Trading offshore : evidence on banks' tax avoidance

Kurzfassung/Abstract

Little is known about how banks shift profits to low-tax countries. Because of their specificbusiness model, banks use other profit-shifting channels than non-financial firms. We propose anovel and bank-specific method of profit shifting: the strategic relocation of proprietary tradingto low-tax jurisdictions. Using regulatory data from the German central bank, we show that a 1percentage point lower corporate tax rate increases banks’ fixed-income trading assets by 3–4percent and trading derivatives by 9 percent. Suggestively, this increase does not arise from arelocation of real activities (i.e., traders); instead, it stems from the relocation of book profits.