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What is the Real Tax Contribution Rate of Banks?

The precise assessment of the banks’ corporate tax position rate is intended to identify levies on the profits they bear as legal entities. This question addresses a general concern about the balance between their contributions and their renewed contributory capacity during the financial crisis and its systemic effects on the public community; these have included direct support to banks by public authorities (budget and monetary authorities), as well as losses in production and opportunities that have an impact on the budgets of other economic agents. In these circumstances, the consideration of levies on banks should also be taken from the perspective of a better balance between private profits and public costs carried over to third parties in the crisis.

The question was addressed often but with contrasting conclusions and above all an ambivalent communication on the conclusions of the studies then published. It is interesting to further highlight the differentiation between banks’ performance and their corporate tax contributions. The implied bank tax rate, which is appreciable only with a great deal of appreciation under current disclosure conditions, appears to deviate significantly from its theoretical rate, due to the rise in international activities, but also of financial and fiscal choices resulting in optimization that must lead to appropriate investigations.

Also, it is desirable to know the trajectories of profits and income tax that diverge. Compulsory levies on financial firms account for an average of 4.9% of all levies and 10.9% of those recorded as being the responsibility of companies in industrialized countries. The amount to 40.3 billion per year, 37% of which correspond to social contributions (14.8 billion), which should instead be identified as wage elements or insurance. In the balance $25.5 billion, $6.5 billion is due to corporation tax (net) plus $3.9 billion in capital gains.

These sums refer to a distribution of taxes in the financial sector that appears singular in relation to the structure of levies paid by other sectors. Share of the various compulsory levies in the total sector-by-sector. The relative weight of compulsory levies on labor is seen as relatively low and, conversely, for corporate taxation. There is a correspondence between this singular profile and the particular conditions for the distribution of value added in the financial sector. This means a sharing of value added with a comparatively high proportion of profits, which, to go hand in hand with a higher level of individual labor compensation than in other sectors, does not translate into least wage share in the value-added sector which is significantly lower.

This distribution cannot be seen as a reflection of a higher level of productive capital. On the contrary, the capital ratio of the financial sector is lower than in the rest of the economy. However, productivity per employee is noticeable as much higher. The latter finding is itself mainly accounting, the level of labor productivity in the financial sector resulting from largely exogenous factors. Even if capital per employee has increased and progress in the human capital of the sector has probably taken place, fundamental efficiency gains cannot be seriously attributed to all productivity gains labor, nor do the returns on capital in the financial sector is the result exclusively of such processes.

Banks pay on average, with two-thirds of all compulsory levies from the financial sector, insurance agencies 21% and financial assistants the balance, or 17%. Some studies show a heterogeneity of the relative weights of compulsory levies on the financial sector at the national level. For the United Kingdom, a relative share of the financial sector is 5.3% of the total per year (6.5%) to 28 billion pounds, significantly less than the majority of Western countries, while the financial sector occupies a much higher relative place in UK GDP.

The trend observed over the past decade in developed countries places the mandatory levies borne by the financial sector on a more inert trajectory than that of its profits. In total, these estimates from the balance of primary income from the financial sector, which aggregates net current resources (i.e., excluding capital gains) from operating costs, grew by 8.1% per annum (4.5% for production and 3.6% for the added value), while mandatory levies increased by only 3.2% despite the additional levies instituted during this period.

It is, as a principal, changes in corporate tax revenues that explain this discrepancy. They contrasted sharply with the evolution of dividends paid by the sector. On a gross basis, the cumulative tax quotas for companies in the financial sector amounted to around $70 billion, 8 years per countiy. In the same period, dividends paid reached $348.3 billion on average per country. Dividends paid are five times the amount of corporation tax. Moreover, these data have not seen a parallel release: until recently, dividends have been significantly more dynamic than corporate taxes, which have, on the whole, stagnated. Subsequently, developments were less distant but due to the effects of the crisis.

It should be noted that these findings bring closer data that are not identical in their field. The tax charges here envisaged in accordance with the application of tax laws which provide to apply the tax to the only income base corresponding to the activity counted as will be national territories. Dividends, on the other hand, are accounted for as a result of their distribution by local entities, which can pay dividends from locally tax-free results. These differences in scope are at the heart of the problems of identifying tax rates borne by the financial sector, which are also dependent on the tax rules mentioned above.

With regard to the nature of the contribution rate, it is remarkable that there is a significant gap in theoretical and effective tax rates that requires clarifications. The implicit bank tax rate is the subject of a discussion which, to result from the subtlety of the tax rules of financial firms, reflects a lack of transparency that needs to be corrected. The taxes on which banks disclose are only distantly related to their actual contributions.

The gap between gross and net corporate tax revenues is considerable for the financial sector, which is the sector with the largest gap between these two sizes, with the sector ultimately paying only 49% of gross contributions. This rate is 37% for banks and 38% for insurance. This discrepancy probably stems a lot from the effects of the tax legislation in place. Either through the “inter-temporal tax integration” offered by the deficit deferral regime, or through specific provisions involving tax refunds, it gives companies in the sector the opportunity to adjust their disbursements consideration of different economic or tax situations. The most consequential modulation charges relate to forward and backward deficit carryovers (in the latter case, modified in a restrictive sense), the tax integration regime, receivables on the tax service intelligence and action against clandestine financial channels under various tax credits but also foreign tax credits. These have an effect on the distribution of contributions between the countries where banks are taxed.

But other factors need to be considered. This is the case with the internationalization of banks, which has complex effects on their taxation, some of their composition, in connection with tax rate differentials between states, others more opaque. The international distribution of taxes paid by financial firms is not known, which justified the intervention of the legislator. By questioning the largest banks on certain aspects of the distribution of then-results, in particular on the results achieved in the countries mentioned on a representative list of jurisdictions offshore, they respond that the banks did not publish results of this kind, which everyone can see. By attracting attention to the quality of the information, it should be noted that the authorities have no, however, statistics on banking GNP and the results of foreign settlements, which are followed by its.

Finally, the assertion of the banks assumes that they would be untied from all accounting or fiscal obligations in the countries under review, which, despite their singularities, is not systematically accurate (nor credible). In this context, the assumption of a structurally lower implicit tax rate associated with the characteristics of an increasingly internationalized financial activity should be seen as playing an important role in the banks’ profits and contributions. It is important to know that implied bank tax rate would have risen on average 20% in recent years. However, levels vary widely between countries.

Some microeconomic data also show a definite variability in tax rates. Some of the local banks appear to be less taxed than some of their counterparts, but on average they do not appear to be unique lying below the implied tax rate as shown in the calculations. On the other hand, despite observations that show the existence of a high relative tax rate in some countries, they seem to escape the effects sometimes lent to the high rate of income tax locally.

Moreover, other images appear in alternative studies on the effective taxation of banks. A study by the ExpertActions Group, based on different statistics on the taxation of the financial sector, notes that:

The implicit tax rate of banks in some countries is well below the overall nominal rate of rich countries (13%).

  • - It has fallen from 35% a few years ago.
  • - Major international banks are less taxed than the average credit institution (15% versus 25% on average).

- For some countries, their tax rate was 8% (compared to an average of 13%).

The disparities in tax rates implicit over time and between countries are not correlated with national tax regimes, which is an index of the tax-based benefits of banks.

This suggests that the internationalization of banks, and in particular their offshore operations, are powerful factors of tax optimization. However, it must be agreed that the values mentioned are fragile but that two results are undeniably robust: the decline banks’ implied rate and the gap in this rate and the theoretical rate.

Beyond that, it should be noted that the foreign location of banks has accelerated since the early 2000s: the number of stranger settlements has doubled: 1039 on average per countiy 88 countries (mainly in the form of subsidiaries), a phenomenon that is highly concentrated, with the top three establishments in a country comprising 83% of the establishments. Also, the banking groups have become more complex and their organization attributes an important role to the establishments in offshore centers should be better counted. The complexity of the structures of financial groups with a proliferation of contact points, the stacking of structures, difficulties in identifying reciprocal commitments and the functions performed by each entity, is a regulator’s concerns. It calls for a considerable analytical effort. The development of financial entities in offshore centers does not facilitate this.

In rich countries, the largest settlements are in the United States with a strong representation of locations in poorly regulated states such as Delaware, Hong Kong, the Anglo-Central Islands (Jersey-Guernsey), Australia, Cyprus, Malta, Switzerland, Brazil, the United Kingdom, Italy, Germany, Spain, Belgium, Switzerland, and Luxembourg. Not all of them can be considered offshore. Four major centers occupy a special place: Switzerland, Luxembourg, Ireland, and the Cayman Islands.

It should be noted that the assessment of the consistency of the deregulation of local banks in offshore centers encounters obstacles related to the absence of an indisputable reference on the methods that could guide it, problems already mentioned. This situation is primarily the result of the multiplicity of lists of countries that, in one capacity or another, are identified as part of the offshore. Statistical censuses will differ depending on whether one relates to a criterion of compliance, financial stability or a tax criterion. For some of these criteria, there are actually several lists, depending on whether one refers to those drawn up by government agencies or those of the financial actors themselves. It must be said that banks tend to downplay their offshore plants. In arguing that, in any event, the interest in locating entities on the spot is fiscally null and void as a result of the tightening of tax legislation.

In fact, the listing of tax havens (noncooperative states and territories) has important tax issues for both businesses and individuals. As far as companies are concerned, it results in the nonapplication of the motherdaughter scheme to dividends. The same applies to the specific system of taxation of capital gains from disposals. Moreover, to identify offshore settlements, the intelligence and action service against clandestine financial circuits is reasoning from the applicability of tax regimes specific to noncooperative territories and jurisdictions, which, given the policy of some countries, multiplies blind spots.

Indeed, the number of subsidiaries of financial companies in the financial sector, which has been affected by the tightening of legislation under review, is negligible. This census, which may seem to be about exact, is far from reflecting the reality of the presence of offshore financial companies. This situation is due to the obviously excessive narrowness of the list decided by some countries, which presumes the fiscal compliance of a country by referring essentially to the existence of a conventional instrument, without any consideration, other than very contingent, of the effective application of the agreements, or even of their applicability.

Consideration of the list of the richest countries, which has no legal extension in tax matters, already broadens the scope of the deployment of financial enterprises in offshore centers. At the end of the year, several hundred settlements that we would have to identify. Moreover, this list is itself quite “conservative,” the panorama of offshore banks must be enriched by many entities. The shortcomings of the censuses carried out by the administrative authorities must be overcome. The Treasury Directorate-General of several countries admits that it has no specific information on the deployment of French offshore banks. It refers to the monetary authorities. Although conventions may play a role in explaining this difference, it is noted that the supervisory authority tends to underestimate the international deployment of banking groups (while at it’s a reality that is already notable).

It was reported that special regimes tightening tax legislation for activities in tax havens were defused by the narrowness of the list agreed in this regard. However, we must also take into account the state of the knowledge available to the intelligence department and action against clandestine financial circuits on this point because of the limitations of its information. This underinformation can pose practical problems for the intelligence and action services against clandestine financial circuits. Thus, even if the list was more extensive, regimes tightening the taxation of activities carried out in tax havens by banks could have found themselves defused: it is difficult to implement legal provisions and to impose the repatriation of subsidiaries’ profits to more than 50%. It is necessary to prove the absence of local economic activity, and the banks in particular generally claim to need this subsidiary to reach “local customers,” which the legislation intends in a very broad sense: for the Caribbean islands, it includes American customers.

For their part, relating to the analysis that it is to make the use of financial companies in offshore territories, the argument is that the statistical framework is insufficient to assess and assess the activity of foreign subsidiaries and branches of banks and other players’ financial institutions. In particular, it emphasizes the inadequacies in its information on interbank transactions and asset performance. As a result, the direct investment flows abroad from banks and other financial actors, such as those of all resident companies and entities, are regularly monitored and statistically surveyed, in principle comprehensive as long as the transactions exceed a certain value.

But the methods used—which are consistent with the IMF’s international requirements for balance-of-payments statistics—and the nature of the information obtained do not allow for a fine traceability of relationships financial markets with a set of countries that are predetermined. Indeed, after a direct investment transaction has taken place in a given country (the first counterparty countiy), information on the final allocation and destination of the fonds is not available. Consistent with the IMF’s international balance-of-payments methodology, the current statistical mechanism does not allow us to know, in particular, whether the funds are being used in the immediate counterparty countiy or transferred from one or more countries’ third party.

In short, the monetary authorities do not have a detailed knowledge of the nature or the ultimate allocations of transactions carried out from dependent financial entities establishments. In these circumstances, a more detailed global census of banking transactions (the “Data Gaps Initiative”) must be quickly effective. Similarly, there is a need to encourage the big banks to respond to the request to contribute as soon as possible. Moreover, this contribution should be extended to all banks but also to other financial players (unregulated entities, insurance, etc.) or the nonfinancial sector (financing or trading centers, etc.).

Finally, and above all, monetaiy authorities should be invited to develop their expertise in activities conducted abroad, particularly when host countries do not have guarantees of end-to-year supervision or compliance. The activity of banking groups abroad is no less followed up. It is measured from bank statements via the “international commitments” collection state, which provides essentially prudential information.

This statement lists on a consolidated basis the exposure of a group to the risks incurred as a result of its international banking activity (regardless of the location of the corresponding assets). The data collected, in particular, ami to enable the measurement of the volume of receivables on borrowers or guarantors residing in different countries, and thus to estimate the impact on the financial situation of the group of a decrease in the value assets in the event of a crisis of the country’s signature. It is possible that the data collected responds to prudential missions, it does not really inform about the functions that banks assign to their offshore entities, nor about the results of those entities.

Consolidated loans from banks in offshore centers amount to several billion dollars (10% of banks’ receivables abroad). Based on this data, it is desirable to know the commitments territories mentioned on the list of countries. For the reasons given, the information provided does not give a complete picture of the banks’ commitments. Total liabilities averaged S614.6 billion per countiy for the top 10 banking groups (8.1% of then-balance sheets). Outside the list, they amount to 2.8% of their balance sheet. The counterparties concerned exclude the consolidated entities of the group since the data are based on a consolidated approach to commitments. They do not provide more information on actual collateral, since they only consider debtors because of their residence in the states in question.

However, the nature of the activities of the companies concerned is not specified. The weight of actual financial transactions is high due to commitments on retail customers (but “private customers” are not distinguished) and financial institutions (excluding consolidation scope). The information leads to the estimation that these commitments are veiy concentrated on a few institutions. In terms of results, the published information lacks data. The relative weight of the results generated by banks in these countries as well as the level of local taxation level is not always available.

Also, the international dimension contributes to the disconnection between the tax contribution rate and the profits of the financial sector in many ways. The international share of banking activity has increased. This process in itself creates a compositional effect in favor of a reduction in the tax rate on bank profits because of the tax differentials between countries. In addition, these can be mobilized by various processes, some of which are subject to patently abusive tax optimization. Data on a particular local bank showed that the internationalization of its activities had gone hand in hand with an expansion of its profits in the countries of implementation resulting in a structural decline in its tax rates.

In view of the tax rates in these countries, it had also rhymed with a decrease in its implied tax rate. For example, the SI280 million in results in Belgium was taxed at an effective rate of 14.1%. Similarly, the 708 million profits in Luxembourg were subject to an effective tax rate of 16.3%. The tax rate in the British Crown’s special status territories was 1.4% for SI40 million in profits. For Switzerland and Singapore, the data showed profits of S376 and $253 million for 17.6% and 16.1%, respectively.

The territorialization of corporation tax implies that these benefits are taxed on the national territory only under certain reservations. The tax that can apply is in any case less than foreign tax credits. The international dimension of the big banks’ business, the fluidity of the receivables and debts on which they operate and the room for maneuver available to them to locate their activities pose acute problems for the services national tax authorities. It is important to note that some examples of the difficulties in this context. The consequences of the checks that sought toe at issue this practice make ongoing litigation before the administrative courts. It should be noted, however, that Organisation for Economic Co-Operation and Development countries have adapted their tax laws to put an end to these optimization behaviors: from now on, the provisions that the amount of tax on which the tax credit is attributable is less than the total expenses owed by the contributor AB the under the operation of “round trip” in particular the loss of value caused by the return of the securities to their original holder and the sums paid to the original holder in compensation for dividends not received by the original holder.

With regard to mother-daughter and territorial status, the income of local or foreign subsidiaries is conditionally entitled to a corporate tax exemption from the mother. As a result, the proceeds of the shares are deducted from the parent company’s taxable profit (minus a 5% fee and expense ratio). The plan, which is optional, has two main conditions: the parent company must hold at least 5% of the capital and the securities must be held for two years. The mother-daughter scheme therefore allows a dividend to be “raised” within a group structure to the holding company in quasi-tax-free (the 5% share being taxed), the result is thus taxed only once (at the companies which one it was realized) regardless of the group’s architecture.

Again, it is a common law system that is not specific to financial groups. Nevertheless, the immateriality of financial transactions makes it easy to locate them in foreign subsidiaries, which facilitates the implementation of a tax optimization frequently recorded in control for the banking and insurance groups.

Large financing transactions can thus be housed in ad hoc subsidiaries, located in other developed countries and which bear low on-site taxation (Luxembourg, Delaware, for example). The proceeds of the transaction are then integrated into the benefit of the local tax-free operation. Sometimes, the assembly also uses a hybrid (quasi-capital) security specific to Anglo-Saxon legislation: the subsidiary pays most of its capital via this type of security, allowing a deduction of the remuneration of taxable profit in country of origin and a dividend qualification on the national territory. The dividend is then disqualified debt income.

Some practices are aggressive tax optimization. Arbitration of withholding tax would be commonplace in trading desks. It would be accompanied by a distribution of its product among the counterparties of the exchange. These practices are probably at issue in the low performance of withholding tax; they also argue against choosing this solution as an alternative to the exchange of information. A number of the techniques mentioned as used for bleaching are also available. The possibilities of transferring profits and losses according to tax situations seem very wide. Witnesses indicated that they were mobilized through “mirror operations” that promoted the location of income in loss-making structures or more simply less taxed. The use of empty shells could be cited. In fact, the number of employees employed on the spot is often uninformed in the documents submitted by the monetary authorities. For example, these data do not allow the number of employees in the Cayman Islands to be quantified in the fifteen locations of a large bank.

The questions raised above were the questions that may arise from certain choices of consolidation of entities, excluded because of their “nonmateriality.” Such a situation is conducive to all fraud. There are secret remuneration systems from entities located in offshore countries and not subject to any financial information. These cases refer quite systematically to entities without appreciable activity, those that banking groups do not consolidate. It would be appropriate for special vigilances are exercised over these situations. But this objective is difficult to achieve by regulators who do not have free access to offshore entities. There is a solution in this case, which is to prescribe the closure of these entities, but it is not used. More broadly, the weight of banks’ commitments and performance abroad would benefit from better monitoring.

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