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Trading Offshore: Evidence on Banks' Tax Avoidance

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  • Dominika Langenmayr
  • Franz Reiter

Abstract

Little is known about how banks shift profits to low-tax countries. Because of their specific business model, banks use profit shifting channels different from those of other firms. We propose a novel and bank-specific method of profit shifting: the strategic relocation of proprietary trading to low-tax jurisdictions. Using regulatory data from the German central bank, we show that a one percentage point lower corporate tax rate increases banks’ fixed-income trading assets by 4.0% and trading derivatives by 9.0%. This increase does not arise from a relocation of real activities (i.e. traders); instead, it stems from the relocation of book profits.

Suggested Citation

  • Dominika Langenmayr & Franz Reiter, 2017. "Trading Offshore: Evidence on Banks' Tax Avoidance," CESifo Working Paper Series 6664, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6664
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp6664.pdf
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    References listed on IDEAS

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    Cited by:

    1. Dutt, Verena K. & Ludwig, Christopher A. & Nicolay, Katharina & Vay, Heiko & Voget, Johannes, 2018. "Increasing tax transparency: Investor reactions to the country-by-country reporting requirement for EU financial institutions," ZEW Discussion Papers 18-019, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

    More about this item

    Keywords

    profit shifting; multinational banks; corporate taxation; proprietary trading;

    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
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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