Trading Offshore: Evidence on Banks' Tax Avoidance

Little is known about how banks shift profits to low-tax countries. Because of their specific business model, banks use different profit shifting channels than other firms. We propose a novel and bank-specific method of profit shifting: the strategic relocation of proprietary trading to low-tax jurisdictions. Using regulatory data from the German central bank, we show that a one percentage point lower corporate tax rate increases banks' proprietary fixed-income trading assets by 2.2% and trading derivatives by 6.3%. This increase does not arise from a relocation of real activities (i.e. traders); instead, it stems from the relocation of book profits.