  • Ernesto Zangari & Elena Pisano, 2019. "Forward-looking effective tax rates in the banking sector," Temi di discussione (Economic working papers) 1236, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1236_19
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2019/2019-1236/en_tema_1236.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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