No. 63: Negative interest rates and corporate tax behavior in banks

Abstract

This study examines the impact of negative interest rate (NIR) regimes on corporate tax behavior. We argue that NIRs act as a de-facto tax levied by central banks and investigate how this ‘tax’ affects banks’ corporate tax planning. Using a sample of domestic banks in OECD countries and a difference-in-difference research design, we find that banks affected by negative interest rate policies exhibit an increase in tax planning following the adoption of NIR, compared to unaffected banks. We document that the introduction of NIRs is associated with a 2.3 to 2.6 percentage point decrease in GAAP ETR and that the effects of NIRs are more pronounced in banks with a lower distance to default or lower reserves, and in countries with lower levels of tax enforcement or lower levels of trust in the government. Collectively, our results suggest that NIRs lead banks to increase tax planning as a funding source.