¨ 434
A . Demirgu c¸-Kunt, H. Huizinga Journal of Public Economics 79 2001 429 –453
r r
ˆ then dp dt 5 p 1 2 a 1 2 t . 0. Next, reported profits, p , are ambiguously
related to the domestic tax rate t, as
r
p 1
r
]] ]
dp dt 5 1 2 a 2
_ 0.
F G
ˆ c0
1 2 t Similarly, actual and reported taxes in the source country vary ambiguously with
t , as
1 2 t t1 2 a
r r
]] ]]]
dtp dt 5 p 2
_ 0.
F G
ˆ c0
1 2 t These two ambiguous relationships reflect that a domestic tax rate increase entails
the need to generate higher pre-tax profits to pay these taxes, but it also increases
r
the incentive to shift profits outward. It can further be checked that p and p both increase with i and e. Note that for all three banking cases considered, actual
domestic profits and the domestic tax rate t can be positively related. A negative relationship between these two variables, however, is only possible for the third
case of a foreign bank with profit shifting opportunities.
3. The data
The data set reflects the income statement and balance sheet data of commercial banks from the BankScope data base provided by IBCA for a complete list of
data sources and variable definitions, see Appendix A. This data set is very comprehensive, covering about 90 percent of bank assets in most countries. After
eliminating countries with very few observations, we have a data set covering 80 countries during the years 1988–1995 with around 7900 individual commercial
bank accounting observations. The data set includes all OECD countries, and many developing countries and economies in transition.
Table 1 first provides some information about the importance of foreign banks for the countries in our sample. A foreign bank is defined as a bank that is at least
50 percent foreign-owned. Foreign ownership generally reflects foreign direct investment as well as foreign portfolio investment. Most banks that are at least
3
50-percent foreign-owned can be expected to also be foreign-controlled. The foreign asset share, in the table, is the ratio of all foreign bank assets to total
banking assets averaged for the years 1988–1995. Banking sectors of several countries Bahrain, Botswana, Jordan, Luxembourg, Nepal, and Swaziland are
dominated by foreign banks, reflecting a colonial heritage or a large neighboring country. Among the major developed countries, Germany, Japan, and the U.K.
have foreign bank shares in the 19–25 percent range, while the share is 8 percent
3
For Germany, for instance, more than half of foreign-owned banks by the 50-percent criterion are fully owned by a single foreign shareholder, and thus can be taken to be fully-owned subsidiaries.
¨ A
. Demirgu c¸-Kunt, H. Huizinga Journal of Public Economics 79 2001 429 –453 435
Table 1
a
Bank spread, profitability and tax ratios: domestic and foreign banks Share of foreign
Net interest margin Before tax profits ta
Taxes ta bank assets in total
Domestic Foreign
Domestic Foreign
Domestic Foreign
Argentina 10
5.8 9.9
2.0 2.9
0.4 0.4
Australia 5
3.4 1.0
1.2 0.2
0.4 0.0
Austria 31
1.9 1.4
0.5 0.3
0.1 0.1
Bahrain 97
2.5 1.9
1.1 0.5
0.0 0.0
Belgium 5
2.2 2.1
0.7 0.4
0.2 0.1
Bolivia 36
1.7 3.8
21.6 1.2
0.6 0.5
Botswana 94
6.8 5.7
3.2 3.0
1.3 0.9
Brazil 30
9.8 6.8
1.9 2.8
1.1 1.1
Canada 7
2.5 1.9
0.6 0.3
0.3 0.2
Chile 25
4.5 3.9
0.7 0.4
0.1 0.0
China 2.1
2.9 1.5
1.0 0.3
0.0 Colombia
5 5.8
6.6 2.8
3.0 0.6
0.8 Costa Rica
5 9.9
17.3 1.5
13.4 0.3
1.8 Cyprus
11 3.3
6.8 1.7
2.9 0.6
1.0 Czech Rep.
51 2.9
2.9 0.3
1.1 0.4
0.6 Denmark
4.8 6.5
0.5 1.8
0.2 0.6
Dominican Rep. 3
6.5 8.2
2.9 3.7
0.6 1.1
Ecuador 52
8.1 6.3
2.2 3.1
0.3 0.3
Egypt 1
1.0 2.0
1.1 1.4
0.2 0.5
El Salvador 28
3.1 3.8
1.5 1.9
0.0 0.2
Estonia 35
6.3 4.5
8.2 5.0
1.7 0.9
Finland 2.0
21.2 0.2
France 8
2.5 1.7
0.3 0.2
0.2 0.1
Germany 25
2.2 1.9
0.7 0.6
0.3 0.3
Greece 77
3.7 2.7
1.2 1.4
0.3 0.4
Guatemala 5.6
0.6 0.2
Haiti 2.7
1.4 0.4
Honduras 23
6.7 7.8
3.1 1.4
1.1 0.3
Hong Kong 69
2.7 2.5
2.3 2.2
0.3 0.3
Hungary 61
5.4 4.4
2.3 3.1
0.7 0.6
India 1.9
1.3 0.2
Indonesia 16
3.3 4.0
1.3 1.4
0.4 0.4
Ireland 11
3.3 1.3
1.1 0.9
0.3 0.2
Israel 2
3.3 2.9
0.9 1.3
0.6 0.7
Italy 1
3.4 3.5
0.9 1.1
0.5 0.6
Jamaica 48
6.9 8.8
2.6 4.3
0.7 1.4
Japan 21
1.6 1.4
0.4 0.4
0.2 0.2
Jordan 95
2.3 1.9
0.9 1.0
0.3 0.2
Korea 23
2.1 1.9
0.9 0.5
0.3 0.2
Lebanon 57
3.4 2.6
1.5 1.0
0.3 0.2
Lithuania 9
10.0 6.4
2.0 21.6
1.6 1.7
Luxembourg 80
0.9 0.8
0.5 0.6
0.2 0.2
Malaysia 6
2.7 2.4
1.2 1.7
0.4 0.6
Malta 2.4
1.3 0.4
¨ 436
A . Demirgu c¸-Kunt, H. Huizinga Journal of Public Economics 79 2001 429 –453
Table 1. Continued Share of foreign
Net interest margin Before tax profits ta
Taxes ta bank assets in total
Domestic Foreign
Domestic Foreign
Domestic Foreign
Mexico 2
4.6 3.1
1.3 20.8
0.3 0.1
Morocco 21
3.5 3.3
1.5 0.7
0.6 0.3
Nepal 100
3.6 2.8
1.0 Netherlands
10 1.8
1.0 0.7
0.3 0.2
0.1 New Zealand
91 4.2
3.1 1.2
1.2 0.4
0.3 Nicaragua
20 4.5
4.8 20.2
1.0 0.2
0.3 Nigeria
51 5.7
4.4 2.9
1.9 0.8
0.5 Norway
1 3.2
2.5 0.4
2.1 0.1
0.4 Oman
4.2 1.7
0.2 Pakistan
12 2.5
3.3 1.5
2.2 0.8
1.1 Panama
39 2.2
2.4 1.3
0.6 0.1
0.0 P. New Guinea 34
4.5 2.7
0.3 2.1
0.1 0.5
Paraguay 39
6.4 7.2
2.5 2.2
0.5 0.4
Peru 35
6.6 6.4
1.5 1.6
0.7 0.7
Philippines 57
3.8 4.1
2.4 2.3
0.3 0.3
Poland 14
4.9 6.6
3.8 4.4
1.6 1.8
Portugal 4
3.4 3.4
0.8 2.0
0.2 0.6
Qatar 1.9
1.2 0.0
Romania 1
9.1 5.8
7.2 6.3
2.2 2.8
Russia 6
6.6 2.3
5.9 2.9
2.2 0.6
Saudi Arabia 43
1.5 1.8
0.6 0.7
0.0 0.0
Singapore 62
2.4 1.7
1.9 1.4
0.5 0.4
South Africa 2
4.4 3.2
1.6 0.8
0.4 0.3
Spain 31
4.0 2.9
1.4 0.6
0.5 0.2
Sri Lanka 8
3.4 4.0
2.0 2.5
0.5 0.9
Swaziland 100
5.5 1.5
0.4 Sweden
2.9 1.9
0.3 1.0
0.1 0.0
Taiwan 9
2.1 2.1
1.3 1.1
0.2 0.2
Thailand 2
2.5 3.1
1.2 1.1
0.4 0.4
Tunisia 35
2.3 2.5
0.9 1.5
0.2 0.3
Turkey 1
7.5 8.0
4.9 4.7
1.1 1.0
U.K. 19
2.6 1.8
1.2 0.3
0.4 0.3
U.S. 3
3.9 3.3
1.5 0.9
0.5 0.3
Venezuela 2
6.7 13.7
2.1 10.1
0.2 0.4
Yemen 2.8
1.6 0.6
Zambia 46
24.7 9.4
2.0 5.7
0.3 1.8
Average 27
3.89 4.17
1.59 1.97
0.48 0.54
a
The share of foreign bank assets in total is the ratio of all foreign bank assets to total bank assets for all banks over the 1988–1995 period. A foreign bank is defined to have at least 50 percent foreign
ownership. Net interest margin is defined as net interest income over total assets. Before tax profits ta is before tax profits divided by total assets. Taxes ta is taxes over total assets. The latter three ratios are
calculated for each bank and then averaged for all banks per country in the sample for the years 1988–1995. All ratios are in percentages. Data are from BankScope data base of the IBCA.
¨ A
. Demirgu c¸-Kunt, H. Huizinga Journal of Public Economics 79 2001 429 –453 437
for France, and relatively small at 3 percent for the United States. Averaged over all the countries, the foreign asset share is 27 percent.
In the table, the net interest margin , as an important part of profits, is the ratio
of net interest income to assets; before tax profits ta in the table, corresponding to the p variable, is before-tax profits divided by assets, while taxes ta is actual
taxes divided by total assets. The relative magnitudes of these three variables for domestic and foreign banks tend to vary across countries. In Canada, Germany,
France, Japan, the U.K. and the U.S., for instance, foreign banks on average achieve a lower interest margin, while they achieve equal or lower profitability,
and pay equal or lower taxes. For many developing countries, the opposite is true. In Colombia, Nicaragua and Poland, for instance, foreign banks achieve higher
interest margins, profitability, and they pay higher taxes than domestic banks. At the bottom of the table, we see that foreign banks on average achieve slightly
higher interest margins and profitability, and they also pay higher taxes.
Table 2 provides summary figures for country groups by income and region. Considering the breakdown by income, we see that foreign banks on average
obtain the lowest interest margins in high income countries and they achieve the highest margins in lower income countries. At the same time, foreign banks
achieve the higher lower interest margins than domestic banks in low income and lower middle income high middle income and high income countries. Also
foreign banks in general appear to have higher net profits and pay higher taxes. The breakdown by regions show that differences between domestic and foreign
4
banks vary considerably across regions. For example, while foreign banks have higher margins and profits and pay higher taxes in Africa, Asia and Latin America,
the opposite is true in the transitional economies.
4. Empirical evidence
