This paper examines the effects of taxation on the liability structure of banks. We derive testable predictions from a dynamic model of optimal bank liability structure that incorporates bank runs, regulatory closure and endogenous default. Using the supervisory data provided by the Bank of Italy, we empirically test these predictions by exploiting exogenous variations of the Italian tax rates on productive activities (IRAP) across regions and over time (especially since the global financial crisis). We show that banks endogenously respond to a reduction in tax rates by reducing nondeposit liabilities more than deposits in addition to lowering leverage. The response on the asset side depends on the financial strength of the bank: well-capitalized banks respond to a reduction in tax rates by increasing their assets, but poorly-capitalized banks respond by cleaning up their balance sheet.

After a brief review of the economic literature, the paper offers a comparative analysis of the main features of capital income taxation in Italy, the EU and the US. The paper also analyses the recent evolution of capital taxation and portfolio allocation in Italy. The findings point to high heterogeneity in the choice of the type of tax system, taxation level and forms of preferential taxation, suggesting no convergence towards a single model of taxation among countries. However, a common feature of most systems is that capital income is taxed more lightly than labour income. The heterogeneity in the tax treatment of households’ savings is likely to persist in the future; recent developments at international level concerning the transparency of taxation are expected to increase governments’ degrees of freedom in choosing their preferred tax system. Empirical evidence for Italy suggests that the tax burden on financial assets has increased in recent years but the evolution of financial assets over time is not particularly sensitive to tax changes.

The ways in which multinational companies operate in the current economic context questions the adequacy of international coordination of corporate taxation. A conceptual approach would require abandoning the classic paradigms of the international tax system (permanent establishment, arm's length, transfer pricing); they remain at the basis of the “Base Erosion and Profit Shifting” project (BEPS) elaborated by the OECD but are now obsolescent. The crisis of this system has been exacerbated by the Trump Reform and the explosion of the digital economy. The former introduces new regimes that undermine international cooperation and are in contrast with the WTO rules and with the double taxation treaties, regardless of the traditional OECD principles. The latter has features that cannot be governed by current tax rules, even if improved with the suggestions of the BEPS project. Solutions proposed at international level or applied by individual countries could lead to great uncertainty. A rational response to these challenges would rest on different bases, such as those of a system of formulary apportionment, with advantages in terms of simplicity, cost and certainty, fostering allocative efficiency and growth. Although this design is not feasible at international level, applying such a system in Europe, with the common consolidated corporate tax base (CCCTB), could ensure greater attractiveness and efficiency of the EU internal market: it would apply the same formulary system applied to other markets (e.g., the US market), while intra-European transactions are still regulated by the transfer pricing mechanism.

Using the supervisory data on Italian Mutual Banks (CCB) and the historical changes in the Italian IRAP tax rates, we show that reductions in tax rates lead the banks to reduce their nondeposit liabilities more than their deposits. This evidence is consistent with the predictions of our dynamic structural model, in which the banks optimally balance deposit insurance premium, tax advantages of debt, and liquidity services with potential costs of bank closure. Our empirical identification of the tax effects takes advantage of the business restrictions of the CCBs and the exogenous variations in the IRAP rates across regions and over time. We also find evidence that a cut in the IRAP rates is associated with a drop in the cost of non-equity funding in the CCBs. In addition, we find that the CCBs trim the proportion of risky loans in their assets when they increase the proportion of the total credit in response to a tax cut. JEL Classification: G21, G32, G38, H25.

In the period 2001-2018 The corporate income taxation has been marked by the need of national legislators to respond to international competition along the two dimensions of tax rate and tax base: this response entailed the reduction of the tax rate and the broadening of the tax base, while at the same time attracting a new one, both by combating international erosion and by reducing the possibility of internal deduction. The analysis of the change that occurred in the last decades shows that similar modifications have been introduced, following also the indications of the OECD BEPS project. In a scenario marked by initiatives towards the reduction of tax base competition, two factors destabilize this search for a balance: the digitalization of the economy, and the international issues of the US tax reform. The current international tax framework seems to be inappropriate to tackle the new challenges.

Following the establishment of the Single Supervisory Mechanism (SSM), concerns about having a level playing field become more important due to the heterogeneity in bank taxation rules across Europe: measuring the tax burden can provide a first rough measure of the extent of heterogeneity across countries. After a review of the main differences in banks taxation between Italy, France, Germany, Spain and the UK, the paper provides estimates for the tax burden and deferred tax assets in these countries over the years 2006-2014; the impact of differences in taxation on bank profitability is also examined. Moreover, the paper carries out a more in-depth analysis of Italian banks by considering both individual balance sheet data and aggregate tax return data. The impact of tax measures on financial stability and on profitability is further analysed. The comparative analysis points to a wide heterogeneity across countries in the tax treatment of the banking sector. This suggests that it would be advantageous to explore possible ways to make the tax systems of the countries participating in the SSM more homogeneous; a first step could be to harmonize tax bases.

This paper explores the effect of taxation on the capital structure of banks. For identification, we exploit exogenous regional variations in the rate of the Italian tax on productive activities (IRAP) using administrative, confidential data on regional banks provided by the Bank of Italy (1998-2011). We find that IRAP rate changes do not always lead to a change in banks’ leverage: banks close to the regulatory constraints do not change their leverage when tax rates change. This holds true for both tax cuts and tax hikes. Among less constrained entities, the leverage of smaller banks is more responsive to changes in tax rates than that of larger banks. Overall, the tax system has little effect on the capital structure of banks, especially for larger and possibly more systemically important institutions; regulatory constraints instead seem to be a first-order determinant. Our findings cast doubt on the role of the tax system as a cause or tool for addressing the negative externalities of excessive leverage in the banking system.

This paper explores the effect of taxation on the capital structure of banks. To identify the effect of taxes, we exploit exogenous regional variations in the rate of the Italian tax on productive activities (IRAP) using administrative, confidential data provided by the Bank of Italy. We find that taxation affects leverage of smaller banks (that is, banks in the lowest three quartiles of total assets) but does not affect leverage of banks in the top quartile of total assets. Taxation also affects leverage of slow growing banks but it does not affect leverage of fast growing banks. Larger and faster growing banks also display higher leverage. Overall, banks with higher leverage do not respond to tax. We control for regulatory capital requirements using a new measure of leverage called maximum leverage ratio for each bank-year observation and the results do not change qualitatively. Maximum leverage only affects leverage of larger and faster growing banks, those for which there is no tax effect. Additionally, the heterogeneity in leverage levels across banks of different sizes and growth groups disappears when controlling for maximum leverage. These results suggest that for banks with higher leverage, the regulatory requirements are binding and therefore, they are less sensitive to tax. JEL Classification: G21; G32; G38; H25; H32.

A number of recent changes to Italian tax law have important implications for financial stability. The taxation of banks’ loan losses has been revised, attenuating its procyclicality, encouraging the adoption of more prudential loan valuation policies and contributing to the transparency of banks’ balance sheet. For all firms, financial and non-financial alike, the allowance for corporate equity (ACE) system, which reduces the penalization of equity with respect to debt financing, has been reinforced, encouraging capital strengthening. Lastly, changes to the taxation of hybrid capital fund-raising have removed the impediments to issuing subordinated securities.

This paper examines the current tax policy on venture capital (VC) in Italy, and compares it with the tax incentives adopted by France, Germany, Spain and the UK. The authors analyze ongoing European initiatives to remove tax obstacles to VC in Europe. Focusing on the taxation of VC funds, they also assess whether the requirements for the new Italian tax incentives are consistent with the uniform regulatory standards designated by the 2011 proposal for an EU Regulation on European VC Funds. Finally, in a quantitative analysis, the tax burden on VC investments in Italy is compared with that in other European countries. The results show that the most favourable schemes are in the UK and in France; the effects of the new Italian VC tax incentives are in line with the British and the French schemes. As regards the design of tax incentives, the authors found that as the duration of investment increases, upfront incentives become less effective than capital gains exemptions.

In this article, the authors provide an update on the tax rules applicable to the venture capital industry, focusing on tax incentives adopted as part of the “Summer Manoeuvre 2011”. After analysing the constraints imposed by the State aid provisions, the authors compare, from a quantitative point of view, the previous and the current tax scene and shed light on the new favourable context for investment in venture capital funds.

Abstract This chapter investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine two specific cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on certain aspects of the tax treatment of performance-based remuneration of managers, which, coupled with other provisions, may have fostered an ever-increasing use of these instruments, resulting in overemphasis of short-term profitability and incentive to excessive risk taking. Second, the securitization process, which played a key role in the outbreak of the financial crisis, was accompanied by opportunities for tax arbitrage and reduction of the overall tax wedge paid by investors, through offset of incomes that are ordinarily taxed at different rates; a de facto exemption of CDS premiums received by non-residents supplemented the tax arbitrage.

The paper considers several approaches to the measurement of firms’ tax burden in order to identify significant indicators for the banking sector. It also analyses features of tax provisions which are peculiar to the Italian system. On these bases, it looks at measures affecting the tax burden on the Italian banking system over the period 2000-09. Inter alia, the analysis shows the role played by the rules for a firm’s tax base and for tax relief and considers the increasing importance of deferred tax assets. The comparison between the Italian banking sector and those of other countries, in relation to commercial banks, shows that over the period 1998-2008 all jurisdictions experienced a reduction in both effective and statutory tax rates. Even if the tax burden on Italian banks has seen one of the largest reductions, this tax indicator is still the highest among the countries considered.

This paper investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine three cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on the taxation of residential building: while the importance of capital gains taxes is disputed, the deductibility of mortgage interest may have contributed to the financial crisis by creating some of the raw materials for the securitization industry. Second, a narrow perspective on the tax treatment, together with specific provisions, may have fostered performance-based remuneration of managers, resulting in overemphasis of short-term profitability and incentive to excessive risk-taking. Third, the securitization process, which played a key role in the outbreak of the financial crisis, was accompanied by opportunities for tax arbitrage and reduction of the overall tax wedge paid by investors, through offset of incomes that are ordinarily taxed at different rates; a de facto exemption of CDS premiums received by non-residents supplemented the tax arbitrage.

The paper considers several approaches to the measurement of firmsi?½ tax burden in order to identify significant indicators for the banking sector. It also analyses features of tax provisions which are peculiar to the Italian system. On these bases, it looks at measures affecting the tax burden on the Italian banking system over the period 2000-09. Inter alia, the analysis shows the role played by the rules for a firmi?½s tax base and for tax relief and considers the increasing importance of deferred tax assets. The comparison between the Italian banking sector and those of other countries, in relation to commercial banks, shows that over the period 1998-2008 all jurisdictions experienced a reduction in both effective and statutory tax rates. Even if the tax burden on Italian banks has seen one of the largest reductions, this tax indicator is still the highest among the countries considered.