Tax Planning by European Banks

Author: Mona Barake

This paper explores profit shifting behaviour by European banks through a newly available data source. Financial institutions as of 2014 started disclosing their activity on a country-by-country level following the CRDIV EU Directive. The country-by-country reporting (CbCR) requires European banks to file their revenues, profits, number of employees and taxes paid in all countries where they operate including tax haven countries. In this paper, I construct the database for bank CbCR from the banks filings and annual reports. The database includes 51 European banks headquartered in 18 different European countries between 2014 and 2020. I use the database to study profit shifting arising from international tax differences between countries. I find that the banks’ profits are sensitive to the tax rate suggesting that banks lower their tax burden through their affiliates. The size of banks seems to have an effect, the larger the bank group, the more it might engage in tax planning. Profit shifting is estimated by using the tax differential methodology. The findings show that profit shifting by the top European banks is around 4-3% percent of the total profits booked abroad. This implies tax revenue losses of up to 3-2%. The introduction of a global minimum tax of 15% would generate between 300 to 2 billion euros depending on the final rules implemented.