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 other profit‐shifting channels than non‐financial 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 1 percentage point lower corporate tax rate increases banks’ fixed‐income trading assets by 3–4 percent and trading derivatives by 9 percent. Suggestively, this increase does not arise from a relocation of real activities (i.e., traders); instead, it stems from the relocation of book profits.