Taxation and Leverage inside Bank Holding Companies

This paper examines the effect of leverage on the corporate taxes paid by United States Bank Holding Companies. We find that, Bank Holding Companies reduce their tax burden when debt is raised from subsidiaries. However, taxes do not significantly change when debt is raised from the parent firm. Our view is that, the more favorable fiscal treatment of corporate debt against equity, gives an incentive to Bank Holding Companies towards the tax consolidation of subsidiaries. In this way they take advantage of the tax shield of the affiliates. The empirical results indicate that, the funding structure of the group plays a role on taxation. The results are important for the understanding of tax avoidance inside large banking institutions.